PHILADELPHIA -- Post-consolidation aftershocks are creating shifts in the key contact points between retailers and grower/shippers, as well as new areas of friction, a biennial snapshot of the industry has found.
Released during the Produce Marketing Association's Fresh Summit 2001, the FreshTrack research study by Cornell University focused this year on supply chain management. It found the state of change has been accelerated by retail consolidation, and the emergence of new, shared concerns like food safety, which are causing a realignment in the distribution chain and the way produce is bought and sold.
Since the last report in 1999, Cornell researchers found that the supermarket produce department has continued its growth as a popular category with impressive margins and high consumer appeal. Retailers participating in the study indicated that the produce department contributed an average of 10.4% to total-store sales, up slightly from 9.5% in 1996, when Cornell first examined the industry in an initial study. New items and additional square footage are still hallmarks of the expansion; however, the study noted the pace of growth seems to be slowing, indicating the number of produce facings might be shrinking to accommodate any new products.
The report confirmed suspicions among grower/shippers that consolidation has, indeed, reduced the number of supermarket produce buyers. Just two years ago, FreshTrack found a total of 10.2 buyers per retail company. Today, that number has dropped to 9.8 buyers per firm.
The decline is most notable in the larger companies, researchers found: In 1999, large companies employed almost 20 buyers, whereas now, they use 15.6. Of those, it appears these large firms have shifted buying operations to divisional or field offices, with fewer than before at the headquarters level.
On another level, FreshTrack found that category management continues to grow in importance. Currently, nearly 59% of respondents said they have category managers. On average there are 8.9 category managers today, up significantly from 3.5, as reported in the 1999 report.
The changes are also reflected in the way produce is bought. FreshTrack found a substantial increase in the amount of product sourced directly from grower/shippers, shifting volume from brokers and produce wholesalers. Respondents stated nearly 75% of all produce they buy is currently shipped directly from production areas to distribution centers, up from the 1999 poll, when only 61% said their produce was directly sourced. Not surprisingly, the largest retailers showed a greater reliance on direct shipments, the study found.
To that end, the number of grower/shippers used by the largest firms -- those with sales topping $1.5 billion -- decreased in number, from 424 in 1996 to 367 today. The data is bolstered by FreshTrack in finding the number of retailers pulling product from their Top 10 suppliers has increased, from 61% in 1996 to more than 68% today.
Retailers with sales of less than $1.5 billion are bucking the trend, however, and are building their network of suppliers. FreshTrack found that, where they reported using 68 suppliers in 1996, they use 76 today -- and predict calling on 92 by 2006.
The impact of these shifts and changes is readily evident in retail buying strategies, the study found. There was a 1% decline in "spot market" purchases, and tremendous gains in the use of contracts. FreshTrack 2001 respondents reported that in 1996, 10.5% of them were using contracts for at least 11% of their buys. Today, that figure has increased to 57.5% of firms. Again, the largest companies were found to be the biggest proponents of contract buying, the study found.
Incorporating these changes, retailers appear to be employing tactics more at home in the grocery category. Researchers revealed that retail buying offices are developing formal guidelines to measure supplier performance. Currently, 36.6% of respondents said they have such standards, while another 34.1% expect to have them within five years. And there are few exceptions -- more than 92% said they "routinely" enforce their performance guidelines. Exceptions are reserved for the very smallest grower/shippers who, they acknowledged, could not reasonably adhere to the prescribed procedures.
An examination of technology in the sourcing of produce held some surprises, in that it still has not caught on as quickly as originally predicted. The Cornell study found that while the use of the Internet as a platform is growing for use as Web pages, B2B transactions, e-mail and support for Electronic Data Interchange, the current level of use has still had a "relatively minor" impact on the produce supply chain.
In fact, less than 10% of produce buys rely on technology, but researchers pointed out the number will likely double in five years as pertinent programs and applications are truly implemented in consolidated companies.
All of this activity within supply chain logistics has created a new level of potential conflict between retailers and grower/shippers. While both sides agree food safety, maintenance of margins and category management are shared priorities now, there is a difference of opinion on other matters such as inventory turns, product traceability, demand forecasting and packaging innovation.
One key conclusion researchers made is that it appears the responsibility for many functions is shifting increasingly back up the supply channel as retailers approach grower/shippers for assistance in sharing more tasks.
For example, in regards to package innovation, grower/shippers feel more strongly that it should be a shared responsibility than do retailers. Likewise, more suppliers believe productivity analysis is a shared responsibility, while retailers consider it an exclusive function.