Consumer Driven Innovations and Adoptions in the Food Supply Chain

1
Consumer Driven Innovations and Adoptions in the
Food Supply Chain Jean Kinsey, Professor,
Applied Economics Department Co-Director, The
Food Industry Center, University of Minnesota,
USA ERS, TFIC, Farm Foundation
Conference Global Markets for High-Value Food
Workshop Washington DC February 14, 2003
2
Consumer Driven Innovations Startwith Consumer
Purchases

• Information about what consumers are buying
  drives decisions back up the supply chain
• The source in retail food bar code
• The sources in food service purchases chefs
  best guess a few bar codes.
• The sources are also public pressure from
  consumer/citizens who care deeply about other
  people, animals and the environment.

3
Consumer Driven Innovations Startwith Consumer
Purchases

• It has reversed the flow of decisions in the
  supply chain gt a new paradigm.
• Old idea today we sell what is available in the
  supply chain.
• New idea today we sell what our consumers have
  indicated they will buy.

4
Global Exchange of Goods and Services - New
Paradigm

• The New Food Economy is
• not about money or trade negotiations
• it is about information, information technology
• personal networks

5
Themes

• Consumer driven demand/supply loops
• Consumers seek value accommodated by discount
  retailers
• Horizontal consolidation at all points
• Intricate and shifting networks of firms around
  the world
• Human contacts count more than ever

6
Themes

• Trading nations diminish relative to private
  firms in procuring food.
• More food, more variation locally, less variation
  globally
• Public policy focusing on food for health care,
  food safety, and food security.

7
Themes

• Consumer driven demand/supply loops
• Consumers seek value accommodated by
  consolidated discount retailers

8
Science Labs
Supply chain
Whole- saler
Retail Food
Demand chain
-
Seed/Feed
Retail
Self-
Store
MANU-
distrib.
Farmers
52
Consumer
FACT-
URER
-

First Line
Whole- saler System Distrib.
Food Service
Handler
Citizen
Food
Ingredient/
Service
Flavor
48
Companies
Food Industry
9
Information Technology Demands
COORDINATION/COMPATABILITY
Retailer orders pull product POS Data
Private alliances Internet Interface- UCCNet?
Food Manufac- turers/ Processors
Wholesalers/Self Distributors
10
4 Top International Grocers

• Wal-Mart Royal Ahold
• Carrefour Kroger
• ---------------------------------------------
  -------------
• Brought to you by
• information technology
• economies of scale
• expert logistics

The Food Institute, 2002
11
Supply Chains in China

• Rapid growth in supermarket (retail) power
• Rise in modern retailers (supermarkets,
  hypermarkets, convenience stores and department
  stores) accounts for 60 of consumer good sales
  in 4 major cities in China.
• Direct Foreign Investment by Multinational firms
  dominate the growth

Chang, WSJ, 11/26/02
12
Supply Chains in China

• Chinese supermarkets (Joint Ventures since mid
  1990s. Must have local partner until 2004)
• Carrefour 31 stores
• WalMart 22 stores
• Mako (SV Holdings Dutch)
• Metro (Germany)
• Buy directly from international companies
• 5 of goods come from within China

13
7 Top International Food Processors

• Nestle S.A. (Switzerland)
• Kraft Foods Inc. (USA)
• ConAgra Inc. (USA)
• PepsiCo Inc. (USA)
• Unilever plc (UK,Netherlands)
• ADM Co. (USA)
• Cargill (USA)

Prepared Foods, 17112, 2002
14
Consolidation at the beginning of the Food
Chain Too
Scripps
Merck
Cargill
Novartis
Sandoz
CIBA Seeds
Monsanto
Dow
15
Supply Chains in Food from Farm to Fork

• Supply chain gt supply push of products
• Linear systems
• Demand chain gt demand pull with information,
  coordination and agreements with global sources
• Circular flow of information and inventory
  replacement
• Product Distribution Networks Webs of
  arrangements

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Theme

• Intricate and shifting networks of firms around
  the world electronic and human facilitators

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Add Value (Process, Package, Cook)
Transport, Delivery
Aggregate, Store
Monitor Quality, Safety
Grow Crops, Raise Animals
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Oversee Market Economic Welfare
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Handle Waste, Environment
FS
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Finance, Credit
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Science, Research, Development
Adopt Technology
Transmit Information About Demand, Analyze Data
18
Add Value (Process, Package, Cook)
Transport, Delivery
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Grow Crops, Raise Animals
Monitor Quality, Safety
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Handle Waste, Environment
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Science, Research, Development
Adopt Technology
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Transmit Information, Analyze Data
19
Transport, Delivery
Aggregate, Store
Add Value (Process, Package, Cook)
Grow Crops, Raise Animals
G
Monitor Quality, Safety
F
H
I
L
H
H
U
I
M
G
M
M
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F
F
W
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Oversee Market Economic Welfare
C
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Handle Waste, Environment
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Finance, Credit
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Science, Research, Development
Adopt Technology
D
Transmit Information, Analyze Data
20
Add Value (Process, Package, Cook)
Transport, Delivery
Aggregate, Store
Grow Crops, Raise Animals
G
Monitor Quality, Safety
F
H
I
H
H
L
U
I
M
G
M
S
M
F
F
W
H
W
FS
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FS
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R
W
R
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FS
C
Oversee Market Economic Welfare
C
C
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C
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Handle Waste, Environment
G
TV
L
FS
R
C
H
F
S
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W
M
I
C
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FS
FS
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Manage, Train Labor
Finance, Credit
F
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Science, Research, Development
Adopt Technology
D
Transmit Information, Analyze Data
21
Add Value
Aggregate, Store
Transport, Delivery
EX
Grow Crops, Raise Animals
Monitor Quality, Safety
F
H
I
L
H
H
U
M
I
WTO
M
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Large F
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Finance, Credit
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Science, Research, Development
Adopt Technology
D
Transmit Information, Analyze Data
22
Demand Driven Food Production networks

• Presents a fundamentally new way
• to conduct business, form organizations, and
  value assets

23
Changing Web Patterns

• Makes changes harder to track
• Raw product source global, seasonal
• Prices negotiated, secret
• Control points and profit margins shift from
• hard assets to market intelligence
• Sellers to buyers (retailers)
• Producers to analyzers

24
New Food Networks

• A move from an economy based on a firms
  production of goods to an economy based on the
  use of knowledge about markets.
• Markets replace firms (or nations) as a unit of
  analysis

25
Theme

• Trading nations diminish relative to private
  firms in procuring food

26
Consumer Driven and Global

• Everyone is a specification buyer (more
  differentiated products)
• Reference prices carry little information
• Downstream firms capture the highest margins
  (profits)
• i.e. retailers capture the value created by
  manufacturers in the supply chain (network).

27
New Food Networks Markets

• Markets are local but firms that supply them can
  be anywhere.
• How do global suppliers learn about local buyers
  preferences?
• 1. Shared data -- e-commerce
• 2. Human networks

28
The (Human) Networked Trade

• Business and Social Networks
• Facilitates information about trading
  opportunities
• Enforces Contracts
• Builds Trust

Rauch, 2001
29
The (Human) Network

• Importance of immigrants to trade with home
  country
• As immigrants increase by 10 exports increase 13
  -47 (network effect)
• As immigrants increase 10 imports increased
  33-83 (taste and network effect)

Rauch, 2001
30
Networked Trade

• Enforces Contracts Build Trust
• Japanese word keiretsu
• Know the characteristics of those who would be
  helpful loyal
• Enforces rules by internal punishment
• Increases direct foreign investment

Rauch, 2001
31
Networked Trade

• Buyers and sellers match in characteristics space
  need thicker information to match partners
• Transnational networks can overcome informal
  trade barriers enhance exports
• Domestic networks can create trade barriers by
  collusion to restrict foreign firms inhibit
  imports

Rauch 2001
32

• Global Supply Chains Producer Driven
• And Buyer Driven
• Producer driven for capital and technology
  intensive industries automobiles, aircraft,
  semiconductors
• Profit greatest for those with scale
  technology
• (manufacturers)

Rauch, 2001
33

• Global Supply Chains Buyer Driven
• Buyer driven for labor intensive, consumer goods
  industries garments, footwear, toys, electronics
  FOOD?
• Profits greatest for those with design and
  marketing expertise ( retailers).

Rauch, 2001
34
New Food Economy?

• The market we know and love is being
  de-democratized by networks human and
  electronic
• Both depend on specific knowledge for specific
  products and markets
• Efficiency models are not enough and maybe not
  right for globally differentiated products and
  market networks

35
Global Supply Chains Buyer Seller
Driven? Driven by the part of the supply
chain/network that is in the best position to
capture the most value from the chain. Where is
that in food and agriculture? Increasingly at
the retail end.
36

• Globalization of Supply Chains
• Will more formal (computerized) information
  networks increase or decrease the usefulness of
  business and social (human) networks?
• Yes if e-commerce networks become dominant and
  parties trust the information to represent the
  behavior of trading partners.
• No if products increasingly differentiated and
  human interpretation of preferences and markets
  needed - and more immigration builds human
  networks and more DFI across borders.

37
New Supply Networks for Food

• Slowly adopting information technology to track
  and manage inventory. Still trying to catch up to
  Wal-Marts logistics.
• Losers Regional wholesalers, small farmers,
  small processors
• Winners Consumers lower prices, variety,
  convenience, diversity, safety, quality
• Multinational food companies (Nestle) use
  Supermarkets to gain access to remote areas.

38
Public Policy Focus Turns to Food for Health,
Safety, Security

• New terms
• Paradox of Prosperity too much food
• Diseases of Prosperity diabetes, heart
  diseases, hypertension
• New meaning to food security
• Bio-security / Bio terrorism

39
Food Variety and Abundance

• The new nutrition - too many calories
• USA 2002
• 65 of adults overweight
• 30.5 obese (BMI over 25)
• 25 children overweight or obese
• Doubled in a decade

40
Food Abundance and Health Care

• Diabetes linked to overweight and obesity
• In 2002
• 17 of Americans has diabetes linked to diet
• 60 pf children have at least one risk factor
  for heat disease
• 10 of Health Care Costs go to treat diabetes
• This is a health care crises in slow motion

41
Indulgence / Abundance
Globally Globesity Adults 7
obese Children 53 undernourished But in
Chile, Australia, Malaysia, Chinese cities, 17
20 obese.
IFIC 3/29/2001
42
Source OECD Health Statistics (2000)
43
Globalization and Public Policy

• Economic integration of private companies with
  national and international trade policies and
  standards
• Homogenization of the foods across nations, more
  variety of food within a nation
• Nation states have less control over policy and
  items traded

44
Globalization and Public Policy

• Retail domination giving consumers lower prices
  so far.
• Demise of small farmers and undercapitalized
  firms
• Foods for health, food safety, food (bio)
  security is international business