State of the Art in Food
Only 20 to 25 manufacturers will be truly global actors in the food and beverage industry, multi format retailers will encounter difficulties in creating synergy, and retailers with A-brand aspirations are underestimating the work involved in brand building. These are the conclusions drawn by Cap Gemini Ernst & Young and Reed Elsevier in their latest research.
Elsevier Food International, Vol. 5, Number 1, February 2002
Rick Hermsen
State of the Art in Food, an extensive international research conducted by Cap Gemini Ernst & Young (CGEY) between July 2001 and December 2001, produced hundreds of insights into the food sector. Two of the leaders of this global research team - research director Jan-Willem Grievink and project leader Lia Josten - shed their light on the outcome of this huge research, which was released on January 31, 2002.
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Key researchers Jan-Willem Grievink and Lia Josten |
Your research predicts that the growth of global brands could come to an end. Why is that?
Jan-Willem Grievink: The big global brands still have appeal in emerging
countries, but the 'thinkers' or strategists behind the global brands know that they must continue to innovate when it comes to their brands. They fear the growing consumer anti-global and 'no logo' movement in some Western countries. Those are forces, a kind of under-current in social consciousness, that will affect the economy of the global food companies. We expect that a number of brands will exist on a global scale. But the manufacturers of these brands will put other values out front, such as more local-oriented values instead of global uniform communicated values. We also concluded that strong local (or multi-local) brands will gain popularity. For this reason, we believe that international manufacturers will increasingly build portfolios that combine global brands with 'local jewels.' And depending on the local sensibility, sometimes the local jewel will be in forefront of the company's commercial strategy and sometimes the global brand will lead. We expect that only 20 to 25 manufacturers will be able to act on a global scale in the food and beverage industry.
Lia Josten: We must realise that global food companies will attract more and more attention among consumers throughout the world. They are in the media spotlight and must act very prudently. They must act responsibly and be conscious of ethical and human values. That is why we believe that the issue of food safety will be more than just hype. No global food company can afford to be the subject of rumours focused on dangerous food production methods.
What is the conclusion in your study about the future of successful retail formats?
LJ: There are a lot of conclusions in our study on this issue. First, we expect that local or regional retailers will successfully compete with the global formats, due to factors such as local relevance, flexibility, strategic intelligence, etc. We also conclude that multi format retailers will face difficulties with synergy. It is very difficult to lead an organisation with hypermarkets, discounters and neighbourhood stores. Our advice would be to concentrate on one format and try to be the best in that category.
JWG: We expect that four types of formats will operate on a global level. First, there are the hypermarkets or super-stores. Hypermarkets may have trouble in the future, however, unless they succeed in creating new appeal for customers. A successful hypermarket in the future must be a merger of entertainment, shopping experience (with services and products) and some very cheap surprises. Those that fail to do so will falter because of increasing traffic problems, lack of shopping-time and the inability to create a dominant price-differentiation with a mainstream supermarket.
Hard discounters will continue their growth, particularly in mature markets. Chains like Aldi will include some elements of a quality-discount concept in their format (better-quality products at a fair but still cheap price).
The third global format will be the full-service supermarket averaging at least 2,000 square metres. This concept will incorporate a number of services like home delivery, household services (cleaning, insurance), fresh meals, local products and solutions to problems.
The last retail format will be convenience stores, which will increase in importance. However, the format will not be that of the classic mom-and-pop small supermarket, which will vanish, but rather a concept that is totally dedicated to a local market with operating hours, product assortments, services, etc, that meet local demands. Some may resemble a meal shop, others a cafe-kiosk with videos and sweets, etc.
Out-of-home consumption
JWG: "In Europe we expect to see within ten to 15 years a situation similar to that in the USA, where every dollar spent on food and indulgences is divided between 50 per cent consumed at home and 50 per cent consumed out of home. Currently in Europe, about 30 per cent of
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The future will see concepts with a fresh image coming from the catering industry. |
And what about e-cornmerce in the future?
LJ: We found that retailers struggle with the concept of delivering foods to consumers' homes, whether they use the Internet as a tool or not. It's clear that the real problem is the last mile to the consumer. Based on our research on this topic we found that every order from an individual household worth €50 still costs about €15 to deliver at home. That means that you need an additional fee of between €12 to € 17 for every drop. Not many retailers dare to ask for this fee from their customers. In our research retailers agreed with this conclusion. When they decided to continue the home delivery, they saw it as a part of their total service portfolio to their customers and not as a separate profit unit. But even when they did so, they indicated that they would increase the delivery fee to the out-of-pocket cost level of €15 per order.
JWG: Some retailers are going to act and behave like A-brands. That means that they guarantee their customers a total portfolio of services and put the mark of their store-concept on it. In that service-portfolio there may be room for delivering foods at home. We concluded that in a homogeneous local or regional market of about 15 to 20 million people, there will be room for three different supermarket chains to behave like A-brands. And in addition to that we will see about ten other retail concepts.
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The State of the Art in Food study identifies six major developments that will have a huge impact on the future of the food-supply chain in the coming five or ten years 1. The necessity for growth among the publicly traded companies is a key goal for the industry. We expect to see new spin-offs of areas of conglomerates that are not considered core to the organisation. We will see more focus on industries that will add value to the total corporation. 2. The power of the food retail sector is just beginning ... 3. We expect to see consumer behavioural changes as a result of greater variety, more eating out of home, more convenience, more reliability and more services around food. 4. The power of individual global brands will come under pressure from public opinion. Global Western brands will still be popular in emerging markets but will need to be conscious of the new social values in mature markets. 5. Technology will increasingly drive certain changes in the industry. In the supply chain, tracking and tracing will be a sine qua non in fresh foods; at the point of sale automatic scanning and paying systems will grow in importance; at the supplier level technology will involve ingredients and GMOs; and at the customer level retailers will begin to make better use of information about customer behaviour. For example, retailers will gain the ability to tell every individual shopper at a checkout what he should have paid if he had shopped at the store of a competitor. 6. The WTO agreements will lead to the elimination of all kinds of subsidising in agricultural businesses. That means a lot for European farmers who will have to restructure their current strategy to include more value-added products. And new markets such as China, South America and Eastern Europe will grow in importance in the agricultural sector. |
When stores become brands, does that mean that they need private labels?
JWG: Yes, that is our conclusion. But not a mainstream private label. When you want your store to be a brand, you need quality standards, you need a unique assortment, you need innovation, you need an attractive image and constant improvement of your standards. Our research points to dozens of future developments regarding brands and private label issues. But an overall conclusion is that a retailer that aspires to be an A-brand underestimates the importance of brand-building know-how. We see that some retailers are at the level of branding their stores. But the ability to continue to meet the constantly changing demands and expectations of their customers is a very difficult job. However, they can learn from brand giants such as Nestle and Unilever how to accomplish this.
With regard to private labels, we will see a segmentation. Top retailers need a home-brand that is positioned at top-level with a perfect quality-price balance featuring many innovations. We expect to see these core value PL’s especially in those product categories where the retailer distinguishes itself from its competitors. But on the other hand, we will also see private labels in mid-range supermarkets or at a discount level. These are defensive private labels generally meant to be an alternative to expensive brands.
The food supply chain is efficiency-driven. Will this continue?
LJ: The food supply chain has not yet reached the gold-medal level of efficiency. Based on our research, in Europe the total food chain can earn about €8 billion until 201O! In the USA this comes to about $6 billion. There are a number of obstacles in the battle for efficiency when it comes to cooperation among retailers, manufacturers and suppliers. Technical barriers in the IT area such as the need for less complexity and more standardisation and the so-called emotional barriers. Retailers show no willingness to share their point-of-sale data and customer information with the rest of the supply chain. And a very important strategic barrier is the turnaround of the classical product-driven supply chain in the agriculture area into a total demand-driven supply chain, ruled by the retailers and by extension consumers. In the next ten years we will see a tremendous change in the agricultural area. The agreements coming out of the World Trade Organisation of 2001 will lead to those changes. In addition, the entrance of Eastern European agricultural states like Poland, Hungary and Romania will continue to build the demand-driven agricultural supply chain.
Did you find remarkable mistakes in the consolidation trends in the food area?
Hypermarkets may have trouble in the future unless they succeed in creating new appeal for customers.
JWG: Yes, we did research on this topic.
The most important mistake is the underestimation of local and cultural importance in the internationalisation of the big companies. Millions of dollars are lost because of a 'one strategy fits all markets' belief. Currently all the global companies know that it is important to root yourself in the different markets as a local company with local leadership and local cultural values. But there is still a gap to bridge between knowing and acting in accordance with that know-how. Big companies have well-established core leadership styles, most of which are impacted by their home-market countries.
And it is difficult to adapt the special values of, for instance, 'feminine' countries when you yourself come from a 'masculine' culture. There is one core value in leadership that is seen as the most important key success factor by almost every company that was involved in this study: that is the ability of international leadership to unlock the possibilities and talents of key people in local markets. In other words, the elephant must be able to dance to the rhythm of every type of music.
Between July 2001 and December 2001, the global consulting firm Cap Gemini Ernst & Young conducted an extensive international research project examining the current and future state of the food supply chain in Europe, Asia Pacific and North America. Under the name 'State of the Art in Food' Cap Gemini Ernst & Young and Reed Elsevier - publisher of Elsevier food International - combined their expertise in the food sector, together with ACNielsen, NFO Trendbox and the professors of three universities. The research comprises 65 in-depth interviews with CEOs from leading food retail and manufacturing firms in 17 countries worldwide and 225 questionnaires answered by other industry executives. The results of the research and a summary of most of the interviews have been published in a book of more than 600 pages (price: €90). For more information please e-mail Jan-Willem Grievink (janwillem.grievink@cgey.nl) or Lia Josten (Iia.josten@cgey.nl).
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