“The American supermarket has represented a revolutionary step in history of commerce, making a full range of goods available to the mass audience. Chapter 6 - Food Wholesaling and Retailing

Wholesaling: Added value services  Approximately 10% of food dollar in 1993  Wholesalers add place, time, and possession utility to food Assembly, dis-aggregating, delivery Transactions and risk-bearing functions

Leading Wholesalers, 2001 FirmSales $B SuperValue20.9 Fleming15.6 C&S Wholesale Grocers8.5 Wakefern Food Corp5.9 Giant Eagle4.5

Wholesaling trends  Concentration Driven by competitive pressures  Integration: Forward and backward Retailers and processors doing their own wholesaling  Technological advancements Information flow and management

Types of food wholesalers  Merchant wholesaler Largest, but declining Buy, store, sell and other marketing functions Important for small independent stores  Manufacturers’ sales division Fastest growing Extension of processor  Agents and brokers Smallest share and declining Do not take title, work on commission

Retail Grocery Wholesalers  Value-added service to smaller retailers Assembly, disaggregate, reassemble  Integration Larger stores can deal direct Retailers into wholesaling  Walmart, Kroger Wholesalers into retailing  SuperValu, Flemming

Food Service Wholesalers  Value-added service Assembly, disaggregate, reassemble Menu planning R&D Quality control (branded products)  Largest players Sysco $22.6 Billion (Leopold, IBQSN) US Food Service $17.7 Billion Performance Food Group $3.2 Billion

Food retailing  Largest retail sector in US Grocery and food service Food accounts for 25% of retail sales Employs 80% of food system workers  Trend to concentration and integration Inflation-adjusted sales are flat Growth by market share  Economies of scale  Information  Bargaining power

US Supermarkets, 2000 Sales $B 1 The Kroger Company/Fred Meyer Albertson's, Inc./American Stores, Inc Safeway Stores, Inc Wal-Mart Supercenters Ahold, USA Publix Supermarkets Winn-Dixie Stores Delhaize America 12.7

Club Stores Grocery Sales $Billion Costco Sam's Total

Concentration concerns  Growing national market share Moderate increases in average combined shares in cities indicating no substantial lessening of competition for consumers Increased market power concerns by sellers Slotting fees paid to get market access

Growth of Foodservice  46% of total food sales  Growth of fast food 1996 first time that more that half restaurant meals eaten off premise.  Home meal replacement: HMR Supermarket response to food service

Top U.S. Resturants 2000 SalesChg MillionPercent 1McDonald's20, Tricon14, Diageo8, Wendy's5, Darden3, ) McDonalds, Boston Market, Donatos Pizza, Chipotles Mexican Grill 2) Taco Bell, Pizza Hut, KFC 3) Burger King, Haagen-Dazs 4) Wendy's, Tim Horton 5) Bahama Breeze, Olive Garden, Red Lobster, Smokey Bones

Food Service Trends  Pushing growth Rising incomes Demand for convenience Smaller households  Limiting growth Aging population

Food Service Strategies  Nontraditional locations McDonalds at Walmart Fast food at gas stations  More variety Choice of bread at Subway McDonalds is largest US beef retailer, but less than half of McDonalds menu is beef items

New Products  Supermarket carries 30,000  Over 16,000 introduced in 2000  Seller pay “slotting allowance”  Buyers reject 60%  Information technology allows better targeting

Product Proliferation  Strategy to control shelf space  Movement away from this strategy Still control space Reduce the number of items  Issue for industry: how to meet consumer demand for varied products (organics, labeled non-GMO, animal friendly, etc.) Ex. UK retailers

Emerging Retailing Developments  Efficiency of supply chain  Walmart  Growth of foodservice  Expansion of private labels  New consumer issues

Information Technology  Trading partners work closely together to eliminate excess costs from the supply chain and efficiently serve the consumer.  A system based on time-phased replenishment of products based on consumer demand that allows the manufacturer to be proactive and more directly respond to consumer purchase behavior. Efficient Consumer Response (ECR) Efficient Foodservice Response (EFR) Collaborative Planning, Forecasting and Replenishment

Adoption of UPC Bar Code  Started in 1972  Now used to track inventory, order products automatically, and report purchases by time  Beginning to use data collected 50% of all retailers offer frequent shopper programs Ways to reduce costs and increase sales  Walmart going to RFID

RFID  Radio Frequency IDentification (RFID) is an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags. An RFID tag is an object that can be attached to or incorporated into a product, for the purpose of identificationautomatic identification

Rise of Wal-Mart  Has built business on knowing what consumers buy when and asking vendors to replenish shelves in a timely manner  Largest retailer in the world Largest food retailer in the US 90 million customers per week  EDLP ( Every Day Low Prices ) strategy in food sales Low fixed margin Nearly infinite growth

Efficient Consumer Response  Wal-Mart model  Retailer & vendor share information  Electronic Data Interchange  Collaborative planning, forecasting and replenishment  Scan-based trading, vendor is paid for what is sold when it is sold

Expansion of Private Labels  Previously a cheaper product  Battle for “brand equity” House brand Wholesale brand Packer brand Farmer brand  New premium quality Wal-mart, KMart  16% of sales, 20% of volume

Merril Lynch, The Food Industry, 2000

Private Label Users American Heavy Users: Income: $20-40,000 Age:35-44 Household Size: +5 Education: High School European: In U.K. Over 50% Private Label Merrill Lynch: The Food Industry, 2000

New Consumer Issues  Natural Laura’s Lean Coleman’s Natural Meats  Organic foods  Welfare friendly Niman Ranch  Farmer-friendly Good Natured Family Farms  Environmentally-friendly

Business Responses  Consumer database analysis  GIS technology  Increased branding of meats and produce Food safety Quality control Consumer loyalty

Business Responses  Virtual supermarkets  Shopping services

Components of Bill for Marketing Farm Foods, 1993 Labor 47% Energy 5% Taxes 8% Int, Repair 6% Corp. Profits 4% Packaging 10% Transportation 6% Advertising 5% Depreciation 5% Rent 4%

Profit Margins  Historically lowest for: Meat, sugar, edible oils, milk, grain processing Homogenous, non-differentiated  Historically highest for: Frozen foods, bakery goods, breakfast cereals, dairy products, beverages Differentiated products

Average profit ratios of food and nonfood firms, Retailing Percent return on equity after taxes Food All NA

Impacting farmer’s share  Degree of processing  Perishability  Seasonality  Transportation cost  Bulkiness in relation to value

Farmer’s Share by Commodity Eggs58%Potatoes 23% Beef56Margarine24 Chicken54Lettuce18 Milk42Frozen dinner12 Pork37Canned tomato 9 Cheese34 Bread 6 Flour28 Corn Flakes 6

Minicase 6 – Page 113 George’s Store