Agribusiness Review - Vol. 4 - 1996

Paper 4
ISSN 1442-6951

The Retailer-Driven UK Food Industry: Structure, Performance and Implications for Australia

Bill Schroder 
Head, Syme Business School-Frankston, Monash University
& Nicki Marks, 
Project Director, Australian Agribusiness Research Unit, Monash University

The authors were Co-Leaders of the Monash Agribusiness Research Unit's Cooperative Directors and Managers tour to Europe in May 1996. This paper is based on published material, and observations and discussions made on this tour. We particularly acknowledge the contribution of the Food Industry Management Group at Wye College. Monash 1 s research program on linkages in the food chain is supported by the Rural Industries Research and Development Corporation.

• Introduction
• Food consumers
• Food retailing
• Overview
• Retail brands
• Horizontal retail alliances
• Internationalisation of retailing
• Competition
• Food manufacturing
• Agricultural producers
• Supply chain management
• Exhibit 2 Bananas: A Case Study of a Dedicated Supply Chain
• Conclusion
• Implications for Australia
• References
• Footnotes

Introduction

The industrialisation of food production and distribution was described in a recent issue of this journal ( Schroder and Mavondo 1995). The demand for industrialisation is driven ultimately by consumers' demands for product diversity and food safety. Food manufacturers and retailers respond to this requirement by seeking differentiated products and raw materials, and an identifiable quality audit trail back to the farm and even farm-input suppliers. Industrialisation is facilitated by biotechnology (allowing a faster response to changes in consumers requirements) and information technology (allowing electronic linkages between firms). For retailers and processors, the transaction costs of dealing directly with agricultural producers is reduced by the emergence of a small number of large 'corporate' farmers.

The industrialisation of food production and distribution was described in a recent issue of this journal ( Schroder and Mavondo 1995). The demand for industrialisation is driven ultimately by consumers' demands for product diversity and food safety. Food manufacturers and retailers respond to this requirement by seeking differentiated products and raw materials, and an identifiable quality audit trail back to the farm and even farm-input suppliers. Industrialisation is facilitated by biotechnology (allowing a faster response to changes in consumers requirements) and information technology (allowing electronic linkages between firms). For retailers and processors, the transaction costs of dealing directly with agricultural producers is reduced by the emergence of a small number of large 'corporate' farmers.

The distinctive feature of the industrialisation of the food chain in the UK is that it is retailer-driven. There is probably no other country in the world in which retailers exert more influence on the food supply chain. This phenomenon manifests itself in the predominance of retail brands, retailer initiatives in new product development, and retailer-initiated vertical and horizontal alliances.

It is not immediately obvious why this has occurred. The British are not renowned for their discernment on food matters (in fact, rather the opposite, as the traditional, British-derived, Australian diet will attest!). The due diligence provisions of the British Food Safety Act 1990 provide a strong incentive for retailers to establish quality audit trails, especially for meat and fresh produce ( Hobbs and Kerr 1992). Marks and Spencer, while representing a small share of the grocery market, pioneered retail brands and, perhaps, provided a model for other retailers.

In this article we will look at the UK food system, from consumer to agricultural producer, emphasising vertical and horizontal linkages. The role of food retailers is discussed in detail. We conclude with a discussion of the possible implications for Australia.

Food consumers

Demographic, lifestyle, attitudinal and food consumption patterns are similar to the other 'developed' countries. These are as follows:

• There are declining birth and death rates with an overall static and ageing population. The UK population is forecast to be about the same in 2051 as it is now about 60 million - but the proportion over 65 years of age is expected to increase from 16 to 24 per cent ( Barnes and Dadomo 1996).
• Household size is falling, due to an increasing proportion of single-member households. The proportion of single-male households is forecast to increase to 13 per cent by 2001 - up from around 3 per cent in 1971.
• There is increasing female employment, with an increasing proportion of people employed in more than one job and an increase in hours worked per week for those who are employed. Incomes are becoming increasingly unequal, with the rich getting richer and the poor getting (relatively) poorer.
• People are generally time-poor. Surveys in 1988 and 1994 showed that the proportion of people who agreed with the statement, "I never have enough time to get things done" increased from 52 to 57 per cent ( Barnes and Dadomo 1996).
• There has occurred an 'internationalisation' of the diet, with food buyers demanding a diversity of ethnic foods.
• An increasing number of meals are consumed outside the home - an increase of 43 per cent between 1981 and 1995 ( Taylor 1995).
• Concern about food quality is increasing, especially since the outbreak of 'Mad Cow' disease and the food-related illness.
• There is growing concern about environmental issues.
• Concern about the morality of food production methods is increasing. This is because of animal welfare consideration in particular. Twenty five per cent of UK women between 15 and 30 are vegetarians. Worries about the treatment of animals are the main reason for vegetarianism, which is significantly ahead of health concerns.

The food industry has responded to these demographic and attitudinal trends by increasing the rate of new food product development, dramatically expanding the range and quality of fresh produce available to consumers, developing convenience products and convenient ways of buying food, and, most importantly, developing 'traceability 1 in the supply chain to meet the due diligence provisions of the Food Safety Act. The Institute of Grocery Distribution runs a 'Consumer Concern' focussing on package open-ability, legibility, and store layout, all designed to benefit the elderly.

Food retailing

Overview

The UK food-retailing sector is the most concentrated in Europe, and has the highest percentage of own-label products (Table 1).
By 1995, the market share of the top five multiples had increased to 70 per cent (Food Industry Management Group 1996). The UK retail concentration figures are somewhat lower than in Australia, where the top five food retailers have a market share in excess of 80 per cent.
The number of produce outlets fell from 30 000 in 1975 to 8 000 in 1995. Own label market shares differ by product category, ranging from less than 5 per cent for chocolate to over 90 per cent for chilled ready meals ( Ennew , McDonald, Morgan and Strak 1995).

Table 1 : Market share of top five retailers and sales of retail brands 1992

Source: Hughes (1994).

Supermarkets handle over 70 per cent of fresh produce, and are the main shopping venue for higher income groups (Table 2). There are only 25 key decision makers in produce retailing, together controlling 80 per cent of produce by value.

Table 2 : Percentage of food purchased from supermarkets, 1994/95

The business practices and characteristics of Sainsbury, the second largest supermarket chain after Tesco, illustrate the key features of UK food retailing (see Exhibit 1).

Exhibit 1 : Characteristics and practices of J Sainsbury PLC: The future face food retailing?

• Sales £12 billion; Profit £900 million (1994195)
• Market share. 19 per cent of packaged groceries; over 20 per cent of fresh produce
• 500 produce lines, 3000 tonnes of fruit, vegetables and flowers delivered daily
• 19000 lines in typical supermarket
• 66 per cent own brands. Some 1200 new own brand products introduced in 1994 / 95
• "Partners in livestock" program has 12000 farmers suppliers, all of whom are individually visited and accredited.
• Integrated crop management system covers more than 60% of crops supplied to Sainsbury
• Employs 600 food technologists
• Sells the apple variety (Aporo) bred exclusively by ENZA (the former New Zealand Apple and Pear Board)
• Stocks of tomato puree made from genetically engineered tomatoes, together with a brochure giving an explanation of how the tomato variety was produced.
• Staff members can remove any product from the shelf if they think its quality is not satisfactory
• Sell their own glossy lifestyle magazine.

Sources: Company Annual Report. Wye College Food Management Group, Wilson (1995), observation discussion with Sainsbury staff.

The Sainsbury story illustrates the pro-active role played by the UK supermarkets in the food supply chain - linking back to individual agricultural producers and using their food technology skills in developing new products and quality assurance.

Retail brands

While own brands account for less than 30 per cent of total packaged grocery sales, their share of the supermarket sector is much higher. In the UK, retail brands are quality brands, rather than the no-name' generic brands found in Australia and the USA. Brands offer security to the buyer. In the UK, this security is increasingly provided by retailers rather than manufacturers. This is not the case in the USA and certainly not in the fast-growing food markets of Asia. The better that supermarkets become at 'branding the store', the less the requirement for conventional approaches to branding through package labelling and the like. Bananas were one of the first fruits to be branded. They are no longer labelled in UK supermarkets. The potential down-side of store branding is the risk that a quality problem in one area will impact on the sales of other products sold under the retail 'brand'. This risk causes the connection between retailer brands and vertical alliances with suppliers to establish traceability and a quality audit trail (discussed further below).

While own brands account for less than 30 per cent of total packaged grocery sales, their share of the supermarket sector is much higher. In the UK, retail brands are quality brands, rather than the no-name' generic brands found in Australia and the USA. Brands offer security to the buyer. In the UK, this security is increasingly provided by retailers rather than manufacturers. This is not the case in the USA and certainly not in the fast-growing food markets of Asia. The better that supermarkets become at 'branding the store', the less the requirement for conventional approaches to branding through package labelling and the like. Bananas were one of the first fruits to be branded. They are no longer labelled in UK supermarkets. The potential down-side of store branding is the risk that a quality problem in one area will impact on the sales of other products sold under the retail 'brand'. This risk causes the connection between retailer brands and vertical alliances with suppliers to establish traceability and a quality audit trail (discussed further below).

Horizontal retail alliances

Individual retail chains are powerful buyers in their own right. In Europe, the chains combine in buying groups to further enhance their buying power. These groups account for one third of the total European food market. According to Fearne (1995): "Horizontal alliances will continue to develop as retailers seek to squeeze procurement and distribution costs further and establish genuine Euro-brands."

Individual retail chains are powerful buyers in their own right. In Europe, the chains combine in buying groups to further enhance their buying power. These groups account for one third of the total European food market. According to Fearne (1995): "Horizontal alliances will continue to develop as retailers seek to squeeze procurement and distribution costs further and establish genuine Euro-brands."

Retail alliances also provide a vehicle for sharing scanning and other data - an activity whose full potential has yet to be realised. In a recent survey (Institute of Grocery Distribution 1995) 69 per cent of food industry respondents agreed with the statement that retail alliances will grow in strength.

Internationalisation of retailing

There are few global food retailers operating in the same way as companies such as Nestle and Unilever operate as global food manufacturers. The offshore activities of the UK multiples are relatively small - Sainsbury owns two chains in the USA (Shaws and Giant); Tesco has a joint venture with Catteau in France. The most global European food retailer is the French company Carrefour, with over half the company's net income coming from outside France.

There are few global food retailers operating in the same way as companies such as Nestle and Unilever operate as global food manufacturers. The offshore activities of the UK multiples are relatively small - Sainsbury owns two chains in the USA (Shaws and Giant); Tesco has a joint venture with Catteau in France. The most global European food retailer is the French company Carrefour, with over half the company's net income coming from outside France.

Food retailers can internationalise their activities in two ways: firstly, by international investment of the type described above; secondly, by becoming exporters. Retailers have the buying power and supply chain management expertise to source products for export markets. For example, a limited number of Tesco brands can be found in Coles supermarkets. It appears that the export activities of food retailers are in their infancy, and there is potential for expansion. In Australia, Woolworths has indicated its intention of becoming a significant force in the Asian food market.

Competition

The supermarket chains face competition from alternative forms of retailing, driven in part by the demographic and lifestyle changes discussed above. Elderly people, for example, tend to shop locally and more frequently, favouring convenience stores. Time-poor people also look for convenience in terms of type of product, type of store, home shopping, Internet shopping and away-from-home food consumption. During discussions we heard the view that supermarkets had, in fact, peaked as the dominant type of food retailer. An alternative view is that the strengths of the chains should allow them to move easily into convenience retailing, home shopping, and the food service industry if they choose to do so.

The supermarket chains face competition from alternative forms of retailing, driven in part by the demographic and lifestyle changes discussed above. Elderly people, for example, tend to shop locally and more frequently, favouring convenience stores. Time-poor people also look for convenience in terms of type of product, type of store, home shopping, Internet shopping and away-from-home food consumption. During discussions we heard the view that supermarkets had, in fact, peaked as the dominant type of food retailer. An alternative view is that the strengths of the chains should allow them to move easily into convenience retailing, home shopping, and the food service industry if they choose to do so.

Food manufacturing

Branded product food manufacturers are still a major force on the UK scene. Thirteen of the 20 top food manufacturers in Europe are UK-based ( Ennew , et al 1995). The major brands have gained market share along with retail brands, implying a major decline in secondary brands ( Taylor 1995). However, even the largest manufacturers are affected by the growth in retail brands. Unilever, with advertising expenditures of £3.4 billion in 1994 is reported to be following the "long-term trend away from branded consumers to own-label products" ( Gunthorpe , Morgan and Strak 1995).

Branded product food manufacturers are still a major force on the UK scene. Thirteen of the 20 top food manufacturers in Europe are UK-based ( Ennew , et al 1995). The major brands have gained market share along with retail brands, implying a major decline in secondary brands ( Taylor 1995). However, even the largest manufacturers are affected by the growth in retail brands. Unilever, with advertising expenditures of £3.4 billion in 1994 is reported to be following the "long-term trend away from branded consumers to own-label products" ( Gunthorpe , Morgan and Strak 1995).

Food manufacturing is more stable than other types of manufacturing ( Ennew , et al 1995, and p.11). It might be expected that food manufacturing profitability would have declined in response to the increasing power of retailers, but this hypothesis is not supported by data showing a steady increase in the operating margins of the major manufacturers for the period 1986 to 1993 ( Ennew , et a! 1995, p.27). For food manufacturing as a whole, the evidence is that sector profitability has increased at a faster rate than general manufacturing, but at a slower rate than food retailing ( Ennew and McDonald 1995) 3 .

The major food manufacturers often assume the role of 'Category Captain' in partnership with major retailers ( Barnes , McGrath and Pinnock 1995), further weakening the position of secondary brand suppliers ( Samuel and Ratnatunga, 1993). Like the retailers, the manufacturers are establishing alliances; Nestle and General Mills, Pepsico and Unilever, Dairy Crest and Yoplait ( Fearne 1995).

Agricultural producers

Compared to the rest of Europe, UK farmers are bigger, and less prone to cooperate in agricultural marketing and processing ( Martin and Hughes 1993).

Farmers are being encouraged to integrate forward by subsidies to establish processing plants under the 'Marketing Institutions' provisions of the World Trade Organisation. Such subsidies are permissible under the 'Green Box' rules of the GATT.

To achieve their quality assurance and traceability objectives, supermarkets prefer to deal with a small (five to 15) number of suppliers for fresh produce. Needless to say, such suppliers are not common. 'Supplier hubs' are alliances of large and smaller producers with the common purpose of supplying a supermarket chain.

These arrangements may also involve specialist distributors. "With the growth of European retail alliances will come joint ventures with distributors, and farmers will be forced to coordinate their activities to meet the tight quality specifications and volume requirements of a "diligent food industry" ( Fearne 1995, p.35).

It appears that traditional farmer cooperatives, which have never had a strong presence in the UK, are not favoured by retailers as suppliers.

Grimsdell (1995) provides a view of supply chain management issues from the perspective of the 'new breed' of agricultural producer. British Field Products (BFP) is one of the largest farming companies in the UK with a turnover of £14 million. BFP produces 7 500 tones of broccoli for the retail and processing markets. BFP deals with supermarkets through two specialist produce marketing companies (Elgro and G's Marketing). The company consciously maintains a balance between the fresh and processed markets with about three quarters of its production going to the latter.

Grimsdell (1995) argues that there are six fundamental requirements for an efficient supply chain between growers and the major retail customers. These are:

• scale of operation,
• strategic alliances,
• production flexibility,
• continuity of supply,
• quality control, and
• communications.

Regional 'branding' of agricultural products is becoming popular, and is encouraged by EU policy. For example, Marks and Spencer market 'Appellation Controlee' dairy products produced from milk sourced from selected Ayrshire herds in Scotland. We are seeing the beginnings of this sort of activity in Australia. An example is King Island Dairies.

Supply chain management

Food retailer supply chain linkages are established with suppliers of meat and produce, as well as with food manufacturers. The UK leads the world in the former, but probably not in the latter (The Wal-Mart-Proctor and Gamble relationship in the US provided a model of manufacturer-retailer supply chain management ten years ago).

The Wye College Food Industry Management Group (1996) gives eight reasons for the emergence of retailer-supplier vertical partnerships in the food marketing. These are:

• rewards by anticipating consumer wants and being able to respond more effectively than competitors;
• the pressures from UK and EU legislation (eg the 1990 UK Food Safety Act);
• consumer concerns about traceability;
• buoyant demand for chilled and fresh products with short shelf lives;
• the need to reduce costs through Just-in-Time, Efficient Consumer Response and other similar business practices;
• shorter life cycles for food products;
• the need for better supply chain integrity to counteract criminal tampering; and
• 'Internationalisation' of the supply year (sourcing seasonal products from different countries).

Why does the UK lead in perishable product supply chain management? According to the Wye College experts (Food Management Group 1996), there are four main reasons, as follows:

• buoyant demand for fresh produce, especially from higher income food buyers;
• the supermarkets' dominance of fresh produce retailing;
• the risk of quality problems in one area of the operation spilling over into other areas; and
• the need for retailers to deal with a small number of suppliers to facilitate quality assurance and new product development.

There will be increasing competition amongst a small group of producers and distributors for 'preferred supplier' status. Once a supplier has achieved this status, it becomes difficult for new entrants to challenge it - a type of barrier to entry ( Samuel and Ratnatunga 1993).

Wilson (1996) provides a case study of supply chain management for an imported product, namely bananas. This is presented in Exhibit 2.

Exhibit 2 : Bananas: A Case Study of a Dedicated Supply Chain

The Players:

J Sainsbury: UK's second largest food retailer.
Sainsbury sells 1500 tonnes of bananas per week The company has seven banana suppliers, but wants to reduce this to four. The company's fresh food philosophy is "to guarantee a quality product sourced through growers who are prepared to take a long term view of their relationship with us". The company identified candidates for preferred supplier status through their distributors;

Mack Multiples : Importer and Distributor of Fresh produce.

Mack is a family owned company established in 1874. Mack Multiples is a division of the company specialising in servicing supermarkets They began sourcing bananas only four years ago.: Importer and Distributor of Fresh produce.
Mack is a family owned company established in 1874. Mack Multiples is a division of the company specialising in servicing supermarkets They began sourcing bananas only four years ago.

Noboa : a major family owned banana plantation in Ecuador.

Noboa is strong in logistics and technical support, controlling 3000 reefer containers and 29 temperature controlled vessels and pioneering integrated crop management in Central America. The company has dedicated arms and pack houses for Mack and is also a significant banana supplier in its own right, Bonita being a Noboa brand.: a major family owned banana plantation in Ecuador.
Noboa is strong in logistics and technical support, controlling 3000 reefer containers and 29 temperature controlled vessels and pioneering integrated crop management in Central America. The company has dedicated arms and pack houses for Mack and is also a significant banana supplier in its own right, Bonita being a Noboa brand.

The supply chain.

The process begins with the Sensory Appraisal Panel in Sainsbury 1 s Home Economics Department. British banana preferences are fed back to Ecuador via Mack Multiples.

The Sainsbury ordering process is computer based and occurs automatically. In Ecuador the Sainsbury bananas are supplied from dedicated plantations and handled through dedicated pack houses. It is possible to identify each hand of bananas back to individual packers - providing the traceability necessary to meet the requirements of the Food Safety Act.

The plantation and pack house managers are kept informed about UK developments and the Sainsbury buyers and technical staff pay regular visits to Ecuador. Information flows are at all levels of the three partners - buying operations, food technologists and logistics.

Conclusion:

Effective Supply Chain Management places its emphasis on the consumer and what will bring the most benefit to the end user. This involves sending information on consumer requirements back along the line - the most transparent chains will give the most feedback to the producer.

J Sainsbury and its fresh producer partners recognise that increasingly the competition basis will be the performance of one supply chain against another, rather than simply, retailer versus retailer, and distributor versus distributor. Promiscuous trading relationships will become passe for the major players in the fresh producer markets.

Source: Wilson (1996).

Implications for Australia

If Australian produce suppliers or food manufacturers are considering exporting to the UK or, for that matter, any other sophisticated European, North American or Asian market, they will have to work hard to achieve "preferred supplier" status. Such status is not granted lightly, and the process of achieving it is time-consuming and expensive. However, relationships, once established, lead to new commercial opportunities.

If Australian produce suppliers or food manufacturers are considering exporting to the UK or, for that matter, any other sophisticated European, North American or Asian market, they will have to work hard to achieve "preferred supplier" status. Such status is not granted lightly, and the process of achieving it is time-consuming and expensive. However, relationships, once established, lead to new commercial opportunities.

The strength of the retailers' brand franchise imposes demands on their preferred suppliers. A quality problem in one produce, line can impact throughout the entire retail chain and also on the retailer's other lines.

Supermarkets are actively seeking fewer suppliers. The consequence of not being in the preferred supplier group are to be relegated to status similar to that of secondary brand' food manufacturers. There are, of course, profitable opportunities for this type of supplier, but they will be under increasing pressure as supermarkets expand, not only in their core business, but in convenience stores, food service outlets, and home shopping.

The Australian supermarket sector is even more concentrated than the UK, but has nowhere near the UK level of retail branding. While Coles has begun to move with their quality Farmland brand, but there is no equivalent brand in Woolworths. Whether Australian food retailing will follow the UK model is a matter of conjecture, but retailers have a unique place in the food chain, because of their proximity to consumers. In a consumer-driven system, this gives them a competitive advantage, which, in our opinion, is a long way from realising its full potential.

References

Barnes S, McGrath M, and Pinnock A, (1995) 'The Category Management Revolution', Institute of Grocery Distribution Report.

Barnes S, and Dadomo 5, (1996) 'Convenience Retailing - Profiting from Growth', Institute of Grocery Distribution Report.

Ennew C, and McDonald 5, (1995) 'Economic Theory and the Food and Drink Industry', Chapter 2 in Strak J (Ed), The UK Food and Drink Industry, Euro PA and Associates.

Ennew C, McDonald S, Morgan W, and Strak J, (1995) 'Overview of the UK Food Industry', Chapter 1 in Strak I (Ed), The UK Food and Drink industry, Euro PA and Associates.

Fearne A, (1995) 'Strategic Alliances in the European Food Industry', European Business Review 94, pp.30-36.

Food Industry Management Group, (1996) Key European Food Industry Trends, Wye College.

Grimsdell K, (1995) 'The Supply Chain for Fresh Vegetables: what Makes it Work', Supply Chain Management 1, pp.11-14.

Gunthorpe M, Morgan W, and Strak 1, (1995) 'Further-Processed and Branded Products, and Alcoholic Drinks', Chapter 9 in Strak I (Ed), The UK Food and Drink Industry, Euro PA and Associates.

Hobbs I E, and Kerr W A, (1992) 'Cost of Monitoring Food Safety and Vertical Coordination in Agribusiness: what can be learned from the British Food Safety Act 1990', Agribusiness: An International Journal 8, pp.576-S 84.

Hughes R (Ed), (1994) Breaking with Tradition: Building Partnerships and Alliances in the European Food Industry, Wye College Press, Ashford, Kent.

Institute of Grocery Distribution, (1995) The Grocer Survey, October.

Martin H, and Hughes D, (1993) 'A Comparative Study of Agricultural Marketing in the Netherlands and the UK', Wye College Report

Messinger P, and Narashiman C, (1995) 'Has Power Shifted in the Grocery Channel? Marketing Science 14, pp.189-223

Samuel N, and Ratnatunga 1, (1993) 'Structural Constraints to the Development of Food Processing Industries: A New Research Agenda', Australasian Agribusiness Review 1(1), pp.50-79.

Schroder W, and Mavondo F, (1995) 'The Industrialisation of Agriculture: Overseas Experience and Implications for Australia', Australasian Agribusiness Review 3(1), pp 25-35.

Taylor J, (1995) 'Investment Opportunities in Agribusiness: Lessons from the UK Food Industry', Australasian Agribusiness Review 3(1), pp.3-i 7.

Wilson N, (1996) 'Supply Chain Management: A Case Study of a Dedicated Supply Chain for Bananas in the UK Grocery Market, Supply Chain Management (to be published).

Footnotes.

3 - In the USA, food manufacturing profitability appears to have increased relative to food retailing (Messinger and Naraslinhan, 1995)