Just 20 years ago, nearly 90 percent of Americans’ at-home food purchases were made in traditional grocery stores. Today, their share has dropped to 69 percent. The biggest food retailers in the country? Walmart’s No.1 and Costco Wholesale Corp. is No. 3 (“traditional” grocer Kroger remains in between), according to Supermarket News. 7-Eleven is No. 11 and Dollar General is No. 19. Target’s coming on strong.

Not only is Walmart No. 1 in food, but food is No. 1 in Walmart. Grocery is far and away the largest category for the giant retailer, accounting for 49 percent of revenue in 2008, up two percentage points from the previous year. That’s nearly four times the next closest category (entertainment at 13 percent). So Walmart is not giving up on food sales any time soon.

Nontraditional food stores have managed to grab market share by enticing consumers with a formula of one-stop shopping and lower prices. They’ve introduced a whole new lexicon into food retailing – words like supercenters, hypermarkets, club stores, dollar stores, limited-assortment stores.  Consumers don’t seem to be confused; they know where to find what they need.

Overall, however, the grocery store remains king. Supermarkets are chosen by 44 percent of food shoppers “almost every time” and “fairly often” by another 31 percent, according to data from the Food Marketing Institute. Supercenters are a distant second, chosen “almost every time” by 18 percent and “fairly often” by 21 percent of shoppers.

“If the past has taught us anything, it’s that there will be no single store format for the future,” says Michael Sansolo, longtime senior vice president of the Food Marketing Institute and now a consultant and speaker on grocery retailing. “There is a place in the world for the big superstore, where one-stop shopping reigns. There’s also a place for upscale shopping. There’s a place for small and convenient. We’ll see more channel blurring from companies like Walgreen’s and CVS [two ‘drug store’ chains]. The key for retailers will be to find their key market niche and create the right focus. It’s not so much the format or the size of the store, but finding what their shoppers want and delivering that.”

The same goes for food processors. That retail emphasis on focus and targeting requires processors “to find the right product mix for this tremendous diversity at retail,” he continues. “I can see the same manufacturer presenting itself in different ways in different stores.” 
 
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4. Getting Back to China

The following was contributed by James Rice, vice president and China country manager for Tyson Foods Inc., and a longtime member of Food Processing’s editorial advisory board.

Quality challenges and the global recession have slowed food, ingredient and agricultural trade between the U.S. and China, but the long-term connection between these two countries is undeniable. Right now, the U.S.-China bilateral relationship is the most important of all, and last year’s challenges will be viewed as a pothole in a rising road.

Since 2000, U.S. exports to China have grown 341 percent and China has been the fastest growing export market for U.S. products. China already is the third largest U.S. export market, worth $70 billion.

In the coming decade, China will represent more than half of the world’s gross domestic product growth and half of the world’s growth in protein consumption. China also will grow in its role as a major supplier to the U.S. and as a consumer of American products. This momentum should not be lost by American food processors. What is needed is a collaborative relationship between the U.S. and China to ensure market access and a level playing field for all companies.

The Obama Administration will continue with two important cabinet-level forums that work with the Chinese leadership: the Joint Committee on Commerce and Trade, which handles specific company trade issues, and the Strategic and Economic Dialogue (S&ED), which serves as a forum to discuss long-term strategic issues and to prioritize the agenda between the two countries. It is the highest official dialogue between China and the U.S. One result of the S&ED was an agreement to establish the U.S. Food & Drug Administration’s first overseas offices in Beijing, Shanghai and Guangzhou.

But the U.S. government will need to do more. Our industries will need more technical exchanges between American and Chinese regulators, so Chinese regulators can understand our processes. This is critical because China is just now developing standards for its own industries.

Local standards that are unique to China create an entry barrier to companies that follow international standards. Another challenge is that U.S. industry organizations generally create their own standards, and these organizations are not equipped to promote American standards globally.

The European Union is much more organized at promoting its standards to Chinese regulators. Adoption of EU standards in China often excludes U.S. products, which is part of the reason 40 percent of Chinese imports come from the European Union and not the U.S.

American businesses need the U.S. government to push China on market access issues. This highly political work cannot be done by individual companies or industry organizations. Billions of export dollars are on the line as the American producers are still waiting for permission to export food and agriculture products, such as beef, potatoes, strawberries and food additives.

While large companies often have the resources and experience to expand into new foreign markets, small and medium size companies rarely do. The U.S. government needs a comprehensive plan to help support these companies’ expansion into the China market. Competitor nations such as the European Union, Japan, Australia, and Canada work hard to support small exporters, while the U.S. spends one-sixth the international average on export promotion programs.

On the Chinese side, there is more work to be done to ensure its products have the quality and safety needed to be sold in the U.S. Clearly, China has the aspiration to address its quality issues and started with the publication of the new Food Safety Law. Implementing regulations need to be published by multiple ministries and agencies, so businesses can understand what needs to be done.

Historically, China has not been transparent in the formulation and implementation of regulations. It would be better if this process were open to public comment, particularly by businesses that will be affected. Down the road, the Chinese government will have to show us in earnest these tough, new regulations will be applied across the board and without exception to all manufacturers in China. That’s the only way the “Made in China” label can stand with any confidence.

The U.S.-China relationship is moving in the right direction, and both countries should expand their dialogue and constructive engagement with each other. Bad trade policies and lack of engagement would leave a serious hole in the business between the U.S. and China. The U.S. is enjoying resurgence in its exports to China, which is a market we should all want to participate in.{pb}

5. Ethical Food Manufacturing

While environmentalism has been around since the 1960s or ‘70s, and arguably before then, the green movement became a lot more urgent with the 2006 documentary “An Inconvenient Truth” and the efforts of former Vice President Al Gore. While even experts argue about global warming, no one can argue that business took notice of the need to save the Earth, parlaying the effort into good corporate PR, the marketing of products and even some operational cost savings.

Walmart’s been a driving force, first requiring its suppliers to complete a packaging scorecard in 2008 and, in July of this year, announcing a similar effort for overall sustainability (the first supplier deadline for which was Oct. 1). Walmart does a good job of defining the multifaceted effort, dividing its new initiative into four general areas: energy and climate; material efficiency; natural resources; and people and community.

Excess packaging is an obvious target, but there are similar concerns for greenhouse gas emissions, water usage, energy reduction, even the fair (but not too rapid) economic development of third-world nations. Obviously those concerns go beyond “reduce, reuse, recycle.”

All of those concerns are starting to coalesce under term such as “ethical” manufacturing or in corporate responsibility reports. While the movement may have slowed somewhat during the recession, it looks poised to come back strong with a pickup in the economy.[sidebar id="2"]

Many food & beverage companies have executives with “sustainable development” or “corporate responsibility” in their titles. And consumers, at least in surveys, keep saying they will choose an “ethical” product over another … it just depends on whether their priorities are global warming, fair trade or minimal ingredients … and if their discretionary spending comes back.

One Trade Association, One Stamp

Consumers want foods & beverages grown, processed and packaged in an environmentally friendly manner; that are genuinely nutritional; that do not contain anything harmful, neither questionable ingredients nor contaminants resulting from shoddy manufacturing practices.

Imagine giving them a “score” that weighs and represents all three. That’s the dream of Winston Riley, who has started the Ecological Food Manufacturers Assn., “the only food and beverage trade association devoted to the full spectrum of ecological and ethical issues,” he says. “EFMA will serve an important role in the development and promotion of foods and beverages that are safe, nutritious and ecological.”

The quest is somewhat quixotic, but Riley has started from ground zero before. As a corporate chef, in 1996 he started the Research Chefs Assn., to bring identity and respect to those chefs who toiled in the world of food manufacturing, not in Zagat Survey restaurants.

“EFMA’s mission statement is twofold: To help companies learn to produce foods that are healthy for the consumer, healthy for the planet and healthy for the manufacturer’s bottom line, and to provide marketing support for its members,” Riley says.

Riley is a firm believer that food processors can be both responsible and profitable. When he visited our offices months ago to solicit our support, he was carrying a copy of “Stirring It Up: How to Make Money and Save the World,” by Gary Hirshberg, CEO of Stonyfield Farm (read Editor's Plate: Save the Planet, Save Some Money)

Hirshberg was building a successful and ethical yogurt company in Londonderry, N.H., even before Groupe Danone bought an 85 percent interest. The capital infusion has only allowed him to invest more in ecologically responsible manufacturing, travel the world delivering his message and directly affect the operations of a $21 billion global company. In the book and in speeches, Hirshberg tells of environmental projects at Stonyfield that also had quantifiable paybacks.

Riley’s initial goal is to create a forum where food & beverage manufacturers can reach consensus on ethical manufacturing issues, ideally spanning that wide spectrum of ecology, nutrition and safety. He wants to involve consumer groups in the process for buy-in and proof of the sincerity of the food processors’ actions.

Secondarily, he hopes his association can foster the development of more ecological manufacturing with best practices, good research and marketing support. His ultimate goal is a singular seal, ideally a singular score, on each package that represents the food & beverage processor’s commitment on all those points.

“This seal on the package will represent the industry’s only consistent measure of a good’s ecological worthiness,” he says. It could/should be a powerful decision-making force for shoppers.

Riley needs board members right now to help define the organization’s scope and purpose. To join his effort, call him at 417-581-0738 or by email at [email protected] or visit www.ecofma.com.

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6. New Ways of Doing Business

The following was contributed by Tony Perazzo, a partner in the San Francisco office of Grant Thornton LLP

There is no doubt the economy has dramatically changed the way people shop. Two questions every food & beverage company executive must ask himself are: “What are we doing to adapt to the change in consumer buying habits?” And perhaps more importantly, “What effect will the events of the past year have on the future?”

It is no secret people are going to the grocery store looking to spend less. Price and value have become key, which has driven many consumers to private label offerings for the first time. Intense price competition coupled with the fact private label SKUs are becoming more and more profitable have driven many retailers to reduce the number of SKUs in virtually every product category.

A grocery store executive we recently talked to used tea as an example. The store has plans to dramatically reduce the number of brands of tea it carries from nearly 20 to approximately five. This movement, often referred to as “SKU rationalization,” lowers carrying costs for retailers, reduces the likelihood of stock shortages and provides retailers with an enhanced ability to squeeze their vendors. After all, fewer SKUs means less inventory and lower carrying costs. Time to focus on fewer vendors creates intense competition for suppliers. Couple all of this with the rising perception in quality of the private label, and it becomes abundantly clear private label is here to stay as a major part of most every retailer’s product offerings.

The economy will recover and people will, of course, gravitate back toward some level of discretionary spending on specialty products and brands. However, the severity of the recession will likely have a lasting impact on how consumers view their weekly trip to the grocery store. Lessons learned with respect to price and value (the fact consumers have discovered they actually can obtain value at reasonable prices with private labels) will no doubt stay with consumers. As a result, the general consensus is people will continue to want more private label, which means it will continue to grow.

That does all of this mean for food & beverage companies? Quite simply, there will be little room for slow-growth brands and non-strategic categories; rather, private labelers, contract manufacturers and even retailers will have to undertake a more aggressive and novel product development than they have in the past. Low-cost “me too” products will not be as viable as in the past, since shelf space will likely be at a premium and retailers will carry fewer SKUs than in recent years. All of this bodes well for larger national brands as shelf space is typically given to the No. 1 and No. 2 brands within a product category; the retailer’s private label will inch its way into the No. 3 spot.

Though all of this may seem to create dim prospects for smaller brands and emerging food & beverage companies, this is not the case at all. Not only are there increased opportunities to partner with retailers in the production of private label products, but there will also be significant opportunities to innovate and provide value in product offerings. And although it is more limited than before, shelf space will be available to accommodate the most innovative products.

Ultimately, the winners will be those who create new and unique products that capitalize on emerging trends important to consumers, and not those who simply copy the latest successful product.

It will be more important than ever for middle market companies to regain access to credit when the credit markets recover to keep up with product development. Emerging and middle-market companies will have to focus on streamlining operations, as learning to operate more efficiently will be paramount to their success. Inevitably, changes in the way banks lend and investors invest will likely put a strain on capital expenditures, which will cause a significant resumption of large companies buying smaller, more innovative companies. After all, every emerging company wants to be the next Vitamin Water.

The bottom line is higher-value, less expensive product offerings are here to stay. This will make innovation, world class operating efficiencies and focus on relationships with retailers more critical than ever for food and beverage companies. {pb}

7. 2020 Vision

Audit and advisory firm KPMG provides this whimsical look even further out, at the consumer and the company of the decade after next.

The 2020 Consumer

• The Instavidual – Crossover customers will jump segments. They may seek Armani style for their wardrobe but private-label pricing for their pantry.
• Consumer as CEO – Consumers will demand more integrity, accountability, information and control, and they will get it.
• Authentic Marketing – Information ubiquity means that when it comes to branding, the “truth will out.
• Taggable Universe – RFID, GPS and related technologies will be affixed to just about everything a consumer touches.
• Circles of Trust – What used to be held in close institutional control will be influenced by outside audiences as innovation, marketing, communication, and other practices take advantage of the role social networking and other new media can play in shaping and informing product development.
• Glocalism” – Connected consumers want what’s good for them to be what’s good for the world too, so long as it’s convenient and fits into their active lifestyle.
• Fungible Future – Social currencies, such as influence on the blogosphere, become an additional source of value.
• Pocket Shopping – Smart phones, ubiquitous WiFi, and mobile banking provide consumers with one-to-one product interaction allowing them to scan a product (in store, on the street, over the radio, etc.), trial, and purchase it at the touch of a button.

The 2020 Company

• Traditional customer segmentation strategies will change dramatically. Companies will be engaged in Total Customer Experience management.
• Customer cocreation will become an embedded way of doing business, not just as a means of offering feedback on product development, but on a wider array of strategic business practices.
• Brands that do not “walk the walk” will be penalized, while product marketing that is open, honest, and credible will resonate.
• Tags will reveal everything from the freshness of storebought broccoli, to inventory holdings at each pickup and distribution point along the company’s supply chain. And that’s just the beginning.
• Those systems that inform a company and its operations will be open to outside voices; while that which distinguishes it uniquely will remain proprietary. Innovation practices will be disaggregated, funneling layers of problem-solving and testing to outside groups while cultivating other pockets of excellence in more formal in-house and virtual networks.
• Companies will fuse their sustainability practices into their business ones, coupling locally made and sustainable products with the advantages of global sourcing and procurement.
• Alternative currencies, such as loyalty and reward programs, will become increasingly integrated into social media.
• Recognizing that the medium is the message, companies will derive a whole new communication style to entice, retain, and satisfy pocket shoppers—offering everything from detailed product information to coupons to customer references.