The Fresh Supply Chain Rethinking
Produce has been the star of the show for food retailers for a long time. Looking to communicate an image of freshness and quality from the moment shoppers arrive in store, grocers have moved packaged goods away from center stage while positioning produce as the focal point of the store. The strategy has paid off, with produce growing at an annual rate of 4 percent while other grocery categories collectively muster annual growth of around 1 percent.
Meanwhile, consumers have spoken. They have voiced concern about food waste, they demand quality, and most important, they want transparency — not just evidence that a product meets food safety requirements, but traceability from the grower to store aisles. The good news is that, just as consumers' expectations are changing, so are suppliers' capabilities. They are changing in ways that favor new forms of engagement with grocery retailers that offer the potential for even greater growth.
The time has come for grocers to invest in their upstream capabilities to gain better control of the value chain that will enable produce to remain the star of the increasingly experiential retail show. Retailers need to form strategic partnerships and invest in a different set of produce capabilities at multiple points in the value chain — especially for the most in-demand items.
Multiple paths to partnership
There is a concentration of commercial and agricultural sophistication among suppliers unlike anything that has previously existed. Data show that over the past few years, the agricultural landscape has undergone significant consolidation. In the United States, for example, from 2002 to 2012 the number of farms required to produce 75 percent of our fruits, tree nuts and berries declined by 30 percent. Viewed over a longer time horizon, during the past 25 years the size of the average U.S. farm has nearly doubled, from 589 acres to more than 1,100 acres.
While supplier partnerships are still a comparative novelty among major grocery chains, there are notable exceptions elsewhere in the industry. For example, companies such as Heinz and Del Monte have integrated with growers to the extent that they finance R&D programs to develop proprietary seed varieties to differentiate their offerings from competitors'.
Food industry partnerships often take the form of joint ventures with long-term contractual linkage and a defined objective. Participants share costs, risks, profits and losses. It is an approach waiting to be adopted — and adapted — by grocery retailers in managing their produce supply chain.
Retailers, for example, might reach agreements with growers to provide operational and financial support — co-developing products through research and development investments or creating agreements that reduce commercial risk. In exchange, growers would prioritize the needs of the retailer with whom they form partnerships.
Acquisition is another approach that allows retailers to not only ensure supply but also tighten quality control. It also improves their ability to reduce prices for consumers.
To date, relatively few retailers have taken steps in these directions. One is UK grocer Morrisons, which acquired a flower grower as well as meat and seafood processing facilities. In the U.S., Whole Foods has forged partnerships with small growers, supporting them through low-interest loans and the promise of shelf space for product test runs.
Invest in organizational capabilities
Until now, supermarket retailers have not typically built elaborate buying functions for produce, opting instead to develop selective relationships with farmers and cooperatives. Usually these relationships are managed from a headquarters that is a significant distance from the suppliers, which sets up the need to use brokers and wholesalers as intermediaries — again, on a selective and transitional basis.
Thus, the responsibilities of a typical produce-management team can get blurred. In some cases, the same team responsible for finding new produce sources and maintaining relationships with an existing grower base also manages supply-chain flows and shippers to make sure fresh foods arrive on time. Frequently they also have input into overall merchandising strategy and participate in end-to-end category management.
Splitting and specifying these roles would enable managers to focus on what they do best. Grocers will need, for example, superior capability in the management of supply-chain lead times and warehouse flow management. Only in this way can they build a reputation for the freshest available produce without spiking holding costs or waste.
To influence outcomes directly, retailers need to position talent further up in the value stream. If they change the way they collaborate, suppliers will get earlier demand signals, retailers will adapt their sales and operational processes to be more forward looking and simultaneously more responsive to volatility, and — best of all — costs will go down, quality will go up.
Implications of investing in the value chain
The competitive advantages of this kind of investment across the produce supply chain are easy to name. In response to volatility, a new agility is introduced. Time to market shrinks. Targeted promotions are enabled, driving shoppers into stores.
A sustained reputation for quality drives sales and burnishes the retail brand, increases supply availability and supports improved margins. With these benefits comes improved understanding of the flow of fresh food across a complex value constellation, including full cost transparency. Risks to supply security are reduced; so is food waste. Actors at every point in the supply chain can be integrated through enhanced information sharing and unified planning.
The opportunities this creates for product innovations — and for exclusive access to those innovations — create additional competitive advantage. Retailers might be able to structure relationships to make themselves first to market on key items.
Operating closer to sources of supply is not risk free. Retailers will need to consider the strategic and operational implications of both their existing business model and the model they wish to build. Are they prepared to make an investment in analytics to unlock currently hidden value? Do they have the expertise required to conduct fact-based negotiations with suppliers? Are there agronomy experts inside the organization who speak the language of growers? How will a supplier's existing customer base react once it is owned by a potential competitor?
The time has come for grocers to invest in their upstream capabilities to gain better control of the value chain that will enable produce to remain the star of the increasingly experiential retail show.
To give themselves a better chance of long-term success, retailers will do well to test new upstream strategies on a small, local scale. Centers of excellence will emerge inside grocery retailers, which would be something new in the industry, and a tremendous boost to innovation.
There is competitive urgency to getting this right. Grocery margins are razor thin, as they always have been. Food prices are under deflationary pressure, and many major chains are struggling. In an operating environment like this, building capabilities close to the source of supply, while not free of risks, is a potent and smart growth strategy.
John Piatek and Giacomo Tortora are principals in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. Giacomo Tortora left the firm since this article first appeared.