Marketing Channels

Farm Input Supply  Firms that supply resources used in the farm production process 1. Chemicals 2. Machinery 3. Live animals 4. Credit 5. Labor

Input Supply Firms  Product Type Differentiated product Equipment Seed Buildings Chemicals Genetics  Largest firms Equipment – John Deere Chemicals – Monsanto Seed – Pioneer  Market segment: Segmented by input use  Trends Slow growth and demand Move towards seed/chemical merger Increase of biotechnology Increased concentration

Farmers  Produce commodities  Growing differentiation  Market concentration is extremely low  Many segments based on the commodity  Strategy: try to be the low-cost producer, however, there is a movement toward differentiation  Sales growth – slow and highly variable  Profit to sales ratio: highly variable but is often negative

Farmers  Trends Larger and fewer firms Some increase in differentiation Slow growth in demand Increase in regulation Continued development of new technologies Increased international competition Rising capital requirements Closer relationships with assemblers and processors

Commodity Assembly:  Firms that purchase farm commodities from a large number of farmers, assemble into larger commodities, store and ship to initial processors 1. Ex.- Grain elevator 2. Livestock auctions - Michigan Livestock Exchange 3. Dairy Co-ops

Commodity Assembly Firms  Trends Some firms are attempting differentiation Increasing concentration Adding more processing (forward integration)  The external environment Slow growth demand Growing demand for differentiated products Closer relationships with manufacturers

Commodity Assembly Firms  Product type is mostly commodity  Largest firms Cargill, ADM Livestock – IBP Dairy – Dairy Farmers of America, MMPA  Market segments are divided by commodity  Strategies – commodity orientated

Initial processors  Firms that purchase farm commodities and process into industrial food products for sale to food manufacturing firms or wholesalers. Ex.- Miller's - transform wheat into flour

Food Manufacturers:  Firms that purchase industrial food products for sale to wholesalers, retailers, or food service

Food Processors and Manufacturers  Highly differentiated products  Many market segments – price quality is dependent on product characteristics  Concentration is increasing  Differentiation is getting more detailed  External Factors affecting firms in food manufacturing 1.Slow growth in demand – Americans eat too much 2.Consumer tastes and preferences for convenience 3.Retailers are a threat  a.) Retailers now control info.  b.) Growth in store brands

Food Wholesalers  Customer oriented (Food retailers or food service industry)  Sales growth is slow and may be declining  Concentration is increasing  External Factors facing wholesalers is the 1.Growth of large retailers (threat) 2.Growth of information technology (threat) 3.Food service products

Food Service Firms  Restaurants, Education, Recreation places, Military Highly differentiated products There are many market segments Very customer oriented (price/quality/service) More emphasis on targeting consumer niches

Food Service Firms  External Factors facing firms 1.Slow growth in demand 2.Very labor intensive – slow growth in labor productivity 3.Increasing international investment 4.Growth in demand for prepared foods 5.Growth towards higher quality products and variety 6.Groceries trying to get into food service  Food service firms are placing greater demands on downstream firms for quality and variety

Retail Grocery Firms  Customer orientated – Price/Quality/Service  Differentiated products  The largest firms are Meijer, Kroger and Walmart  Market segments 1.Low price/low service 2.Higher price/higher service

Store Format Definitions  Conventional Supermarket – 9,000 items – 92% is food, 8% is GM/HBC (General Merchandise and Health, Beauty, Cosmetics)  Superstore – 14,000 items – expanded selection of GM/HBC (ex.=Kroger or Safeway)  Food/Drug Combo – combination of a superstore and a drug store (ex.=Jewel or OSCO stores)  Super Warehouse – high volume superstore-warehouse store (ex.=Sam’s Club)

Store Format Definitions  Limited Assortment Store – a bare bone low cost store – 1,500 items (ex.=Aldi)  Convenience Stores – high margin with limited selection (ex.=QD, 7- eleven)  Hypermarkets – very large food and GM stores  Super center – a bigger version of a hypermarket (ex.=Meijer’s)

Consumer Market Segmentation  Types Age Usage of Product Brand loyalty  Sociological Groups Singles Families Racial/Ethnic  User behavior Food fanatic Calorie counter Fearful Don’t care buyer  Three big changes People are getting older Growth in two income households More people are living by themselves

Consumers  Desire for meal solutions  What do consumers want? Convenience Quality Value Shoppers go to the supermarket an average of 2.2 times per week, and spend an average of $83/week or $33/person

The Transformation of Products in a Food Marketing Channel  Farm comodities: homogeneous agricultural products that have little or no additional processing 1. Uses: raw materials for initial processing or food manufacturing 2. Ex.- wheat, soybeans, live hogs  Industrial Food Products: processed raw material requiring additional manufacturing for consumption 1. Ex.- flour, soybean oil, pork chops  Consumer Food Products: for final preparation and consumption 1. Ex.- bread, potato chips, sausage

 Does every product pass through every stage of the food marketing channel? No - fresh fruits and vegetables and fluid milk do not  Is every stage of the food market chanel owned by a different firm? No - A food retailer may own a wholesaling warehouse - Meijer's, Riceland Foods. A firm may do both initial procesing and further manufacturing  Does every firm perform every dunction in the market channel? No - But every firm must perform at least one function