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Trends in U.S. Fresh Produce Marketing

DR. ROBERTA COOK Dept. of Ag and Resource Economics University of California Davis Fresh Produce and Floral Council Luncheon September 2004

TOTAL 2003 U.S. FOOD* SYSTEM: $943.3 BILLION

$498.3 billion food retailing (excluding non-food grocery store sales)

53% of total

$445 billion food service (including $17.8B foodservice sales made by food retailers)

 

47% of total around 844,000 outlets *Excludes alcoholic beverages and other grocery Sources: ERS/USDA and The Food Institute

U.S. FOOD EXPENDITURES as a SHARE of DISPOSABLE PERSONAL INCOME, 1970-2003 13.8

13.4

At-home Away-from-home 3.6

4.3

12.0

11.8

11.7 11.5 11.5 11.6 11.6 11.2 11.1 11.3

11.0 10.8 11.1 11.0

10.3

10.1 10.2

10.1 10.1

4.3

4.3

4.3

4.3

4.3

4.3

4.2

4.2

4.3

4.4

4.3

4.2

4.4

4.4

4.1

4.7

4.7

4.7

4.7

10.2

9.1

7.7

7.5

7.4

7.2

7.2

7.3

7.4

7.0

6.8

6.9

6.7

6.6

6.7

6.6

6.2

5.4

5.5

5.4

5.4

70 85 87 89

Source: ERS/USDA

91 93 95 97 99 2001 2003

U.S. Grocery Industry New Product Introductions, 1988-2003

25,000 20,000 17,566 16,143 15,000 13,244 10,558 20,076 10,000 22,572 Nonfood Food 22,374 23,181 19,572 19,331 18,043 19,458 16,695 16,562 5,000 0 1988 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: The Food Institute Report, 2-2-04; Column totals in white represent combined food and nonfood new product introductions.

Trends in US Food Expenditures

1990-2000 2001-2010 CAGR 5% 4% 3% 2% 1% 0% 3.2% 3.4% 4.6% 4.3% Food At Home Food Away From Home 3.8% Total 3.9%

US Foodservice Segment Shares, 2003

1% 6% 4% Full-Service Restaurant 3% 8% Fast-food Retail store Education Other Noncommercial 4% 37% 36%

Fast-Food

Full-Service Restaurant Other Commercial Recreation Hotel/motel Source: ERS/USDA 2004

FOODSERVICE OPPORTUNITIES FOR FRESH PRODUCE

Since 1992 consumer spending at restaurants is up 56%

Consumers are trading up, contributing to higher sales in full service restaurants and fast casual (like Baja Fresh, Chipotle, Panera)

 

Consumers search for VALUE, 62% say they

are “willing to spend more time and money for better quality food.” 91% of consumers say “It’s worth it to wait a little for food customized to my liking.”

Foodservice fresh produce and fresh-cut demand rising.

Sources of Takeout* Food in the US,

Supermarkets Gaining!

1996 2004 5% 4% 1% 3% 6% Source: FMI Trends in the Supermarket 2003, 2004 Fast-food rest.

12% 48% 25% Restaurant Super market Fast-food rest.

Supermarket Gourmet/specialty store 1% 27% Supermarket Restaurant Other C-Store Fast-food rest.

18% Restaurant 35% *Takeout only, not all foodservice Don't know

US Estimated Fresh-cut Produce Sales, All Marketing Channels, $ Billion

$ billion 16 14 12 10 8 6 4 2 0 3.3

6.0

7.1

9.0

11.8

$4 plus at retail 15.0

1994 1997 1998 1999 2003 2005 Sources: IFPA and IRI

U.S. Fresh Fruit and Vegetable Value Chain, 2002 Estimated Billions of Dollars $5.9

imports institutional wholesalers $40.0

food service establishments produce and general-line wholesalers farms $19.2

shippers $3.4

exports integrated wholesale retailers $39.7

supermarkets and other retail outlets $81 consumers farm & public markets Source: Estimated by Dr. Roberta Cook, UC Davis, based on numerous public and private sources $1.3

U.S. S

UPERMARKET

F

RESH-

C

UT

S

ALAD

S

ALES, Million $

2,453 1,1691,328 1,477 1,671 2,030 981 716 831 415 197 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 Source: IRI

US Fresh-Cut Vegetable Facts

Fresh-cut veggies represented 31% of all

pre-packaged produce retail sales in 2003.

Carrots were about half the $1.3 billion

fresh-cut veggie category, followed by spinach ($108 million), potatoes ($87 million), celery ($85 million) and mixed vegetables ($69 million)

77% of consumers purchase fresh-cut

veggies, but on average, only once every 9 weeks Source: IRI

US Fresh-Cut Fruit Facts

Fresh-cut fruit is still a small share of total fresh-

cut sales, retail sales were estimated by IRI at $238 million in 2002, with total fresh-cut sales (incl. foodservice) estimated at at least $600 million. Forecast by IRI to reach $1 billion by 2008. Household penetration of only 17% in 2003.

Great potential for fruit in both retail and

foodservice channels

McDonald’s offering apple slices as alternative to

French Fries in Happy Meals

Quick-service restaurants and fast casual segment

keep adding fresh produce, including fresh-cut

Supermarket Trips Per US Household Per Year 100 80 60 85 83 78 75 73 72 40 20 0 1998 1999 2000 2001 2002 Source: Coca-Cola Retailing Research Council of N. America 2004 2003

US Supermarket Share Continues to Decline for Key Grocery Categories

(% Shoppers Who Generally Buy That Item at the Supermarket) Nonprescription drug Paper Products 23% 33% 2004 2001 31% 2004 54% 2001 62% 2004 Cereal 81% 2001

Source: FMI Trends in the US, Consumer Attitudes and the Supermarket, 2004

Top Factors in US Consumer Selection of Primary Supermarkets, 2004 Items on sale or specials Store layout Fast Checkout Personal safety outside the store Accurate shelf tags Use-before/sell-by-date marked Convenient location Courteous/friendly employees Low prices High-quality meat High-quality fruit/veg.

Clean, neat store 62% 65% 65% 66% 68% 72% 73% 74% 79% 80% 85% 88% Source: FMI Trends 2004

Quality of Shopping Experience by Channel, TRI*M Index

(Differences of 3 or more are signficant) Limited-Assortment, 106 Warehouse Club, 101 Dollar Store, 100 Mass Merchandiser, 93 Supercenter, 93 Supermarket, 91 Drug Store, 87 C-Store, 80 Source: Coca-Cola Retailing Research Council of N. America 2004

Quality of Shopping Experience by SUPERMARKET TYPE, TRI*M Index

(Differences of 3 or more are signficant) Total Supermarkets, 91 Natural/Organic, 109 Upscale, 100 Price-Oriented, 96 Main-Tier, 89 Source: Coca-Cola Retailing Research Council of N. America 2004

US Store Format Growth Trends and 2003 Sales*

2003 Sales $Million 2003 # Stores 2003 $ % Share 2008 $ % Share

Traditional Nontraditional Total C-Stores GRAND TOTAL $422,791 41,530 $235,100 40,721 $93,518 129,000 $754,408 213,981 56.3

31.3

12.4

100.0

48.3

39.7

12.0

100.0

Grocery sales only, excludes electronics, prescription drugs, toys, jewelry,

sporting goods, gas, clothing, footwear, knickknacks, and hardlines Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Traditional Grocery Channel

2003 Sales $Million 2003 # Stores 2003 $ % Share 2008 $ % Share

Total Traditional Conventional Superstore Food/Drug Combo Limited Assortment Super Warehouse $422,791 $97,110 $164,268 $114,400 $16,107 $14,331 41,530 12,450 8,100 5,000 3,150 530 56.3

12.9

21.9

15.2

2.1

1.9

48.3

11.6

18.5

13.1

2.1

1.6

Other (Small Grocery) $16,575 12,500 2.2

1.5

* Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc.

Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Traditional Grocery Channel

Total Store Area Average Total SKUs Average Weekly Sales $ Grocery & Consumables % of Sales

Total Traditional Conventional Superstore Food/Drug Combo Limited Assortment Super Warehouse Other (Small Grocery) 25,800 51,200 55,700 11,200 59,500 9,000 22,000 30,000 52,000 1,900 33,000 3,000 195,777 150,000 390,000 440,000 98,333 520,000 25,500 100 100 100 100 100 100 100 * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc.

Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Nontraditional Grocery Channel

2003 Sales $Million 2003 # Stores 2003 $ % Share 2008 $ % Share

Total Nontraditional $235,100 40,721 31.3

39.7

Wholesale Club Supercenter Dollar Store Drug $51,953 $85,155 $10,686 $33,189 1,030 1,840 15,000 18,500 6.9

11.3

1.4

4.4

8.7

17.0

2.9

5.2

Mass Merchandise $49,873 4,170 6.6

5.3

Military $4,243 181 0.6

0.6

* Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc.

Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Nontraditional Grocery Channel

Total Store Area Average Total SKUs Average Weekly Sales $ Grocery & Consumables % of Sales

Total Nontraditional 124,466 Wholesale Club Supercenter Dollar Store Drug Mass Merchandise Military 135,000 190,000 8,000 12,000 100,000 29,400 5,500 125,000 4,000 20,000 95,000 15,000 970,000 890,000 13,700 34,500 230,000 450,800 59** 60** 66 34 23** 100 * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc.

** Does not include gasoline sales Source: Competitive Edge, June 2004

S UPERCENTER I NDUSTRY SALES and UNITS, 1993 2007, (About 35-40% estimated to be grocery-equivalent) 3,000 Units Sales (billions) $228 Sales $250 2,500 2,000 1,500 1,000 500 0 $13 $16 $26 $34 $41 $52 $72 $84 $98 *forecast

Source: The Food Institute’s Food Industry Review 2003

$200 $175 $153 $132 $117 $200 $150 $100 $50 $0

Domestic and International C

lub

S

ales and U.S.

M

embership

U

nit Growth Slowing, 1993 2007, (61% estimated to be grocery-equivalent) 1,600 1,400 1,200 1,000 800 600 400 728 Units 786 805 822 Sales (billions) 845 886 932 989 1,078 74 1,148 1,210 1,270 1,3201,370 1,420 101 105 87 91 96 80 67 60 54 41 46 48 37 40 200 0 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 *forecast

Source: The Food Institute’s Food Industry Review 2003

20 03 * 20 04 * 20 05 * 20 06 * 20 07 * $120 $100 $80 $60 $40 $20 $0

Competing in a Value-Driven Market

• • •

Channel blurring has caused the retail landscape to be overstored.

Plus, foodservice channels compete with all forms of food retailing which tend to offer ingredients to prepare instead of meals to eat.

Retail Home Meal Replacement helping somewhat and fresh produce value-added products benefiting.

Competing in a Value-Driven Market

• • •

Grocery retailers have been losing share to foodservice for decades, now to value retailers Conventional grocery retailers must identify value propositions they can own if they are to remain competitive! (fresh produce can be a point of differentiation) Bottom line: more structural change expected in the US grocery industry and more pressure on suppliers!

The Revealing Percentages

Conven’l Super Disc. Club Grocery Center Drug Store Gross Oper Exp 25.3 25.0 20.0

21.8

11.0

17.5 16.0 7.5

Net Margin

(Before taxes)

3.5 7.5 4.0 3.5

Source: Glen Terbeek

U.S. F

OOD

B

USINESS

M

ERGERS

&

A

CQUISITIONS

1981-2003

734 813 753 666 588 645 583 658 724 599 652 556 415 468485 522529 538 641 516 413415 365

1981 1983 1985 1987 1989 1991 1993 1995

Source: The Food Institute’s Food Industry Review, 2003

1997 1999 2001 2003

U.S. Grocery Retail Concentration*

Percent of U.S. grocery store sales 70 60 50 40 30 20 10 0 1987 Sources: ERS/USDA; US Retail Census, firm annual reports 58 47 33 Top 4 Top 8 Top 20 1993 1995 1997 1999 2001 2003 *Includes grocery-equivalent supercenter sales ONLY. Excludes sales of c-stores with gas. Excludes the portion of any grocery chain’s sales corresponding to their drug store, jewelry store or other non-grocery store sales.

U.S. Fruit and Vegetable Supply-Side Marketing Structure Becoming Less Fragmented, 2002 Fruit, berry and nut farms* Vegetable and melon farms* Number of fresh shippers Total chains, grocers, wholesalers

Retail chains Produce wholesalers

26,571 15,355 5,000 1,079 267 188 *Selling over $50,000/yr.; Total of 107,707 fruit, berry, nut farms and 59,044 total vegetable and melon farms, all sizes – US 2002 Census of Ag

Stock Price Performance, Top 5 US Grocery Retailers 1/1/99 – 2/23/04

Chain Wal-Mart Kroger Safeway Albertson’s Ahold Dow % Change + 48% -32% -61% -57% -75% +15%

Return on Asset Comparison, Top 4 US Grocery Retailers

Wal-Mart ROA = Profit/Sales X Sales/Assets 9.04% 3.48% 2.60

Kroger 5.18% Safeway 1.61% Albertson’s 4.11% 1.96% 0.78% 1.74% 2.64

2.06

2.36

Conventional Retail Chains Reconsidering their Models

The experience from the merger trend of the late 1990’s has shown that getting bigger wasn’t enough to meet the new competitive benchmark imposed by Wal-Mart’s success in logistics, data management and cost reduction.

President of Safeway just announced a move to net, net pricing, moving away from allowances, following on the Wal-Mart model. But, as always, fresh produce lags grocery.

Conventional Retail Chains Reconsidering their Models

The challenge for retailers is to effectively utilize scanner, customer loyalty card and other data in order to identify the right product mixes at the individual store level.

Food retailing is inherently local, and as retailers get larger and consumers more diverse, intensive data management is critical!

The Future

Wal-Mart will be the mainstream retailer for the foreseeable future but there will also be lots of new winners. New price driven retailers will increase competition for Wal-Mart and Wal-Mart’s growth may slow as it tackles issues faced with expansion in urban areas (high land costs, unions, local regulatory policies).

Consumer research conducted by The Hartman Group indicates that consumers don’t express excitement or devotion about shopping at Wal-Mart. Many just view it as a way to save on staples without taking over their shopping lives. Lukewarm support creates opportunities for competitors.

The Future

The winners will compete on various dimensions of

value

: price, product, service, and selection.

There are a number of formats successfully defining “white space” market opportunities. Examples include Trader Joe’s, Whole Foods, Dollar Stores, and conventional chains like Wegman’s and HEB, as well as independents. Retailers can deliver value to consumers at both the high and low ends of the price spectrum, depending on product selection and quality levels, and format design, by understanding the needs and wants of target segments for specific shopping occasions.

The middle, unclearly defined ground – retailers with no clear value proposition – will be increasingly challenged.

Products Distinguishing Themselves More Through Aesthetics, Adding Emotional Value to Practical Use – Food Especially!

“Quality is yesterday’s news. Today we focus on the emotional impact of the product.” (Dilbert comic strip)

Research from Cornell and U of Colo. show that income level is positively associated with experiential over material possessions. (Van Boven and Gilovich)

Ego – Starbuck’s – an affordable luxury for all income levels

• •

Products Distinguishing Themselves More Through Aesthetics, Adding Emotional Value to Practical Use – Food Especially!

Travel; eating out, increasingly in restaurants providing more memorable experiences; and differentiated foods purchased at retail are gaining. “Upscale” positioning may be bundled with several perceived emotional values organics benefit. Fresh produce is a part of the trend.

But, to afford these “extras” people are often making a greater effort to economize in their routine grocery purchases, hence, growth in value retailers.

Consumers are Becoming More Eclectic: Unabashed Wal-Mart Shopper Speaks The writer found a brown stretch top with a ruffle drizzling down the V- neck, for about $9, and jeans made of two-inch-wide strips of washed corduroy, denim and a blue lace print, reminiscent of Dolce & Gabbana, $17.98, at Wal-Mart. She wore them with Celine platforms, $420. Value Propositions and Needs! This also applies to food. Flavor Density re calories.

EATING OCCASIONS MATTER!

Adapted from Food Marketing Institute 2002

US P ER C APITA V EGETABLE C ONSUMPTION, P OUNDS, 1976-2004 F 438 450 400 350 359 126 Processed Vegetables (Excl. potatoes) 300 119 Processed 90 Potatoes 250 200 150 76 150 46 176 Fresh Potatoes 100 50 49 115 Fresh Vegetables 0 1976 1987 1989 1991 1993 1995 1997 1999 2001 2003 ‘04 Source: USDA/ERS, Vegetables and Specialties Outlook, July 2004

US P ER C APITA F RUIT C ONSUMPTION, P OUNDS 1976-2002 300 264 250 102 200 283 87 96 150 78 100 50 29 55 24 76 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: USDA/ERS, Oct. 2003 Processed Citrus Processed Noncitrus Fresh Citrus Fresh Noncitrus

Shoppers’ concern about nutritional content and evaluation of diet 80% 60% 40% 20% 0% 62 45 '96 '97 '98 '99 '00 '02 '03 '04 very concerned about nutritional content my diet could be healthier Source: FMI Trends in the US Consumer Attitudes and the Supermarket 2004

Changes for healthier diet 100% 80% 60% 40% 20% 0% '96 '97 '98 '99 '00 '02 '03 '04 Source: FMI US Consumer Trends and the Supermarket 2004 more fruits/ vegetables less fats/oils less meats/red meats less sugar more poultry more fish more organic, natural

U.S.

D

EMOGRAPHIC

I

NDICATORS, 2002

     

111.3 million households 289 million inhabitants 2.6 persons average household size Average household income of $57,852 Median household income of $42,409 Average household food spending of $5,375 (including $3,099 at-home and $2,276 away-from-home)

Sources: US Bureau of Census; Food Institute Demographics of Consumer Spending 2004 for food spending only

SEGMENTATION/TARGET MARKETS

Variables commonly used to categorize consumer

differences to focus marketing activities

geographicdemographicpsychographic--based on attitudes & activitiesSTATUS SEEKERS, CHASE & GRABITS,

ENVIRONMENTALISTS

»Mass individualization! »Problem solving is key! »Understanding needs and constraints in

individual eating occasions essential!

US Household Composition, 2002

Ave. Household Size: 2.5 People Other 15% 50% Single 29% 6% Single Parent Husband & Wife

Husband & Wife with Children under 18 19% of Total Households Source: Demographics of Consumer Food Spending 2004, The Food Institute

U.S. Per Capita Food Expenditures, 2002, by household size – Small households spend more per capita!

Food at home Food away from home Average One Two Or More Two Three Four Five Or More

Source: Demographics of Consumer Food Spending 2004, The Food Institute

D ISTRIBUTION

HOME of

US H OUSEHOLDS, S HARE

of

F OOD E XPENDITURES/ I NCOME L EVEL

and

P RODUCE E XPENDITURES, 2002 T OTAL AT F RESH $235 /13% $70,000+ 23% <$15,000 21% Average fresh produce expenditures per income group $ $384 /16% $50,000 69,999 15% $342/21% $30,000 49,999 22% $15,000 29,999 21% % of total at home food expenditures contributed by each income group $303 /18% Source: Demographics of Consumer Food Spending 2004, The Food Institute

Consumer Food Expenditures, by Household Income Level 2002

$5,000 $4,000 $3,000 $2,000 $1,000 $0

<$15,000 $15,000 - $19,999 $20,000 - $29,999 $30,000 - $39,999 $40,000 - $49,999 $50,000 - $69,999 $70,000 Plus Food At Home: Food Away From Home 2,116 1,034 $2,483 $1,286 $2,768 $1,581 $3,006 $1,875 $3,241 $2,261 $3,555 $2,994 $4,524 $4,350 Source: Demographics of Consumer Food Spending 2004, The Food Institute

US Fresh Produce Consumption by Race 2002, $ Per Household

Hispanic Vegetables Fruits African American Vegetables Fruits White/Other Vegetables Fruits $128 $136 $181 $184 $247 $242

Source: Demographics of Consumer Food Spending 2004, The Food Institute

60 40 20 0

U.S. Hispanic Population Projections, Millions

38.2

43.7

49.3

2005 2010 2015 Source:US Bureau of Census

Hispanic Population Boom,

2050 2000

(U.S. Census)

72% 52%

(Projected)

1% 4% 12% 11% 1% 10% 14% 23% Hispanic African-Amer Asians Other Non-Hisp. Whites

Conclusions

Streamlining the Distribution Channel

How best practice retailers are using information:

Identifying and merchandising product affinities associated with popular items.

Grooming vendor capability to provide useful insights.

Source:Willard Bishop Consulting, Ltd.

Streamlining the Distribution Channel

New tools using data-mining capabilities are entering the market to provide:

Cost-effective consumer-centric business processes

Customer purchase patterns

Product promotions Source:Willard Bishop Consulting, Ltd.

S HELF C APTAINS

Leading, technologically savvy vendors—sometimes brokers

• • • •

Take category interface respon sibility for section May work in retailers’ headquarters Recommend shelf sets, product placement Very influential to category management

Basic Strategies for Shippers

Low-cost grower/shipper

Differentiated year-round grower/shipper marketing a premium product or product with identifiable preferred characteristics that are

commercially perceived and valued

First strategy increasingly difficult as buyers push more demands and services upstream to suppliers

Increasingly shippers must add value and at the lowest cost – need strong core competencies!

C

ONCLUSIONS:

The Future?

More and more, large year-round grower-shippers may become the sourcing entities for retailers, procuring volume above and beyond their own via geographic diversification, including imports.

Smaller seasonal players will need to find niche markets.

Fierce competition places multiple demands on fresh produce suppliers while product perishability continues to limit bargaining power... So more

shipper/supplier consolidation to come!

• • • • •

Quality: taste!

freshness temperature shelf-life nutrition Quantity Costs Shippers

• • • •

Specific requirements packaging pallets size tailor-made value Tracking and consistency tracing Flexibility Safety: microbial On-time delivery and pesticides

60

Source: Adapted from Rabobank Mexico