The fruit and vegetable sector looks set for a challenging time over the next 12 months and beyond as it continues to come to terms with the impact of the varying economic conditions around the world.
This commercial challenge is all set against a wider background of the need to feed a world population that has now reached seven billion. There are, of course, another two billion on the way within a generation.
UK businesses across the supply chain are currently experiencing the biggest economic downturn since the 1930s. The current level of GDP in the UK, for example, is as much as 10 per cent less than it would have been without a recession. Predictions are that the UK economy might not return to ‘normality’ until 2014.
In the rest of continental Europe it might be even worse, with huge concerns over the fate of the eurozone economies, especially in Greece, Spain, Portugal and Italy as well as in Ireland - all major agricultural and food producers. The North American economy still looks equally fragile. Japan has seen long-term economic stagnation, even before the combined effects of the financial crisis and a natural disaster.
Yet in the BRIC countries - Brazil, Russia, India and China - and most of the so-called N-11 (the ‘New 11’, which include Indonesia, Mexico, South Korea, Turkey and Vietnam), economic performance is much stronger, with agricultural and food sectors continuing to move forward. This economic robustness, however, can bring its own problems. There are concerns in these emerging markets over rising labour costs, the price of fuel and distribution as well as exposure to volatile exchange rates.
A review of just a small number of the key developments we see impacting on the horticultural sector shows just how fast moving the sector is, and underlines the challenges the supply chain faces. These include:
World policy developments - progress in WTO talks is still painfully slow. Not least, many of the key players are preoccupied with their own economic problems and challenges. In a worst-case scenario, there is a fear that an overly inward-looking focus on economic policy will lead to greater protectionism in areas such as agricultural trade talks.
EU policy - there will be significant changes in the way that the EU’s CAP will operate in future. In particular, there will be more emphasis on greening, the move towards uniform area payments across the EU, smoothing out payments to farmers in the new member states, capping the level of direct payments that can be claimed by an individual farm, and more help for smaller farms as well as for those in disadvantaged areas. While the opening shots of CAP reform were fired in October 2011, there are still two long years of negotiation ahead.
Oil prices - these determine the cost of energy and transport for both farmers and along the rest of the supply chain. For many fruit packers and exporters the cost of energy is now the single largest cost they incur - even higher than labour costs. They are still likely to remain higher than historical levels, even if the worst predictions of the ‘peak oil’ advocates are not realised.
Supply chain configuration - in the last few years, the move towards direct sourcing by major retailers has been growing apace. This is changing the way the supply chain operates and most of the leading UK retailers have in place some form of direct-sourcing arrangements. The investment made by retailers in direct sourcing has been considerable. It is not indicative of a temporary experiment. Initiatives for reducing costs further from the supply chain will be ongoing in all areas.
Retail developments - in the UK, the combined market share of the discounters has now reached six per cent. The so-called middle market, which is characterised by a mix of discount retailers, independent retailers and foodservice companies, is a highly price-conscious market. Both Aldi and Lidl have announced ambitious plans for significantly more store openings in the UK over the next few years and mainstream UK retailers have consequently been forced to readjust their position in the market. The plans of the German discount giants certainly do not appear to stop at capturing increased market share in the UK. Long-term, Aldi has stated its intention to continue expansion, not only in the UK, but also in the US, as well as in other attractive markets such as China, Russia and New Zealand. Lidl is also sizing up opportunities in markets such as the US, Turkey and Russia.
Activity by non-governmental organisations (NGOs) - these organisations will continue to put agricultural and food sectors under the spotlight. Horticulture will be no exception to this. Attention will be focused on a range of issues that concern these groups. For commercial growers and importers/exporters, having rock-solid Corporate Social Responsibility credentials will become an increasingly important factor in deciding who gets the business with major customers and who might not.
What does this all mean?
The implications of these factors, which all create an environment of uncertainty for horticultural producers and marketing businesses, include the following:
Business models - there is probably no single ‘right’ business model. Nonetheless, businesses that have achieved a degree of scale in their operations have access to unique products and technologies, sell to a good spread of international markets and have well-developed supply chain relationships are in a better position than those without such characteristics. Even in niche markets such as organics and fair trade, having a large scale of operation is normally considered desirable.
Adding value to products or services - in today’s environment, it is not always necessarily about who has the cheapest products. It may be equally or more important to add value to a portfolio of products and services based on a company’s knowledge of its market, customers and industry.
What needs to be done ?
Around the world and in these uncertain times, supermarkets, processors and large foodservice companies will still dominate the end-user markets. Volatility will be a key feature of international markets in the future, but closer supply-chain relationships will be an important way of combating this. The need to partner and work in close collaboration with others in the supply chain has certainly never been greater.
Growth will come from the emerging markets, but mature markets in the EU, US and Japan are still very important to international horticultural businesses and clearly should not be ignored. The Corporate Social Responsibility agenda will also come to the fore in a way not seen until now. In these circumstances, a number of key actions seem to be imperative if businesses are to survive, let alone thrive, and these include a combination of the following:
Consolidate, or be consolidated - the process will be ongoing and accentuated by all the pressures felt across the supply chain. It is normally best to do this from a position of advantage rather than leave it too late in the day.
Ongoing full value-chain analysis - seed to shelf - as a matter of course and on a regular and consistent basis, not least to remove and reduce waste from the supply chain. Certainly for businesses operating on slender margins, every penny literally does count.
Use every bit of technology available in order to reduce costs and boost yields. This is definitely not an out-and-out call in the UK or other EU markets for the use of GM, but does require all other options for new ways of growing, packing and distribution to be evaluated and this includes services and business systems, not the produce itself.
Benchmark regularly against other best-in-class operations.
Aim to be the leader on consumer and category knowledge unless the discussion with customers is to be about price and price only. This includes the need to promote and maximise PR opportunities with younger consumers.
Invest in R&D and knowledge transfer and look to leverage the resources and expertise of commercial partners - such are the challenges faced in the future, it is not likely that all the answers are to be found under one roof of any one company.
The current underlying theme of many publications produced by government agencies and R&D organisations globally is the need to “produce more from less” (ie productivity growth). The needs of the commercial supply chain, although starting from a different angle, often have the same overarching objectives. Companies who can contribute to this agenda are more likely to be successful.
However, patchy global economic recovery, price and currency volatility, strong NGO activity, the role of the middle market and supply-chain efficiency will continue to feature strongly in the horticultural business environment, presenting both threats and opportunities for all. -
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