Market Trends and Retailers’ Strategies in Fresh Produce

1. Market Trends and Retailers’ Strategies in Fresh Produce Dr Marian Garcia Kent Business School University of Kent Cal – Med Consortium Workshop III Mediterranean Products in a Global Market Place Barcelona, 26-27 April 2007

2. Presentation Outline • Growing global importance of supermarket chains: globalisation  global sourcing • Retail change and competition • Developments in Supermarket Supply Chain Management • Supermarket strategies • Implications for suppliers • Conclusions

3. Wal-Mart P. Morris 73 Carrefour Ahold Home Depot Nestlé 50 Retailers Kroger Unilever 46 Suppliers Metro Sears Target P&G 39 Albertson's Nine retailers belong to Global Fortune 100 Global Fortune 100- Ranking and 2001 revenues in $bn - Ranking

4. Retailers: Increasing expansion worldwide International presence of top 20 retailers

5. Share of largest retailers in European grocery markets, 2004

6. Four largest UK food retailers account for 75.6% of total grocery sales UK Grocery Market Share 12 Weeks to 25 March, 2007 Source: TNS

7. Movements in operating margins and market shares of the major grocery retailers, 2000/1 - 2004/5 source: IGD Grocery Retailing 2005.

8. How Retailers Compete Challenges Resulting Trend Increased focus on customer demand to drive business decisions • Retailers are struggling to differentiate their stores in the mind of the consumer • Store is the battle ground for share of the wallet • Grater emphasis on customer loyalty programmes • Grater focus on fresh items management as a • differentiatior for supermarkets • - Price, range and service • - Diversification into non-food • and services • Shift to premium products • Opening high-street • Convenience stores • Extreme competitive environment with • new entrants and formats • Commodity nature of many product categories and many available consumer choices • Closer collaboration with suppliers to develop value creation strategies • Desire to reduce waste and complexity to allow improved, more flexible and faster decisions at a lower cost Reducing costs in the supply chain to free up cash flow to allow execution of differentiating activities

11. Developments in Supermarket Supply Chain Management 1990s: paradigm shift in the way firms sought to compete • Sustainable competitive advantage could not be achieve by firm in isolation • But through the engineering and management of efficient and effective supply chains, in collaboration with their customers and suppliers • Business success will be derived from companies managing and enhancing the total performance of the supply chain, for the purpose of delivering improved value to customers. • Companies are seeking to construct ever more efficient and responsive supply chains as the nature of competition moves from firm against firm to supply chain against supply chain

12. Supermarket Strategies • Exclusive products/service replacing location as the USP • Strategic emphasis on ‘own label’ requires strategic approach to supply chain relationships for ‘destination categories’ (fresh produce, meat, ready-meals) • risk management (food safety) • crisis management (traceability) • establish/restore consumer confidence (assurance schemes): • Growing awareness of & concern about food production (safety, welfare and environment) and food composition (diet and health) • Diminishing confidence in government, scientists, food processors, farmers and…retailers? • Supermarkets are effectively integrating backwards Supply chain collaboration is now the preferred business model for retail food chains

13. Paradox of Power Supermarkets demanding: • consistent high quality (and systems to assure it) • diminishing role for spot (wholesale) markets • problems with price determination and discovery? • behaviour-based contracts replacing outcome-based contracts • Environmental uncertainty versus task programmability • competitive prices • Premiums must be earned (market research and innovation) • large volumes from fewer (‘preferred’) suppliers (category captains) • Reduce transaction costs • ‘powerful’ buyers increasingly dependent upon fewer, larger, more sophisticated and dedicated suppliers • Investment in specific assets = opportunity not threat

14. Impact on Fresh Produce Suppliers • The supply of fresh produce is becoming increasingly competitive. • In a market where there are plentiful suppliers, buyers can afford to develop and impose effectively more stringent requirements. ‘The Assured Produce Scheme provides the railway track on which UK retailers run their own trains’ APS provides benchmark standards to which some retailers add their own additional requirements in order to differentiate their products from the competition Suppliers of fresh produce are less able to differentiate their products at the consumer level • They are in a weak bargaining position as price differentiation is almost the only available strategy.

15. Impact on Fresh Produce Suppliers • Despite increasing rationalisation of the supply base, retailers are still able to switch volumes between suppliers of fresh produce. • As a result, suppliers of fresh produce are often forced to accept low prices in order to get volume growth, which does little to improve their immediate and long-term financial performance. • In response to consumer trends and marketing demands, innovative growers of fresh produce have increased their cooperation and involvement with buyers and other members of the supply chain to ensure their produce meet consumer expectations. • Closer relationships between the various members in the supply chain, ensure information is shared and can be used to improve the competitive position of all members in that supply chain.

16. Conclusions • Competition between firms is being replaced by competition between supply chains • Firms seek sustainable competitive advantage • Reduce costs (operational and transactional) and break out of the commodity trap • Supply base rationalisation (paradox of power) • Process integration (technology enabled) • Innovation (all aspects of the business: products, people, processes) • Corporate Social Responsibility • Triple bottom line (environment, social, ethical performance)

17. Conclusions • Fundamental change in trading relationships: • declining emphasis on narrow/short term performance measures (eg price of raw materials, production lead time, market share) • increased emphasis on broad/strategic performance measures (eg total cost of acquisition, total cycle time, market growth) • declining importance of spot markets and spot trade (distinct role for web-based trading platforms?) • Fundamental change in the structure and culture of business organisations • from constrained (hierarchical) to ‘empowered’ (de-centralised) • from reactive to pro-active • from ‘learning organisation’ to ‘learning chain’ (with IT providing the essential lubricant)

18. Thank you