This article by Karen Gentry, Associate Editor, appeared in the April 2000 issue of “The Vegetable Growers News.”
n 1998, four chains controlled almost 36 percent of grocery sales in the United States. Today, 5 chains control over 50 percent. Consequently, growers and shippers need to consider large retailers when planning for the future, according to Kristen Park, Extension support specialist for Cornell University.
Park, who works with retailers and manufacturers, spoke at the Michigan Produce Marketing Conference in Grand Rapids, Michigan in March. She told the audience of growers, packers, and produce industry representatives that the square footage of produce departments is increasing, and these departments are carrying an increasing number of items or SKU’s.
“The space for new traditional items has been squeezed, and the number of buyers per firm has been going up,” said Park. “Retailers will utilize spot buying less and less in the future as retailers are into more long-term strategic planning,” she said.
Large retailers’ top 10 suppliers have become more important, according to Park. “Year-round product availability is very important to retailers,” Park said. Most growers are also shippers themselves or they have alliances with a shipper, said Park. She advises shippers to start having product year round, which may make it necessary to go to other areas of the United States or, in some cases, other countries.
In a 1999 study by the Food Industry Management Program at Cornell, Park reported that retailers currently buy 69.3 percent of their produce purchases from their top 10 suppliers, and this is expected to increase to 70.1 percent by 2004, driven by large retailers with more than $1.5 billion in annual sales.
In discussions about global procurement in the study, some retail companies are looking to give one or a few shippers the opportunity to supply all the companies’ stores. As an example, one shipper may be asked to provide all the kiwi fruit for 2,000 stores.
Park said she firmly believes growers will have to gain more control over some things retailers might want to give up, like the vendor-managed inventory system used by retail giant, Wal-Mart. The top three electronic technologies used by produce purchasers include Electronic Data Interchange (EDI), case coding, and automated POs. She said some vendors are even responsible for tracking inventory levels and for sending the right amount of product on the right day.
“This hasn’t moved into perishables quite yet,” Park said. Current coding is unable to track different aspects like grade, weight, and quality in apples. Current four-number codes on apples don’t capture all the information that technology needs at the moment, Park said. She said it’s possible for an apple shipper to manage a whole category, such as all varieties of apples, and make sure the inventory of the category is maintained in a chain.
Park said as retail chains get bigger, some shippers are branching into marketing. She said growers and shippers need to expand control, integrate vertically, develop new products, make alliances, and focus on value, not volume.
Produce department sales make up 12.8 percent of total store sales and 20.9 percent of total store profits, making it one of the more profitable departments in the retail store. Although retailers do hold a lot of bargaining power, overall profits for retailers are only 1 percent. The cost of marketing has gone up, which cuts into profits, according to Park.
“Most of the changes in demand for food has been demand for convenience,” said Park. There’s more packaging and higher quality demands. “Growers haven’t received the benefit of that,” said Park, about increases in marketing.
“What shippers should do is really take a long-term look at their growth strategy and see if it fits in with the needs of retailers,” Park said. She said growers/shippers have to look ahead 10 years, as any changes implemented in the field take time to make an impact in the marketplace. In the Cornell study, most shippers indicated they have added growers and added different commodities to their sale sheets to expand into new product lines.
However, most growers have not expanded their control through acquisitions, mergers, or alliances. Park indicated that mergers and alliances among larger shippers are starting to escalate, creating even larger suppliers with resources that could leave smaller and medium-sized shippers out of buyers’ offices, according to Park.
The study advises growers to expand control, horizontally or vertically. To consolidate horizontally, means need to be found to coordinate with other grower/shippers to obtain the supplies required to do business with ever-larger wholesale and retail accounts. Park cites joint sales agencies, various forms of cooperative activity, contracting, and new creative equity alliances. Shippers need to expand product lines by extending into new commodities and/or new geographical regions to become more of a “one-stop shopping” source on a year round basis, according to Park.
To integrate vertically, Park recommends that growers align themselves more formally with packing and selling companies. “Otherwise, the picture for certain agricultural producers may be dim; if they are not adding value in meaningful ways, they will be able to claim only whatever system residual is left, if any, after others have extracted their returns,” Park wrote in the report on the study.
For small producers, Park advised growers to sell products locally in the summer, as retailers still like to highlight local farms. She cautions growers that relying entirely on local sales can be limiting. “You have to grow your business beyond inflation,” said Park.
Cornell University has one of a handful of business schools that include food marketing as part of their undergraduate business program, according to Park.
Return to May 2001 Vegetable Production & Marketing News
