Food industry changes coming fast Contracting by Wal-Mart, worldwide consolidations top list
Grocery retailer consolidation and slotting fees are the big topics today in the fresh produce industry, but there are many more changes in the nation's food business than mega mergers and paying for shelf space, according to Roberta Cook.
The University of California, Davis Cooperative Extension economist told the 10th annual Desert Vegetable Crop Workshop and Expo recently in Yuma, Ariz., that mergers extend through the nation's food industry, not just retailers. This means fewer people across the board have more produce buying clout than ever before.
However, what is really shaking up the produce industry is the year-round produce contracting by the huge retailer Wal-Mart and worldwide consolidation of the retail grocery business.
Wal-Mart, a worldwide retailer with more than $165 billion in total sales, is taking a principle used in its hard goods to the produce aisles of rapidly growing supercenters - large retail outlets that include supermarkets.
There are more than 700 Wal-Mart supercenters now in the U.S., and that should be topping 800 as the year ends. And, they are rapidly moving up the sales scale among U.S. food retailers. They ranked fifth in 1999 with almost $16 billion in sales from just 682 supercenters. They were just behind Ahold with 1,194 stores in the U.S. and $23.4 billion in sales.
Cook said the huge retailer negotiates a low cost contract with a produce supplier and ties that supplier into the retailer's computer system to track sales for replenishment.
It is the supplier's responsibility to keep the produce shelves filled. Wal-Mart also expects double digit sales growth as well. If the arrangement is successful, Wal-Mart shares that success financially with the supplier.
"This is not the norm in the food industry," said Cook.
The supplier is in the loop on what is moving at what price and in turn produce quality becomes a key component in the supply side of the agreement, she said.
These supercenters are "driving the costs out of the system by contracting with preferred suppliers in a vendor-managed automatic inventory replenishment," she said. This is also reducing dependence on spot markets.
And, supercenters are growing more rapidly in sales than retail grocery stores, she added.
This is just one of the key drivers Cook outlined for those attending the workshop and expo in the Yuma Convention Center sponsored by Western Farm Press, University of California, University of Arizona, Western Growers Association and the Yuma Valley Shippers Association.
Other new competitors and rules include European players, on-line consumer food shopping and electronic procure systems. They're all "shaking up conventional retailers."
Consolidations both in the U.S. and worldwide are placing pressure on producers to consolidate and form strategic alliances to come closer to matching the scale of buyers. Cook said that this grower/shipper consolidation, however, remains largely fragmented.
Consumer preferences On the consumer side, higher consumer incomes are changing fresh produce distribution and sales.
Cook said the produce industry has benefited from the consumer's increasing ability to pay for convenience. Plus, consumer demand for variety and choice, safety and traceability from farm to the fork, healthfulness and a growing interest in the environmental effects of ag "all join forces to stimulate new produce development and branding in the fresh produce industry," she said.
Cook predicted the level of food business mergers and acquisitions will continue as they have for the past three years. However, the mega-mergers may slow, and there will be more regional mergers.
The top four grocery retailers in the U.S. now are Kroger (2,268 stores and $43.1 billion in sales); Albertson's (1,797 stores and $37.5 billion in sales); Safeway (1,435 stores and $29 billion sale), and Ahold based in The Netherlands (1,294 stores and $23.4 billion sales.).
Sales of the top four chains rose from a 16 percent share of total grocery sales in 1992 to 29 per cent in 1999. The top 20 chains control 52 percent of the sales.
"These are some of the things you have to think about when you want to sell produce. It is thought provoking. You had better be focused if you want to be competitive," she said.
Typically, fresh produce represents about 11 percent of total grocery store sales. That means Kroger alone has the produce buying power of $4 billion annually.
This concentration can be even more staggering in specific metropolitan markets where one chain can control up to 87 percent of the market share. This is one reason why the Federal Trade Commission has stopped some mergers.
Largest chains foreign The consolidation globally is even more staggering. Only three of the top eight global retailers are American.
The largest worldwide is Carrefour/Promodes in France with more than 6,300 stores and $60 billion in sales. Second is Metro Ag from Germany with almost 2,100 outlets and almost $50 billion in sales. Kroger is third worldwide.
This worldwide buying power has already produced two worldwide promotions of fresh produce items, she said. Ahold recently promoted mangoes and a bagged salad worldwide, contracting with two Brazilian mango producers and Dole to supply the items.
This, she said, cites the importance of forming produce marketing alliances to supply retailers wherever they are.
Ahold's chairman predicts that five to eight supermarket leaders will eventually survive globally, according to Cook. Many of these already have pre-qualified suppliers, even though Wal-Mart is the only pre-qualified grocery retailer in the U.S.
While some of these mega mergers are increasing retailer fresh fruit and vegetable buying power and demands for fees and services, the huge volumes now needed by a few also make them more dependent on shippers for stable, year round volumes, she points out.
"This may limit the exercise of market power in the fresh produce sector," she said.
These companies financially supported the 10th Annual Desert Vegetable Workshop and Expo with their participation in the trade show.
Agricultural Supply, Inc. Bayer Corp. Dune Co. Western Farm Press Southwest Transplants/H&H Seed Co. Harris Moran Seed Co. Incotec Liquid Ice, Inc. Mycotech Corp. GCA Financial Services Naumann-Hobbs Material Handling Novartis Crop Protection Rain For Rent Roberts Irrigation Products T-Systems International, Inc. Thermo Trilogy Weather Tec Corp. Western Growers Association