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 processingFood 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 (%)

0

10

20

30

40

50

60

70

1967 1972 1977 1982 1987 1992 1997 2001

CR 4

CR 8

CR 20

US Supermarkets, 2000

Sales $B1 The Kroger Company/Fred Meyer 49.02 Albertson's, Inc./American Stores, Inc 31.53 Safeway Stores, Inc 28.54 Wal-Mart Supercenters 22.95 Ahold, USA 21.86 Publix Supermarkets 14.77 Winn-Dixie Stores 13.78 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

Supermarket80%

Specilaized food store4%

Conveniencece store4%

Superettes, small grocery stores

12%

Trend in Foodstore Sales by Store Type

0

50

100

150

200

250

300

350

400

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

35%

40%

45%

50%

55%

60%

65%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

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 9.71) 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

0

5,000

10,000

15,000

20,000

25,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

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.

10.0%

15.0%

20.0%

Years 1970-2000 in 2 year increments

1982

1988

18%

Merril Lynch, The Food Industry, 2000

Private Label Users

American Heavy Users:Income: $20-40,000Age: 35-44Household Size: +5Education: 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