September/October – 2002
Story Title: From Price Taker to Price Maker
by: Steven Carruthers
In his keynote address at the recent Hydroponic Farmers Federation conference, publisher and editor STEVEN CARRUTHERS highlighted emerging trends in the Australian and global fresh food markets, and opportunities for growers to become price makers.
Hydroponic and greenhouse growers need to have a greater understanding of changing consumer demands, Hydroponic and greenhouse growers need to have aand what’s happening at the food retail level if they are to maximise the potential of their business.The purpose of my keynote address is to look at some important factors driving a changing market environment, and to highlight those areas where there are opportunities for growers to become price makers.
Over the past decade,the global food system has experienced significant mergers and the entrance of new competitors playing to new rules,placing greater competitive pressures on growers and conventional food retailers. Among these new competitors are mass merchandisers and ‘value chains’ introducing supply chain management,a procurement model designed to streamline the food distribution system. Europe leads in the development of this new market model,and is putting pressure on North American, Australian and New Zealand markets to follow suit.
Figure 1: Australian Vegetable Market.
In Australia, the changing market environment is evidenced by the collapse of the Franklins supermarket chain last year,leaving a retailing duopoly with increasing power to dictate what fruit and vegetables are planted by growers and how much they are paid for their produce. We have also seen the emergence of food processors or ‘value chains’ that co-ordinate the fresh food supply chain from production to marketing to optimally deliver products to retailers with attributes that meet specific end-user needs. Like their overseas counterparts, Australian supermarkets are shifting their focus to vertical integration and building relationships with value chains,rather than with individual growers.
Interest in healthy food is growing as the population ages.
Food retailers are also faced with the challenge of repositioning themselves as new marketing choices develop,such as on-line food shopping and emerging e-commerce procurement options, both of whose impacts and roles are as yet uncertain.The future role of business-to-business e-commerce in fresh produce is particularly unclear given the perishable nature of the products and difference in quality and volumes both intra and inter-seasonally.Unlike the dry grocery industry,the fresh produce sector is more volatile and operates through personal relationships rather than an automated procurement system. However,as competition increases,there are compelling reasons to streamline fresh produce procurement,and retailers are starting to treat fresh food like other food commodities with more stable pricing and volumes.They are looking for greater efficiencies in the procurement process.By purchasing more volume,they hope to lower the per unit cost of goods by negotiating lower prices.In return,food retailers are developing partnerships with value chains,concentrating volumes with these companies.Among the benefits for operators in the supply chain is that demand is more predictable,and there is greater transparency from pricing to food safety.
According to recent studies, the changing market environment is being driven by consumers increasingly demanding more services, including convenience in food purchasing and preparation,taste, quality,safety and variety.There is ample research information freely available in the marketplace, including the Internet,that points to changing consumer demands.The population consensus released in June 2002 reports Australia is shifting towards a society based on the individual rather than the family,a more multicultural society where people live in apartments,marry later and have fewer dependents.
The population study adds weight to those research studies that conclude consumers are changing their eating habits. Along with an ageing population,and a wider range of lifestyle choices made by younger people,consumers are changing to meals that are quick and easy to prepare.With 62% of shoppers spending less than an hour in the supermarket compared to 28% in 1998, consumers have become much more ‘hit and run’ in their shopping habits,and they are buying smaller portions of food.
According to Rob Robson,the CEO of Australia’s largest fresh-cut supplier, Harvest Fresh Cuts/Vegco,research continues to show that people are far more likely to use prepared foods for meals,for entertaining, or cooking for large numbers of people. Fresh-cuts represent a new generation of foods that are growing and evolving quickly in response to consumer demands for convenience,variety, quality and health. While fresh-cuts only represent 2.8% of the fresh produce market in Australia toda, this market share is expected to grow significantly over the next decade.
Changes in consumer habits have also been recognised by the Australian Meat and Livestock Association where market research reports that a family dinner is typically served 4.5 times during an average week.In the same period,red meat is consumed 2.9 times during the family meal,or around three in seven meals.In an average week, 2.6 meals involve stir fries. According to this study, eight in ten people said they had specially prepared meals five or more times a week,and 63% have a home delivered meal at least twice a week.
These studies have important implications for growers:what they grow, how they grow it, and how it is packaged.
Value for Time
The change in consumer demands has been linked to ‘value for time’, where people feel their leisure time is under pressure,and they are choosing to spend less time preparing and cooking meals. Consider the recent study by Wye College, London, which reports meals that took 60 minutes to prepare and cook in the 1950’s, and 30 minutes in the 1980’s, are taking 20 minutes today. In 2010, it is expected to only take eight minutes.
In today’s consumer society,people are looking for ways to save time:they plan less meals, buy fewer ingredients, prepare fewer components,and they are looking for fewer cooking stages and faster cooking times.
Figure 2: Food preparation time at home. (Source: Wye College, London)
Figure 3: Fresh-cut markets – value-added as a % of Total Produce Sales.
There is also a link between food and good health. According to a number of studies,consumption of salads are up and lunch box meals and convenience take-away foods are on the way down. However, the increase in the number of cooking books, good health magazine supplements and TV celebrity chefs has not led to any increase in food preparation and cooking time; rather, consumers want to know more about food:where it’s come from, how it’s been grown, and how it’s been handled throughout the whole process. As our population ages, interest in healthy food is increasing.
Functional food (foods specifically designed to improve health) is expected to become more important as baby boomers continue to fight the ageing process,every step of the way.In the United States, industry experts predict specialty crops will play an increasingly important role in the American diet. As the baby boomers age, specialty crops will also play an important role in Australian diets.
Many consumers are now aware of the health benefits of tomatoes,where recent studies show lypocene, the major carotenoid found in tomato, plays an important role in cancer and heart disease prevention. A great marketing benefit for hydroponic tomatoes. However,promoting health benefits alone seldom sustains a marketing campaign. As long as tomatoes are stacked loose in supermarkets and retail outlets,consumers will forget the niche differentiation. Products promoting health benefits need to be packaged and presented differently,otherwise the consumer will not make the connection.
The McKinsey report into the U.S food service industry predicts changing attitudes and behaviours will influence eating trends over the coming decade.The study forecasts some operator segments will grow,such as full-service restaurants, supermarket food service and recreational lodging.Still growing, but at a slower pace, will be quick service restaurants, bars and taverns.
The McKinsey report also warns that many food products were made successful by the baby boomers,whereas their children,the ‘echo boomers’, can make or break a product in the changing market environment.There is recognition in the food service sector that it needs to capture the hearts and minds of the echo boomers who know what they want, when they want it, and how they want it.
Overseas trends show growers are adopting ways to cooperatively produce products with improved, consumer-driven attributes. The focus of the production sector is moving away from growing products and towards the manufacturing of goods with value-added,consumer-driven attributes. In Europe and the United States, fresh-cuts now represent 18% and 13.8% of the fresh produce market, respectively, and the latest research shows the U.S.market is growing at around 2-3% annually.
Food supply chains are relying more and more on vertical integration and coordinated techniques of production,marketing, and/or processing to optimally deliver products with attributes that meet specific end-user needs. A typical fresh-cut pack now contains everything from leafy greens to bacon pieces and salad dressing, minimising preparation time for consumers.
In Australia, value chains are forming important relationships with growers to supply specialty produce year-round, such as baby spinach and baby capsicum. Industry pundits predict independent operators will become totally inter-dependent on one another in order to meet changing consumer demands. Value chains such as Harvest Fresh Cut/Vegco and Perfection Fresh collaborate directly with supermarkets and other retail outlets to deliver processed foods with short preparation times, and a long shelf-life.
Food safety and quality control are becoming driving forces in the food sector. To a large extent,adverse publicity surrounding genetically modified foods and food-related health scares, has helped shape consumer attitudes. From a grower perspective, processors,retailers and consumers are demanding greater transparency along the supply chain. They want to know about the grower’s quality assurance program,what’s happening with sustainability practices and spray programs. That’s good news for the hydroponics and greenhouse industry which can show it uses sustainable growing practices to consistently produce high quality,safe produce.The adoption of integrated pest management by growers will be essential in this new market environment.
The development of organic and nutraceutical industries based on horticultural products is starting to develop at a rapid rate. The term nutraceutical refers to substances that may be considered food or part of a food and provide medical or health benefits, including prevention and treatment of disease. The movement to organic and nutraceuticals (aka functional foods) is one that could represent the most significant trend affecting the fresh food industry during the next decade.
Food production is becoming increasingly dependent on precise information flow to manage crop production. More and more growers are banding together to achieve better economies of scale, and to market volume produce under a single label. Australia lags behind Europe, North America and New Zealand in this new form of co-operative marketing.In Australia,the Hydroponics Farmers Federation representing tomato growers is a model for other commodity groups to follow.
In general, technology for value-added processing is available. For most value-added technology, the critical issue is developing that technology so it is appropriate to the scale of groups of producers and is economically feasible. If the development of appropriate technology is not feasible, the development of producer-controlled institutions large enough to generate the capital and input base needed to fit the existing technology is a critical issue.
Most growers are aware that if they sell their products directly to consumers, it significantly affects their profit. Direct marketing does not require substantial capital investments or additional business development. It fits into the urban-development trends now occurring worldwide, and a consumer demand trend for healthy food products.
However,direct marketing does require a change in focus by growers. They have to focus production around their market rather than produce a commodity. The underlying concept is that there is a difference between marketing and selling. It’s possible to add value to products by direct marketing when producers assume the marketing functions traditionally done by others. By doing this, producers become price makers in their market, not price takers.
There are many steps in the market channel, including picking, cleaning, packing, transporting, possible broker services, wholesaling, shipping from wholesale to a retail outlet, and retail sales.Typically, the price retailers charge for products are at least two to three times higher than what is paid to the grower. Producers can market large quantities of product through this alternative, but their profit margin is very small. Because of fluctuating wholesale prices, at times producers may sell their products below break-even prices.
Figure 4. Steps in the marketing channel from producer to consumer.
Direct Sales to Restaurants and Retailers
Selling directly to restaurants or retailers eliminates at least two steps in the market channel, which adds to the value the grower receives for the products. A producer often also supplies trans-portation, which can be looked at as value-added service. Another feature of marketing directly to restaurants and retailers is that the price received is usually more stable, thus reducing price uncertainty.
Growers need to study their existing markets.The concept of ‘value for time’ may impact on restaurants, where chefs are looking for healthy, minimally processed foods to shorten preparation and cooking times in the kitchen, thus reducing waiting times for meals. For restaurateurs,return business is critical to their success. Value-added products can also be used by chefs to distinguish their menu from the restaurant down the road.
This direct-marketing alternative reduces the need for packing, which is a substantial cost reduction for growers.It provides a higher price because growers sell their products as a retailer. Price fluctuations are usually reduced or eliminated. For this marketing alternative,growers provide all of the steps from producer to the consumer, which adds value to their products.Selling through farmers’ markets is flexible and is a good alternative for growers getting started in a suitable horticultural alternative, or as an outlet for excess production.
This alternative eliminates the need for transportation because products are usually sold on the farm where they are produced. Again,growers provide all of the steps from producer to retailer, which increases the price and reduces price fluctuations, thus reducing price uncertainty. Roadside markets also give growers opportunities to further act as retailers by buying products wholesale and selling them retail. This phenomenon also gives roadside marketers an opportunity to expand their market beyond what they grow themselves. Many roadside markets have grown and developed into multi-million-dollar retail outlets.
Consumers drive out to the farm,pick the products themselves, and transport those products back to their home. The price received at a pick-your-own operation is often very close to the price consumers would pay for those products at a retail level. Consumers are willing to pay that price because of the freshness of the products and the on-farm experience that goes with it. Costs for the grower are significantly reduced, and the value added by this alternative is highest of all the marketing alternatives. This opportunity could be limited in the short term by the current insurance crisis facing Australia.
With Australia’s growing multicultural society, there are many opportunities for growers to develop specialty crops. The cuisine of many ethnic groups is centred on fresh vegetables. To produce for these markets, the grower needs to understand a little about how vegetables are prepared and the individual quality preferences. Our traditional concepts of quality are not always transferable, and preferences can vary by country and region for one crop.
Home delivery of farm fresh produce is becoming popular among health-conscious consumers,and for those people who have a busy lifestyle and value their time. Woolworths (http://www.woolworths.com.au/) and greengrocer.com (http://www.greengrocer.com.au) offer home delivery in Sydney and Melbourne and the Organic Delivery Company (http://www.organicdelivery.co.uk/) in the United Kingdom. There are any number of low-cost marketing strategies that growers can use to develop home delivery customers, including letterbox leaflet drops and local newspaper advertising. Growers can add value to their products by on-farm processing and packaging at prices closer to retail. Other primary producers in the district may combine to offer a basket of farm fresh produce,delivered direct to the door.
Agricultural entertainment has become one of the most profitable ways to add value to a product and/or farm. Local market fetes, school tours, petting zoos, festivals,and catered parties are just a few of the opportunities farmers are utilising to add value to their products and generate income on their farm. In the case of agricultural entertainment, growers are not only selling products they produce, they are charging admission to consumers who want to participate in the on-farm activities.
Hydroponic and greenhouse growers are well placed to meet the challenges of the changing market environment. They can demonstrate sustainability and guarantee quality and consistency. In the near future,more and more growers will band together to form strategic relationships with value chains,by-passing wholesale markets and agents where there is no transparency from pricing to food safety issues. If Australia follows overseas trends, then the market power of supermarkets will be diminished by value chains that are starting to emerge in the Australian market.In this evolving market environment,there will be many opportunities for growers to become price makers;not price takers.
About the author
Steven Carruthers is the Publisher and Managing Editor of Practical Hydroponics & Greenhouses magazine, winner of the Australian Business Publishers (ABP) Bell Award for “Best Special Interest Magazine of the Year” and “Best Small Publisher of the Year” in 2001. Ω
PH&G Sept/Oct 2002 / Issue 66