The US Fresh Produce Supply Chain DR. ROBERTA COOK Dept. of Ag and Resource Economics University of California Davis March 2009 U.S. Fresh Fruit and Vegetable* Value Chain, 2008 Estimated Billions of Dollars $10.1 imports institutional wholesalers produce and generalline wholesalers $48.4 food service establishments farms shippers integrated $21.2 $5.6 *Excludes nuts exports wholesaleretailers Source: Estimated by Dr. Roberta Cook, UC Davis, based on numerous public sources, incl. USDA, DOC, Progressive Grocer, and PMA. Preliminary estimate. Not for publication. $63.1 supermarkets and other retail outlets farm & public markets $1.7 $113.2 + consumers 1
Leading US Fresh Market Vegetable States in 2008: Geographic concentration of production (due to climate) limits local sourcing potential, yet it is growing in the summer/fall Area Harvested Production Value State % of Total State % of Total State % of Total CA 44 CA 49 CA 50 FL 11 FL 10 FL 15 AZ 7 AZ 7 AZ 7 GA 6 GA 5 GA 4 NY 4 NY 4 NY 4 Source: NASS/USDA, Vegetables 2008 Summary, January 2009 Leading State Market Shares, Value of Production of Fresh Fruits State CA WA FL OR MI NY Others Selected state fresh fruit value Total US fresh fruit value Source: USDA/ERS, Gary Lucier. Value ($1,000) $ 3,665,350 $ 2,021,237 $ 498,527 $ 101,578 $ 83,234 $ 249,583 $ 838,317 $ 7,458,226 $ 8,543,212 % 49% 27% 7% 1% 1% 3% 11% 100% (selected state value is 87% of total US value) 2
Market Structure Most growers rely on shippers to market their products, most of which are family-owned forward-integrated grower-shippers, most of which market not only their own production but that of other growers For products that are shed packed (such as Ca. tree fruit) some growers may use one packer to pack the fruit and a packer-shipper to market it (not relevant for field-packed items) This means that when looking at the number of sellers facing buyers we should focus on grower-shippers or packer-shippers rather than the number of growers 3
Growers and shippers are price takers, they typically are not large enough to set prices Growers receive the residual of the market price less marketing charges, pick, pack and harvest, palletization, in some cases cooling, and other handling charges and mandated-marketing or other institutional fees (e.g., CLGA, commission or marketing order charges) The shipper has incentives to continue shipping if at least covering variable costs, and in order to meet commitments with buyers; sometimes there is no return to the grower (production costs are not recouped) Perishability makes markets and returns volatile 4
US Fresh Produce Trade,* $Million, 1994-2008 12,000 10,000 10.6 8,000 Imports 6,000 5.6 4,000 Exports 2,000 0 1994 1996 1998 2000 2002 2004 2006 2008 *Fruit imports may include frozen. Source: USDA/FATUS Estimated fresh fruit and vegetable imports as a percent of U.S. disappearance, 2007 Fresh Fruit, all Excluding Bananas Item Fresh Veg., incl. Melons & Potatoes Vegetables & Melons Melons Vegetables, excl. Melons and Potatoes Potatoes Fresh Fruit & Veg., all Excluding Bananas % 16.9 18.5 24.8 17.3 9.3 47.0 29.7 27.8 21.6 Source: Economic Research Service, USDA, Gary Lucier. 5
Top U.S. Grocery Retailers, Estimated Grocery-Equivalent Sales Only (not total firm sales), in U.S. Market, 2008 Estimated Sales Company in billion $ # Stores Wal-Mart 167.2 4,184* Kroger 66.3 3,269 Costco 39.8 394 Supervalu 37.4 2,514 Safeway 36.0 1,518 Publix 22.8 1,044 Ahold 21.8 735 Target 21.4 1,682 Source: www.planetretail.net downloaded March 17, 2009, Food Banner Sales only. Top U.S. Grocery Retailers, Estimated Grocery-Equivalent Sales Only (not total firm sales), in U.S. Market, 2008, cont. Estimated Sales Company in billion $ # Stores Delhaize Group 15.8 1,594 HE Butt 12.7 289 Aldi (Albrecht Fam.) 10.9 1,304 Meijer 10.8 190 Whole Foods Market 7.7 264 Winn-Dixie Stores 7.1 521 Tengelmann (A&P) 6.6 434 *Includes 814 discount stores, 2621 supercenters, 145 Neighborhood Markets, 600 Sam s, and 4 Marketsides. Source: www.planetretail.net downloaded March 17, 2009, Food Banner Sales only. 6
2008 Estimated U.S. Retail Concentration Ratios Depends on which numerator you use Concentration Ratios Share top 4 Share top 8 Share top 20 % of Food Sales 1 52.4 % 69.6 % 86.8 % % of Grocery Sales 2 25.6 % 36.3 % 47.0% 1 Planet Retail food banner sales shares of USDA retail food sales. 2 Planet Retail food banner sales shares of estimated Willard Bishop US grocery sales. Source: Compiled by Roberta Cook from above sources. Note HHI calculated by Cook at a little over 1000 with >1000 the threshold for mild concentration. Ca. Share of: the Number of U.S. Vegetable Farms, and Sales, by Key Size Category, 2007* Item Farms with Sales of $1 Million or more - # Total Sales ($millions) of farms with sales of $1 Million or more CA 1,109 $5,212 % US 1.6% 35.5% *Vegetable production for fresh and processed markets. Source: 2007 Census of Agriculture 7
Estimated Number of U.S. Wholesale and Retail Firms, and Grower-Shippers, 2008* Item Retail Chains (10 or more stores) Retail Chains with 100 or more stores Independent Retailers (<10 stores), in Bluebook Wholesale grocers Total US Grower-Shippers Grower-shippers in California Grower-shippers in Florida 156 58 >72 220 3,452 1,102 404 Source: Bluebook online queries, March 18, 2009. *May be over counting due to firms listed in multiple categories. Each grower-shipper is competing for growers and growers tend to focus on short-term returns and compare prices/box to their neighbors This makes it very difficult for shippers to invest in marketing where short-term returns may not be that apparent Marketing is often viewed as just taking cents/carton off of the bottom line rather than adding value The reality is that investing in marketing must be done judiciously, strategically, with a medium-term plan and that competitive positioning is a key element of the go-to-market strategy scarce resources must be effectively targeted! 8
Fresh Produce Industry Environment Suppliers evaluate traditional practices Sell what we produce/grow Focus on productivity/yields and costs Order-book selling New challenges in a competitive environment Create value from the consumer s perspective Quantify current category performance Identify performance gaps and sales opportunities Are there specific strategies and tactics that are correlated with superior performance Category Leadership Approach Produce/Grow what consumers want Increase marketing sophistication Fact-based selling PRODUCTS Source: The Perishables Group SOLUTIONS Implications for Suppliers Opportunity: Become a total category supplier Offer fact-based insights beyond category management Guide sales analysis and research to develop the category Understand role of promotion, pricing, assortment and merchandising Low Cost Provider Differentiated Service Provider Source: The Perishables Group 9
Industry Trends Identifying which activities add more value than cost Eliminating non-value-adding activities Decreasing operational inefficiencies often hidden and not important enough to attract attention in more favorable markets but with margin squeeze they count Information technology, business intelligence will play a key role at all levels of the value chain going forward Those who embrace this may gain competitive advantages This includes a better understanding of consumers and the tactics that increase consumption without sacrificing return for the commercial buyer or seller Challenges Competition is more intense than ever at all levels of the value chain our food market is relatively mature (slow population growth), and concentration is increasing at all levels of the system What entails sufficient wherewithal to compete continues to grow meaning marginal competitors are becoming road kill Size is increasingly important as investment requirements increase e.g., in order to invest in business intelligence systems or proprietary varieties or enhanced food safety metrics or new store designs or improved distribution facilities or processes Scale can help achieve buying and selling advantages but can only be managed successfully with focused management, real-time data management systems and operational excellence 10
Market-driven vs. production-driven Becoming market-driven rather than production-driven is a mindset, and a challenge, but is increasingly becoming a necessity for production ag with the potential for keeping ahead of competitors! Most grower-shippers know little about the consumers of their products Commodities with generic promo programs tend to know more, but generic promo increasingly threatened Marketing is the art of creating genuine customer value New Trends in the Fresh Produce Industry Wal-Mart is changing its fresh produce procurement model: including more opportunity and local buys, rather than using a supplier-assigned DC approach now there are dollar value assignments, taking into account food miles, system in flux. Recently Ron McCormick moved to a new position, head of sustainability and locally grown initiatives. Newer entrants such as Tesco from the UK, smaller store formats, private label focus, Trader Joe s already succeeded. 11
New Trends in the Fresh Produce Industry Marketing to children, 41 million kids have buying power of >$40 billion and influence $146B of expenditures; Disney Garden, new branded value-added products targeting kids; other character-driven programs; National Mango Board, Mango Fandango, Jango Mango, HEB school programs, ETC! Greater shipper emphasis on brands and consumer marketing (especially using websites as a vehicle for direct consumer communication) changes dynamics Branding vs. private label, both hinge on understanding what represents value to consumers New Trends in the Fresh Produce Industry Emergence of mega-retailers over last decade has led to supplier concern over countervailing power More commodity groups are utilizing information sharing cooperatives as a tool for managing flow to market and maintaining firmer f.o.b. prices Closer alignment (vertical coordination) of buyers and sellers in supply chain, account driven sales and marketing is a big deal now! 12
WHAT a DOLLAR SPENT for FOOD PAID FOR in 2006 in the USA Labor 38.5 Other costs - 3.5 Business taxes - 3.5 Repairs - 1.5 Interest - 2.5 Rent - 4.0 Depreciation 3.5 Advertising - 4.0 19 Pre-tax profits - 4.5 Energy - 3.5 Transportation - 4.0 Packaging - 8.0 Marketing bill 81 Gross Farm Value 19 Source: Howard Elitzak ERS/USDA Where does $1.00 in retail fresh produce sales go? C.O.G. 10% 10% 10% 45% Labor Shrink Misc. Exp 15% 15% Source: Bruce Peterson, President, Peterson Insights, 2009 Misc MD Net Profit 13
Top Factors in US Consumer Selection of Primary Supermarkets, 2008 High-quality fruits and vegetables Low prices* Clean, neat store High-quality meat Accurate shelf tags Convenient Location Sales/specials** Use-before/Sell-by date marked Courteous/friendly employees Fast Checkout Store Layout Nutrition/health info Private Label Recycling/sustain. Organic/Nat. 26% 25% 54% 60%64% 53% 73% 75% 72% 66% 68%72% 66% *Was 64% in 2007 **Was 55% in 2007 17% 20% Source: FMI Trends 2008 Retail Produce Department Indicators Contributes about 10-12% of total store sales and about 17% of net store profit Pre-tax profit margins in the produce dept. are around 10% - 12% Buyers are generally not held accountable for net margins/profit as the expense side is typically viewed as beyond their control. Buyers focus on gross margin! Source: Bruce Peterson 14
Retail Produce Department Pricing It s takes a 7% change in a retail price for a consumer to sense there has been movement. It takes a 10% change in retail pricing for a consumer to think about a behavior change. It takes a 15% change in retail pricing for a consumer to act and change behavior. So if the f.o.b. price declines buyers will generally take it in margin and it won t negatively impact quantity sold. Source: Bruce Peterson Retail Pricing Strategies Every Day Low Pricing (EDLP) or High-Low pricing are the two most common strategies. EDLP is generally used by new model retailers supercenters, club stores and generally margins are lower than for conventional supermarket chains. Costco margins never exceed 14%. EDLP operators emphasize contract vs. spot market buying but conventional retailers are also increasingly operating more on a partnership basis with key preferred suppliers with program focus. Successful grower-shippers are increasingly account-driven so they can respond to either EDLP or High-Low pricing retailers accordingly. 15
First Quarter 2009 US Retail Fresh Produce Dept. Performance, % Change from Q1 2008 Weekly quantity sold per store Ave. retail price 20.2 13.4 20.2 1.7-3.0-2.8-3.1-5.6-4.9-3.8-15.5 All produce Berries Apples Bananas -11.4 Tomatoes Grapes Source: Perishables Group Chain Wal-Mart Kroger Safeway Supervalu Dow Stock Price Performance Top 4 US Grocery Retailers Stock Price 3/16/09 $59.65 $27.80 $26.24 $24.34 11,517 % Change 9/1/08 3/16/09-18.2% - 24.0% - 26.7% - 38.0% - 37.3% 16
Leading U.S. Supercenter Operator Total* Sales and Units, 2008 Source: compiled by Roberta Cook from www.planetretail.net sales ($ millions) % share units Wal-Mart $235,913 82.5 2,621 Super Target $21,427 7.5 239 Meijer $15,483 5.4 190 Fred Meyer $9,015 3.2 128 Super Kmart** $2,775 1.0 55 Biggs $1,196 0.4 11 TOTAL $285,809 100.0 3,233 *Total sales, not just grocery sales. **2006 Membership Club Industry, U.S. Units, Market Share, and U.S. Food and Sundries Sales,* 2007 Sales ($ billions) % Share Units Costco 28.1 50.3 389 Sam s Club 23.2 41.5 579 BJ s 4.6 8.2 177 TOTAL 55.9 100.0 1,145 *Not grocery sales, excludes: international operations; tobacco; HBC and other nonfood sales; and services. Source: Food Industry Review 2008 17
Sales and Store Numbers in Major US Grocery Channels, by Key Format, 2007, Excluding: Membership Clubs, C-Stores, Grocery Stores with Sales <$2M/Yr., and Dollar Stores Format # of % of Sales, % of Stores Total Stores Million $ Total Sales Total 34,256 100.0% $568,839 100.0% Supermarkets* 27,485 80.2% $405,892 71.4% Supercenters** 2,957 8.6% $135,956 23.9% Combined ltd assort and fresh/natural 3,814 11.1% $26,991 4.7% formats *Conventional supermarkets and super warehouse formats. **Sales of supermarket-type items only (food and non-food grocery). Source: Calculated by Roberta Cook based on data in The Future of Food Retailing, Willard Bishop, June 2008. US Grocery Sales,* Store Numbers and Market Share, by Channel, 2007, and Projected Share, 2012 2007 2007 2007 2012 Sales No. of % of % of $Million Stores Sales Sales Traditional $444,241 40,313 48.9 43.3 Nontraditional $318,259 49,613 35.0 39.6 Total C-Stores** $146,227 148,803 16.1 17.1 GRAND TOTAL $908,727 238,729 100.0 100.0 *Grocery sales only (food and nonfood); excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines. ** Sales exclude gas. Source: The Future of Food Retailing, Willard Bishop, June 2008 18
US Grocery Sales, Store Numbers and Market Share, by Store Format, 2007, and Projected Share, 2012 Traditional Grocery Channel 2007 2007 2007 2012 Sales No. of % of % of $Million Stores Sales Sales Total Traditional $444,241 40,313 48.9 43.3 Trad. Supermkt $389,693 26,894 42.9 35.9 Fresh Format $7,485 814 0.8 0.9 Ltd Assortment $19,506 3,000 2.1 3.2 Super Warehouse $16,199 591 1.8 2.3 Other (small groc.) $11,358 9,014 1.2 1.1 Source: The Future of Food Retailing, Willard Bishop, June 2008 US Grocery Sales,* Store Numbers and Market Share, by Store Format, 2007, and Projected Share, 2012 Nontraditional Grocery Channel 2007 2007 2007 2012 Sales No. of % of % of $Million Stores Sales Sales Total Nontrad l $318,259 49,613 35.0 39.6 Wholesale Club $71,601 1,262 7.9 7.6 Supercenter $135,956 2,957 15.0 21.7 Dollar Store $15,496 20,901 1.7 1.8 Drug $45,796 20,540 5.0 5.0 Mass $43,937 3,782 4.8 2.9 Military $5,472 171 0.6 0.5 *Grocery sales only (includes food and non-food); excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines. Source: The Future of Food Retailing, Willard Bishop, June 2008 19
Private Label Sales in Supermarkets, 2007: Top 10 Private Label Categories by Dollar Volume: Fresh Produce Becoming Important Milk Bread & Baked Goods Cheese Fresh Eggs Fresh Produce Paper Products Deli Dress., Salads, Prep'd Foods Pkg'd Meat Unprep'd Froz. Meats, Seafood Frozen Vegetables $2,100 $2,000 $1,900 $1,400 $1,300 $1,200 $1,100 $3,500 $3,100 $7,400 Millions Source: The Food Institute s Food Industry Review, 2008. Threats and Opportunities Private labels are becoming more important to retailers both as a differentiation tool with innovative rather than just me-too products, and as a way to offer value (price relative to quality) to consumers. Private labels can represent an opportunity to fresh produce suppliers by generating predictable demand for those items, on the other hand, margins are likely to be thin. 20
Total US Food Service $513.186 Billion, Forecast, July 2007, share of dollar sales Bars & Restaurants $328.982B Limited Service 52% 47% Other B$184.204 Travel, Bus. & Ind. Leisure Educ. 21% 12% 14% 23% 11% 19% 1% Bars, Taverns Full Service Retail Hosts Remainder Source: Industry Size July 2007, Technomic Inc. Healthcare Threats and Opportunities On the one hand, intensified competition among retailers provides opportunities for fresh produce suppliers since the fresh produce department is a key point of differentiation for retailers. On the other hand, the growth in new store formats and marketing channels selling fresh food means more pressure on retail margins. And, mega-retailers are likely to exert even more price pressure on suppliers. However, new channels (foodservice, c-stores) selling fresh produce can create new demand that does not cannibalize retail produce sales. 21
Conclusions Emergence of mega-retailers over last decade has led to supplier concern over countervailing power More commodity groups are utilizing information sharing cooperatives as a tool for managing flow to market and maintaining firmer f.o.b. prices but difficult to manage firm rivalry among members Closer alignment (vertical coordination) of buyers and sellers in supply chain still has a lot of room to unfold gains should be huge Growth & Opportunity John Rand Senior Analyst/Management Ventures, Inc.: The US retail landscape is undergoing fundamental change, moving from the bigger I am, the faster I grow to the faster I am, the bigger I grow. E.g., Trader Joe s, Whole Foods, HEB. What is significant is being excellent at something. If a retailer is really good at something that matters to consumers, it will grow. By itself, being big doesn t guarantee growth. We are moving from economies of scale to economies of skill. 22
Supplemental Information 100 U.S. Consumer Store Shopping Habits 90 80 70 60 50 40 30 20 10 0 Grocery Source: ACNielsen Mass Merch Household Penetration (%) Drug Supercenter Dollar Stores Club 2001 2004 2007 23
U.S. Consumer Store Shopping Habits, by Household 80 60 40 Trips Per Year/Household 2001 2004 20 2007 0 Grocery Mass Merch Drug Supercenter Dollar Store Club Source: ACNielsen U.S. Consumer Store Shopping Habits, by Household Looking back even further, in 1995 consumers made 92 trips/year to a grocery store (supermarket) vs. 59 in 2007. But the decline for supermarkets is not the whole story. Total shopping trips/year, across all formats, are down from 152 in 2001 to 138 in 2007. Conventional grocery retailers are fighting back, (e.g., Safeway lifestyle stores, Ingredients for Life Campaign; Hannaford nutritional rating service, Guiding Stars), all benefiting fresh produce Source: ACNielsen 24
US Estimated Fresh-Cut Produce Sales, All Marketing Channels, $ Billion $ billion 18 16 14 12 10 8 6 4 2 0 3.3 6.0 8.9 11.8 Around Source: 55-60% Dole estimated to be sold via foodservice channels. 15.5 ~$6-6.2 at retail 1994 1999 2003 2005 2007 Sources: IFPA, IRI, AC Nielsen; 2007 estimated by Cook Fresh-Cut Produce Retail Sales Stagnate in the Aftermath of the Spinach E. Coli Incident in Sept. 2006 2005 retail fresh-cut produce sales were estimated at $6 billion, the same as in mid-2007. Fresh-cut fruit and fresh-cut veggies continued to grow, BUT. Their growth merely offset the decline in bagged salad sales, for no net growth in the total freshcut category. This is likely the first time that has occurred since the fresh-cut industry began. 25
Fruit, Vegetable and Nut Farm Structure - 4,711 farms selling >$1million account for 4% of total fruit/berry/nut farms and contribute 67% of total value - 4,908 farms selling >$1million account for 7% of total veg/melon farms and contribute 84% of total value Total of 112,690 fruit, berry, nut farms and 69,100 total vegetable and melon farms, of all sizes, but only need $1000+ in sales to be called a farm. Source: 2007 Census of Ag Ca. Share of: the Number of U.S. Fruit and Nut Farms, and Sales, by Key Size Category, 2007 Item Farms with Sales of $1 million or more - # Total Sales ($millions) of farms with sales of $1 million or more CA 2,647 $7,880 % US 2.3% 42.3% Source: 2007 Census of Agriculture 26
U.S. FOOD BUSINESS MERGERS & ACQUISITIONS 724 666 645 658 652 588 583 599 556 1981-2007 538 468 485522529 415 365 813 734 753 641 516 403 368351323 392 413 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: The Food Institute s Food Industry Review, 2003 and 2008 Allocation of U.S. Consumer Food Expenditures: Marketing Bill for Domestically Produced Food $ Billion 1000 800 600 400 200 Marketing Spread 0 1950 1958 1966 1974 1982 1990 1998 2006 Total Value Farm Value Source: ERS/USDA, March 2009, http://www.ers.usda.gov/data/farmtoconsumer/marketingbill.htm 27