Trends in U.S. Fresh Produce Marketing

1
Trends in U.S. Fresh Produce Marketing
DR. ROBERTA COOKDept. of Ag and Resource
Economics University of California Davis Fresh
Produce and Floral Council LuncheonSeptember 2004
2
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
3
U.S. FOOD EXPENDITURES as a SHARE of DISPOSABLE
PERSONAL INCOME, 1970-2003
13.8
13.4
At-home Away-from-home
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
Source ERS/USDA
4
U.S. Grocery Industry New Product Introductions,
1988-2003
23,181
22,572
22,374
20,076
19,458
19,572
19,331
18,043
17,566
16,695
16,143
16,562
13,244
10,558
Source The Food Institute Report, 2-2-04 Column
totals in white represent combined food and
nonfood new product introductions.
5
Trends in US Food Expenditures
CAGR
6
US Foodservice Segment Shares, 2003
1
Fast-Food
Full-Service Restaurant
Source ERS/USDA 2004
7
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 Its worth it to wait a
  little for food customized to my liking.
• Foodservice fresh produce and fresh-cut demand
  rising.

8
Sources of Takeout Food in the US, Supermarkets
Gaining!
1996
2004
Fast-food rest.
Fast-food rest.
Restaurant
Restaurant
Supermarket
Super- market
Source FMI Trends in the Supermarket 2003, 2004
Takeout only, not all foodservice
9
US Estimated Fresh-cut Produce Sales, All
Marketing Channels, Billion
billion
4 plus at retail
Over 60 estimated to be sold via foodservice
channels
Sources IFPA and IRI
Source Dole
10
U.S. Fresh Fruit and Vegetable Value Chain,
2002 Estimated Billions of Dollars
40.0
institutional wholesalers
food service establishments
produce and general-line wholesalers
5.9
imports
39.7
supermarkets and other retail outlets
81
farms
shippers
consumers
integrated wholesale-retailers
19.2
3.4
farm public markets
exports
Source Estimated by Dr. Roberta Cook, UC Davis,
based on numerous public and private sources
1.3
11
U.S. SUPERMARKET FRESH-CUT SALAD SALES, Million
Source IRI
12
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
13
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
• McDonalds 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

14
Supermarket Trips Per US Household Per Year
Source Coca-Cola Retailing Research Council of
N. America 2004
15
US Supermarket Share Continues to Decline for Key
Grocery Categories
( Shoppers Who Generally Buy That Item at the
Supermarket)
2004
2001
2004
2001
2004
2001
Source FMI Trends in the US, Consumer Attitudes
and the Supermarket, 2004
16
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
Source FMI Trends 2004
17
Quality of Shopping Experience by Channel, TRIM
Index (Differences of 3 or more are signficant)
Source Coca-Cola Retailing Research Council of
N. America 2004
18
Quality of Shopping Experience by SUPERMARKET
TYPE, TRIM Index (Differences of 3 or more are
signficant)
Source Coca-Cola Retailing Research Council of
N. America 2004
19
US Store Format Growth Trends and 2003 Sales
2003 SalesMillion 2003 Stores 2003 Share 2008 Share
Traditional 422,791 41,530 56.3 48.3
Nontraditional 235,100 40,721 31.3 39.7
Total C-Stores 93,518 129,000 12.4 12.0
GRAND TOTAL 754,408 213,981 100.0 100.0

• Grocery sales only, excludes electronics,
  prescription drugs, toys, jewelry,
• sporting goods, gas, clothing, footwear,
  knickknacks, and hardlines
• Source Competitive Edge, June 2004

20
US Store Format Growth Trends and 2003
SalesTraditional Grocery Channel
2003 SalesMillion 2003 Stores 2003 Share 2008 Share
Total Traditional 422,791 41,530 56.3 48.3
Conventional 97,110 12,450 12.9 11.6
Superstore 164,268 8,100 21.9 18.5
Food/Drug Combo 114,400 5,000 15.2 13.1
Limited Assortment 16,107 3,150 2.1 2.1
Super Warehouse 14,331 530 1.9 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
21
US Store Format Growth Trends and 2003
SalesTraditional Grocery Channel
Total Store Area Average Total SKUs AverageWeekly Sales Grocery Consumables of Sales
Total Traditional 195,777 100
Conventional 25,800 22,000 150,000 100
Superstore 51,200 30,000 390,000 100
Food/Drug Combo 55,700 52,000 440,000 100
Limited Assortment 11,200 1,900 98,333 100
Super Warehouse 59,500 33,000 520,000 100
Other (Small Grocery) 9,000 3,000 25,500 100
Grocery sales only, excludes electronics,
prescription drugs, toys, jewelry, sporting
goods, etc. Source Competitive Edge, June 2004
22
US Store Format Growth Trends and 2003
SalesNontraditional Grocery Channel
2003 SalesMillion 2003 Stores 2003 Share 2008 Share
Total Nontraditional 235,100 40,721 31.3 39.7
Wholesale Club 51,953 1,030 6.9 8.7
Supercenter 85,155 1,840 11.3 17.0
Dollar Store 10,686 15,000 1.4 2.9
Drug 33,189 18,500 4.4 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
23
US Store Format Growth Trends and 2003
SalesNontraditional Grocery Channel
Total Store Area Average Total SKUs AverageWeekly Sales Grocery Consumables of Sales
Total Nontraditional 124,466
Wholesale Club 135,000 5,500 970,000 59
Supercenter 190,000 125,000 890,000 60
Dollar Store 8,000 4,000 13,700 66
Drug 12,000 20,000 34,500 34
Mass Merchandise 100,000 95,000 230,000 23
Military 29,400 15,000 450,800 100
Grocery sales only, excludes electronics,
prescription drugs, toys, jewelry, sporting
goods, etc. Does not include gasoline
sales Source Competitive Edge, June 2004
24
SUPERCENTER INDUSTRY SALES and UNITS, 1993-2007,
(About 35-40 estimated to be grocery-equivalent)
Sales
units

forecast Source The Food Institutes Food
Industry Review 2003
25
Domestic and International U.S. Membership Club
Sales and Unit Growth Slowing, 1993-2007, (61
estimated to be grocery-equivalent)
Sales in billion
units
forecast Source The Food Institutes Food
Industry Review 2003
26
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.

27
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!

28
The Revealing Percentages
Convenl Super Disc. Club Grocery
Center Drug Store
Gross 25.3 25.0 20.0
11.0 Oper Exp 21.8 17.5 16.0
7.5 Net Margin 3.5 7.5 4.0
3.5 (Before taxes)
Source Glen Terbeek
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U.S. FOOD BUSINESS MERGERS ACQUISITIONS1981-20
03
Source The Food Institutes Food Industry
Review, 2003
30
U.S. Grocery Retail Concentration
58
47
Percent of U.S. grocery store sales
33
Includes grocery-equivalent supercenter sales
ONLY. Excludes sales of c-stores with gas.
Excludes the portion of any grocery chains sales
corresponding to their drug store, jewelry store
or other non-grocery store sales.
Sources ERS/USDA US Retail Census, firm annual
reports
31
U.S. Fruit and Vegetable Supply-Side Marketing
Structure Becoming Less Fragmented, 2002
Fruit, berry and nut farms 26,571 Vegetable
and melon farms 15,355 Number of fresh
shippers 5,000 Total chains, grocers,
wholesalers 1,079 Retail chains
267 Produce wholesalers 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
32
Stock Price Performance, Top 5 US Grocery
Retailers1/1/99 2/23/04
Chain Change
Wal-Mart 48
Kroger -32
Safeway -61
Albertsons -57
Ahold -75
Dow 15
33
Return on Asset Comparison, Top 4 US Grocery
Retailers
Sales/Assets
ROA
Profit/Sales X
Wal-Mart 9.04 3.48 2.60
Kroger 5.18 1.96 2.64
Safeway 1.61 0.78 2.06
Albertsons 4.11 1.74 2.36
34
Conventional Retail Chains Reconsidering their
Models

• The experience from the merger trend of the late
  1990s has shown that getting bigger wasnt
  enough to meet the new competitive benchmark
  imposed by Wal-Marts 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.

35
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!

36
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-Marts 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 dont 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.

37
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 Joes, Whole Foods,
  Dollar Stores, and conventional chains like
  Wegmans 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.

38
Products Distinguishing Themselves More Through
Aesthetics, Adding Emotional Value to Practical
Use Food Especially!

• Quality is yesterdays 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 Starbucks an affordable luxury for all
  income levels

39
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.

40
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
41
US PER CAPITA VEGETABLE CONSUMPTION, POUNDS,
1976-2004F
438
359
126
(Excl. potatoes)
119
90
Pounds per capita
76
46
176
49
150
115
04
Source USDA/ERS, Vegetables and Specialties
Outlook, July 2004
42
US PER CAPITA FRUIT CONSUMPTION, POUNDS 1976-2002
283
264
87
102
96
Pounds per capita
78
24
29
76
55
Source USDA/ERS, Oct. 2003
43
Shoppers concern about nutritional content and
evaluation of diet
62
45
Source FMI Trends in the US Consumer Attitudes
and the Supermarket 2004
44
Changes for healthier diet
Source FMI US Consumer Trends and the
Supermarket 2004
45
U.S. DEMOGRAPHIC INDICATORS, 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
46
SEGMENTATION/TARGET MARKETS

• Variables commonly used to categorize consumer
  differences to focus marketing activities
• geographic
• demographic
• psychographic--based on attitudes activities
• STATUS SEEKERS, CHASE GRABITS,
  ENVIRONMENTALISTS
• Mass individualization!
• Problem solving is key!
• Understanding needs and constraints in individual
  eating occasions essential!

47
US Household Composition, 2002 Ave. Household
Size 2.5 People
Source Demographics of Consumer Food Spending
2004, The Food Institute
48
U.S. Per Capita Food Expenditures, 2002, by
household size Small households spend more per
capita!
Source Demographics of Consumer Food Spending
2004, The Food Institute
49
DISTRIBUTION of US HOUSEHOLDS, SHARE of TOTAL AT
HOME FOOD EXPENDITURES/INCOME LEVEL and FRESH
PRODUCE EXPENDITURES, 2002
520 /32
235 /13
Share of households
Average fresh produce expenditures per income
group
384 /16
of total at home food expenditures contributed
by each income group
303 /18
342/21
Source Demographics of Consumer Food Spending
2004, The Food Institute
50
Consumer Food Expenditures, by Household Income
Level 2002
Source Demographics of Consumer Food Spending
2004, The Food Institute
51
US Fresh Produce Consumption by Race2002, Per
Household
Vegetables
Fruits
Vegetables
Fruits
Vegetables
Fruits
Source Demographics of Consumer Food Spending
2004, The Food Institute
52
U.S. Hispanic Population Projections, Millions
SourceUS Bureau of Census
53
Hispanic Population Boom,
2050 (Projected)
2000 (U.S. Census)
54

• Conclusions

55
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.

SourceWillard Bishop Consulting, Ltd.
56
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

SourceWillard Bishop Consulting, Ltd.
57
SHELF CAPTAINS

• Leading, technologically savvy
• vendorssometimes brokers
• Take category interface responsibility for
  section
• May work in retailers headquarters
• Recommend shelf sets, product placement
• Very influential to category management

58
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!

59
CONCLUSIONS 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.

60
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 value
• consistency

• Specific requirements
• packaging
• pallets
• size
• tailor-made

Quantity
Costs
Shippers
Tracking and tracing
Flexibility
On-time delivery
Safety microbial and pesticides
Source Adapted from Rabobank Mexico