Consumer Driven Innovations and Adoptions in the Food Supply Chain

Jean Kinsey, Professor, Applied Economics Department; Co-Director, The Food Industry Center, University of Minnesota, USA

ERS, TFIC, Farm Foundation ConferenceGlobal Markets for High-Value Food Workshop

Washington DCFebruary 14, 2003

Consumer Driven Innovations Startwith Consumer Purchases

Information about what consumers are buying drives decisions back up the supply chain The source in retail food = bar code The sources in food service = purchases + chef’s

best guess + a few bar codes. The sources are also public pressure from

consumer/citizens who care deeply about other people, animals and the environment.

Consumer Driven Innovations Startwith Consumer Purchases

It has reversed the flow of decisions in the supply chain => a new paradigm.

Old idea: today we sell what is available in

the supply chain.

New idea: today we sell what our consumers have indicated they will buy.

Global Exchange of Goods and Services - New Paradigm The New Food Economy is

not about money or trade negotiations

it is about information, information technology &

personal networks

Themes :

Consumer driven demand/supply loops

Consumers seek “value” – accommodated by discount retailers Horizontal consolidation at all points

Intricate and shifting networks of firms around the world Human contacts count more than ever

Themes :

Trading nations diminish relative to private firms in procuring food.

More food, more variation locally, less variation

globally

Public policy focusing on food for health care, food safety, and food security.

Themes:

Consumer driven demand/supply loops

Consumers seek “value” – accommodated by consolidated discount retailers

Whole- saler Self-

-

distrib.

First LineHandler

Retail Food

MANU-FACT-URER

FoodService

FoodService

48%

Consumer

-&

Farmers

Seed/Feed

Science Labs

RetailStore52%

Ingredient/Flavor

Companies

Supply chain

Demand chain

Citizen

Whole-salerSystemDistrib.

Food Industry

Information Technology Demands COORDINATION/COMPATABILITY

Retailer orderspull product

POS Data

Privatealliances

Internet Interface-UCCNet?

Food Manufac-turers/

Processors

Wholesalers/Self Distributors

Wal-Mart Royal AholdCarrefour Kroger ---------------------------------------------------------- Brought to you by:

information technology economies of scale expert logistics

4 Top International Grocers

The Food Institute, 2002

Rapid growth in supermarket (retail) power Rise in modern retailers (supermarkets,

hypermarkets, convenience stores and department stores) accounts for 60% of consumer good sales in 4 major cities in China.

Direct Foreign Investment by Multinational firms dominate the growth

Chang, WSJ, 11/26/02

Supply Chains in China

Supply Chains in China

Chinese supermarkets: (Joint Ventures since mid 1990s. Must have local partner until 2004)

Carrefour 31 stores Wal*Mart 22 stores Mako (SV Holdings – Dutch) Metro (Germany)

Buy directly from international companies 5% of goods come from within China

Nestle S.A. (Switzerland) Kraft Foods Inc. (USA) ConAgra Inc. (USA) PepsiCo Inc. (USA) Unilever plc (UK,Netherlands) ADM Co. (USA) Cargill (USA)

7 Top International Food Processors

Prepared Foods, 171:12, 2002

Consolidation at the beginning of the Food Chain Too

Cargill

Monsanto

Novartis

Scripps Merck

CIBA SeedsSandoz

Dow

Supply Chains in Food from Farm to Fork: Supply chain => supply push of products

Linear systems

Demand chain => demand pull with information, coordination and agreements with global sources Circular flow of information and inventory

replacement

Product Distribution Networks – Webs of arrangements

Theme:

Intricate and shifting networks of firms around the world – electronic and human facilitators

Handle Waste,

Environment

Manage, Train Labor

Adopt TechnologyTransmit InformationAbout Demand, Analyze Data

Science, Research, Development

Finance, Credit

Oversee Market & Economic Welfare

Grow Crops, Raise Animals

Transport, Delivery

Add Value (Process, Package, Cook)

Aggregate, Store

Monitor Quality,Safety

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Demand Driven Food Production networks

Presents a fundamentally new way

to conduct business, form organizations, and value assets

Changing Web Patterns

Makes changes harder to track Raw product source – global, seasonal Prices – negotiated, secret

Control points and profit margins shift from: hard assets to market intelligence Sellers to buyers (retailers) Producers to analyzers

New Food Networks

A move from an economy based on a firm’s production of goods to an economy based on the use of knowledge about markets.

Markets replace firm’s (or nations) as a unit of analysis

Theme:

Trading nations diminish relative to private firms in procuring food

New Food Networks & Markets Markets are local but firms that supply

them can be anywhere.

How do global suppliers learn about local buyers preferences? 1. Shared data -- e-commerce 2. Human networks

The (Human) Networked Trade

Business and Social Networks Facilitates information about trading

opportunities Enforces Contracts Builds Trust

Rauch, 2001

The (Human) Network Importance of immigrants to trade

with home country: As immigrants increase by 10% exports

increase 13 -47% (network effect)

As immigrants increase 10% imports increased 33-83% (taste and network effect)

Rauch, 2001

Networked Trade

Enforces Contracts – Build Trust Japanese word: keiretsu

Know the characteristics of those who would be helpful & loyal

Enforces rules by internal punishment Increases direct foreign investment

Rauch, 2001

Networked Trade Buyers and sellers match in characteristics

space – need “thicker” information to “match” partners

Transnational networks can overcome informal trade barriers – enhance exports

Domestic networks can create trade barriers by collusion to restrict foreign firms – inhibit imports

Rauch 2001

Global Supply Chains: Producer DrivenAnd Buyer Driven

Producer driven for capital and technology intensive industries: automobiles, aircraft, semiconductors

Profit greatest for those with scale & technology(manufacturers)

Rauch, 2001

Global Supply Chains: Buyer Driven

Buyer driven for labor intensive, consumer goods industries: garments, footwear, toys, electronics – FOOD? Profits greatest for those with design and marketing expertise ( retailers).

Rauch, 2001

New Food Economy? The market we know and love is being “de-democratized”

by networks – human and electronic

Both depend on specific knowledge for specific products and markets

Efficiency models are not enough and maybe not right for globally differentiated products and market networks

Global Supply Chains: Buyer – Seller Driven?

Driven by the part of the supply chain/network that is in the best position to capture the most value from the chain.

Where is that in food and agriculture?Increasingly at the retail end.

Globalization of Supply Chains

•Will more formal (computerized) information networks increase or decrease the usefulness of business and social (human) networks?

•Yes – if e-commerce networks become dominant and parties trust the information to represent the behavior of trading partners.

•No – if products increasingly differentiated and “human” interpretation of preferences and markets needed - and more immigration builds human networks and more DFI across borders.

New Supply Networks for Food Slowly adopting information technology to track

and manage inventory. Still trying to catch up to Wal-Mart’s logistics. Losers: Regional wholesalers, small

farmers, small processors Winners: Consumers – lower prices,

variety, convenience, diversity, safety, quality Multinational food companies (Nestle’) use Supermarkets

to gain access to remote areas.

Public Policy Focus Turns to Food for Health, Safety, & Security New terms:

Paradox of Prosperity – too much food Diseases of Prosperity – diabetes, heart

diseases, hypertension

New meaning to food security Bio-security / Bio terrorism

Food Variety and Abundance The new nutrition - too many calories

USA 2002:65% of adults overweight30.5% obese (BMI over 25)25% children overweight or obese

Doubled in a decade

Food Abundance and Health Care Diabetes – linked to overweight and obesity

In 2002 17% of Americans has diabetes linked to diet60% pf children have at least one risk factor for heat disease

10% of Health Care Costs go to treat diabetes

This is a health care crises in slow motion

Globally: “Globesity”

Adults: 7% obese

Children: 53% undernourishedBut in Chile, Australia, Malaysia,

Chinese cities, 17 – 20 % obese.

IFIC 3/29/2001

Indulgence / Abundance

Countries with at least 10 Percent of the Adult Population Obese

10.0 10.8 11.2 11.4 11.5 12.914.6

18.7 18.7 19.4 20.0

30.5

0.05.0

10.015.020.025.030.035.0

Source: OECD Health Statistics (2000)

Globalization and Public Policy Economic integration of private companies with

national and international trade policies and standards

Homogenization of the foods across nations, more variety of food within a nation

Nation states have less control over policy and items traded

Globalization and Public Policy Retail domination giving consumers lower

prices – so far.

Demise of small farmers and undercapitalized firms

Foods for health, food safety, food (bio) security is international business