Food processing

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					Food Wholesaling, Retailing
and Food Service
• Changing food manufacturing and
  distribution – market channels
• Integration and concentration
• Growth in food service
• Information technology
• Walmart
• Product introduction
     Top Food Processors, Million
     Dollars of Sales, 1998
1      Philip Morris          31,416
2      PepsiCo, Inc.          22,348
3      Coca-Cola Company      18,813
4      ConAgra, Inc.          17,928
5      IBP, Inc.              12,849
6      Sara Lee Corp.         10,832
7      Anheuser-Busch         9,239
8      H.J. Heinz Company     9,209
9      Nabisco, Inc.          8,400
10     Bestfoods              8,374
11     Tyson Foods, Inc.      7,414
      Food processing
• Increasing concentration , e.g.
  • Phillip Morris (Kraft, General Foods, Oscar Mayer,
    Miller Brewing) buying Nabisco
  • General Mills buying Pillsbury
  • Cargill acquiring Continental Grain
  • Tyson buying IBP
  • Smithfield getting into beef
  • Sara Lee-Earth Grains
  • Unilever – Ben and Jerry’s
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

Firm                    Sales $B
SuperValue                  20.9
Fleming                     15.6
C&S Wholesale Grocers         8.5
Wakefern Food Corp            5.9
Giant Eagle                   4.5
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
               Share of Grocery Store Sales (%)
70

60                 CR 4
                   CR 8
50
                   CR 20
40

30

20

10

0
     1967   1972    1977   1982   1987   1992   1997   2001
  US Supermarkets, 2000
                                           Sales $B
1 The Kroger Company/Fred Meyer                49.0
2 Albertson's, Inc./American Stores, Inc       31.5
3 Safeway Stores, Inc                          28.5
4 Wal-Mart Supercenters                        22.9
5 Ahold, USA                                   21.8
6 Publix Supermarkets                          14.7
7 Winn-Dixie Stores                            13.7
8 Delhaize America                             12.7
Club Stores Grocery Sales $Billion


               1995       2000
Costco          17.9       31.9
Sam's           19.8       26.4
Total           39.9       63.2
Foodstore Sales, 2002   Specilaized food
                              store
                               4%
                                              Conveniencece
                                                  store
                                                   4%




                                           Superettes, small
                                            grocery stores
                                                12%




                                    Supermarket
                                       80%
              Trend in Foodstore Sales by Store Type

400
350
300
250
200
150
100
50
 0
      1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
           Supermarkets    Conventional     Superstore   Other
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
                   Share of US Food Expenditures

65%

60%

55%

50%

45%

40%

35%
  80

        82

              84

                    86

                          88

                                90

                                      92

                                            94

                                                  96

                                                        98

                                                              00

                                                                    02
 19

       19

             19

                   19

                         19

                               19

                                     19

                                           19

                                                 19

                                                       19

                                                             20

                                                                   20
                        At Home             Away from Home
        Top U.S. Resturants
                                         2000 Sales                   Chg 99-00
                                            Million                     Percent
    1   McDonald's                          20,415                           6.5
    2   Tricon                              14,500                           0.0
    3   Diageo                               8,620                          -1.2
    4   Wendy's                              5,837                           7.4
    5   Darden                               3,826                           9.7
1) 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
                         New Products Introduced
25,000

20,000

15,000

10,000

 5,000

    0
         87
              88
                   89
                        90
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                                                                          00
                                                                               01
     19
          19
               19
                    19
                         19
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                                   19
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                                              19
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                                                                       20
                                                                            20
                                  Food           Nonfood
  Product Proliferation

• Strategy to control shelf space
• Movement away 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
  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 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
        Private Label Market Share, U.S.

20.0%
                          1982
                                                    18%
15.0%

                                        1988
10.0%
             Years 1970-2000 in 2 year increments
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 http://www.laurasleanbeef.com/?source=goto
  • Coleman’s Natural Meats http://www.colemanmeats.com/

• Organic foods
  • http://www.ers.usda.gov/publications/agoutlook/apr2000/ao270d.pdf

• Welfare friendly
  • Niman Ranch http://www.nimanranch.com/

• Farmer-friendly
  • Good Natured Family Farms http://www.goodnatured.net/

• Environmentally-friendly

				
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