Consolidation is an unrelenting trend for U.S. food retail chains. The five largest now account for more than 41% of total retail food sales.
Why is this happening, and what does it mean for consumers and suppliers?
How will the trend affect retailers' expectations of packers who, in turn, will look to producers for new and different “raw materials” and production methods?
How will the independent, traditionally adversarial, segments work together?
Supermarkets are consolidating for the same reasons that have driven mergers and acquisitions in other industries: to lower costs, jump-start gains in market share and to benefit from effective and efficient coordination in all operating areas.
For food retailers, much of this consolidation is being driven by the exploding competitive threat of Wal-Mart and other large discount retailers that have added retail food sales to their formats.
Ten years ago, a weak dollar prompted European chains to invest in U.S. firms. The resulting exchange of information has transformed many U.S. operating practices and management.
In addition, competition for the U.S. food dollar has increased from convenience stores, fast-food operators, restaurants, smaller specialized retailers, home delivery services and the Internet.
Two Major Challenges
The result offers two major challenges for traditional supermarket meat departments and their beef supply chains:
How do we coordinate and motivate the entire supply chain to provide customers with reliable, consistent, safe beef products at a competitive price?
How do we organize within each company to revitalize product development, marketing and merchandising for the meat category? Meat products and services still lag behind in a world where customers need and want convenient, healthful and safe, interesting and value-priced choices when purchasing meats and meat-based meals and meal components.
Coordination and cooperation across the supply chain is also now a necessity to provide products for ever-larger retailer merchandising programs where reliability and consistency of supply are critically important for success. Suppliers must understand and deliver what their retailer customers require in the way of meat products and services. They must also do it on a scale and scope that requires deliveries of huge quantities over wide geographical areas.
In turn, these retailers must share customer and operating information — and an appropriate share of the economic benefits generated — across a more efficient integrated system.
The Promise Of Case Ready
Centrally processed, case-ready (CPCR) meats have long been advocated to improve cost efficiencies and ensure the consistency, quality and safety of meat products. Despite the proven economic and marketing benefits of CPCR, U.S. retailers have continued to cut and package boxed, sub-primal beef cuts in the back rooms of their stores.
In Europe, however, CPCR meats have long been the industry norm. There, retailers led or pressured processors to collaborate in an economically efficient, case-ready system that delivers high-quality, conventional fresh beef cuts and many value-added beef products.
Meanwhile in the U.S., the impetus for CPCR products has largely come from meat processors. Retailers have been slow to accept the idea.
The entrance of Wal-Mart onto the supermarket stage has changed all that. Two years ago, Wal-Mart decided to go from back-room processing to a system of total central processing for fresh meats — delivered to supercenters in case-ready packages. This single corporate decision has had far reaching consequences for the U.S. meat industry and continues to exert pressure for change along the entire beef chain.
No U.S. retailer has escaped Wal-Mart's competitive pressures — be it in clothing, hardware, housewares or electronic components. Now, it's the food industry's turn.
Wal-Mart's decision single-handedly changed case-ready meats from a fad to a trend in the U.S. beef system. It also made change inevitable, not only for beef processors but for the people and companies that breed and feed animals.
Ground beef is a good example of how the industry has resisted making change. Fresh ground beef is the largest volume item in retail meat departments. It's also most susceptible to mishandling and contamination in packing plants and supermarket back rooms.
High-visibility episodes and large product recalls of ground beef due to E. coli 0157:H7 have occurred frequently. Central processing using modern equipment and procedures was available to provide a significantly higher degree of safety, plus, improved cost margins, shelf life and product quality. But even with all these pluses, case-ready ground beef has only recently been broadly accepted by the industry.
Packers, processors and retailers recognize they need to cooperate to achieve:
efficient product delivery and stocking,
effective merchandising of meat department staple products and special promotional sales and
improved supply chain operations.
Excel's collaboration with Kroger is one example. IBP and Wal-Mart also have partnered to develop a case-ready beef program using a packer brand.
Future Beef Operations (FBO) and Safeway are working in a vertically-integrated system to implement innovative methods of animal genetic development, procurement, processing and marketing. The two companies have a 10-year agreement in which FBO is Safeway's exclusive supplier of fresh, processed, cooked and marinated, value-added beef products and pet treats.
The Safeway/FBO alliance is designed to provide a full line of consistently high-quality beef products that are safe, traceable, efficiently produced, competitively priced and targeted specifically toward meeting the needs of Safeway's shoppers. The coordination to achieve this goal begins with cow/calf operators and stockers and continues through the supply chain to feeders and finally to the FBO facilities for processing and value adding.
Given the increased needs and wishes of consumers for convenience and value-added food products in every food category, retailers have had to respond competitively in their meat departments. They typically have resisted branding red meats as a means of providing the qualities and new products that customers demand — be it processor brands or their own retailer brands.
Stocking the meat case primarily with non-branded, commodity-quality fresh cuts once was considered the only choice. Profitability was variable and often unknown.
At the same time, retailers observed that well-developed and marketed processor brands with strong consumer franchises were profitable and constituted an important profit center for the meat case. This led to strategies of financing the development and marketing of retailer brands.
Beef producers and processors also have come to realize that developing and investing in added-value beef products and strong brands is an imperative for reducing their exposure to volatile commodity livestock prices and supplies, and moving to sustained profitability.
At Wal-Mart, for example, Hormel Foods and IBP have helped draw customers to the chain's meat department with the power and support given their respective Hormel and Thomas E. Wilson brands. Competitor retailers have responded in their meat case with their own product mix of processor and retailer brands and traditional, non-branded meat cuts.
Harlan Ritchie, Michigan State University distinguished professor of animal science, says in the previous article that producer and/or processor brands accounted for 10-12% of beef's market share in 1998. He predicts that figure may be 25-30% by the end of this year.
The industry now seems to accept the concept that strong brands are an important tool for effectively communicating beef product qualities and values to shoppers. And, it accepts that strong brand marketing programs allow both suppliers and retailers to build consumer loyalty and better net margins.
It seems certain that case-ready systems for processing and packaging will dominate the way meat is sold. The trend will grow as it becomes clearer that CPCR results in safer, more consistent, high-quality meat that's more convenient for shoppers and offers longer shelf life in the store and home.
Integrated beef supply chains and central processing also can generate the cost efficiencies needed for retailers to profitably offer consumers genuine choices in the value and prices of beef products. An important reason for having a greater variety of beef products is to offer a broad range of prices to meet the needs of individuals with different food budgets.
Globalization And The Beef Industry
Globalization has increased the transfer of new beef production and merchandising strategies. It's also spurring the adoption of CPCR meats in the U.S., as European retailers who pioneered the concept in Europe now own important supermarket chains in the U.S.
The Netherlands' Royal Ahold, for example, has acquired the second and third largest U.S. foodservice suppliers. As knowledge and best practices are shared among firms, the U.S beef supply system will move toward CPCR.
It's important to note, however, that CPCR meat packaging will never account for 100% of retail meat sales. Nor will there be a single format for innovative change in the meat industry — be it how the players cooperate and integrate, how CPCR systems develop or how retailers organize their product mix of processor-branded, retailer-branded and traditional beef products to attract their customers.
Food retailers in a variety of markets and with different types of customers will adapt their meat counters to suit each situation. Some will compete by offering in-store service counters to custom cut and package meats and to attract customer segments wanting these special services.
The success of the Whole Foods Markets chain is a good case in point. Even within a single chain, different store designs and product mixes are needed for different customer segments.
The trends toward CPCR meats represent a logical progression in the meat industry from a supply system based on processing and distributing a commodity to one producing customer-driven food products and services. As with many other commodities, beef is no longer a basic, raw food that retailers simply reduce to smaller, undifferentiated packages for their customers. It's a collection of foods and meal components that deliver to customers a wide range of product choices.
And in so doing, beef is a food category wherein growers, processors and retailers have the capacity and knowledge to serve their final customers well and also profitably. What the industry must continue to do is move forward to aggressively implement this knowledge.
John Allen is a Michigan State University professor emeritus of food marketing. He lives in East Lansing, MI.