Fresh produce businesses could be better placed than other sectors to face the challenges of the economic downturn and, although it may be a rough ride, there could even be positive outcomes as shoppers trade down from luxury items and focus their finances on food.
Figures from market researcher TNS Worldpanel suggest that the fresh produce industry is bearing up as the credit crunch bites. The vegetable sector, in particular, is up both in value and volume sales overall on last year. Marrow, pumpkin and asparagus are just some of this season’s winners, improving significantly in volume sales compared to the same 12-week period last year. Some vegetables have not fared so well, however, with items such as artichokes and Brussels sprouts suffering sales drops - some of which is weather-induced.
Fruit has been hit harder, and while expenditure has increased by 6.4 per cent overall, volumes have dropped by 2.1 per cent. Exotic lines such as lychees and figs have seen a significant reduction in sales. However, some categories have excelled, with easy peelers increasing in volume sales by 13.4 per cent, black grapes by 15.7 per cent and white grapes by 17.9 per cent.
Traditional staples such as potatoes are doing particularly well, with maincrop lines increasing in expenditure by 19.9 per cent and in volume by 5.7 per cent on last year.
Gavin Rothwell, senior business analyst at food and grocery expert IGD, says food and grocery tends to remain relatively resilient in a downturn. “Compared with more expensive items such as furniture, cars or holidays, individual food items do not cost very much and shoppers will look for indulgences that cost pennies, not pounds,” he says.
Fresh produce is under pressure from competitive pricing, but in many cases volumes are holding firm as consumers go back to basics. Nigel Jenney, chief executive of the Fresh Produce Consortium (FPC), says fresh produce businesses should weather the storm better than most. “The produce industry has gone through a number of different challenges over the years, such as rising fuel costs, so this has meant that fresh produce businesses are very lean and efficient, and used to working in a very competitive marketplace,” he says. “The industry may well be better able to respond to an economic downfall than other sectors that have not worked within such a competitive business environment.”
Rothwell agrees businesses must do everything to remain profitable. “Of course, no-one knows how deep the downturn will be, or how long it will last,” he says. “But there are number of factors which may be relevant to producers. We have found that a significant proportion of the value of many products is destroyed through supply chain inefficiency. At a time when commodity and energy prices are high, scrutiny of each stage of the supply chain can reap benefits, as can looking at the whole supply chain.”
But the fresh produce industry has a number of opportunities on its side.
Fresh produce sales are being helped by the increase in online shopping and this has been earmarked as an area of continued growth. “We predict significant online growth and believe the 2007 £2.4 billion UK online grocery market will more than double over the next five years to reach £5bn in 2012,” Rothwell says.
Online grocery retailing sales have grown by nearly a third in the past year and nearly one in 10 consumers are expected to start doing all their grocery shopping online in the next five to 10 years. “The online grocery market is still only two per cent of the total market, but is growing more than six times as fast as we have become used to buying music, books and holidays online, and as the technological revolution has yet to impact on the way most of us buy our groceries,” says Rothwell.
Specific fresh produce categories are being boosted by price increases in the rest of the food industry. The rise in potato volumes, for example, has been helped partly by sharp increases in the price of alternatives such as rice and pasta.
Paul Coleman, technical director at potato supplier Greenvale AP, expects potatoes to be a winner when consumers are reining in their spending, as they tend to go back to basics. “Overall, potatoes are doing alright and it is reasonable to gauge that volumes are not declining at all,” he says. “Vegetables may be harder hit - consumers may be trading down from more expensive products to cheaper alternatives. We supply processed potatoes into the ready-meal market and there seems to be some trading down in that area.”
Competitive supermarket pricing puts significant pressure on suppliers. However, supermarkets have been performing well over the last few months, with Tesco estimating profits of £500 million from sales of locally produced food and drink this year. “Promotions now are so hard-hitting,” says Coleman. “Tesco launched a campaign as the biggest discounter - it has had an effect on the marketplace, but Tesco and Sainsbury’s both have good six-month performance figures, which is good news.”
The foodservice sector, on the other hand, is another aspect of the industry that has been hit by the credit crunch. How this will pan out remains to be seen. Nigel Harris, chief executive of foodservice supplier Fresh Direct, says price pressures are not any different to previous years. “We have been hit by rising fuel costs and the fall of the sterling against the euro, but produce prices have not been following suit,” he says.“Other years have seen price challenges of their own.
“Fresh produce will always be the last thing to be affected in a situation like this. At the moment, the media has been pushing for everyone to eat healthily and that means buying fresh produce. Up until now, businesses that have succeeded in running successfully are seeing strong like-for-like sales,” Harris adds.
But he stresses that, while fresh produce is in a good position to defend itself against the downturn, the crunch “may hit in six to 12 months’ time, so we need to be prepared”.
“Actual price pressures such as fuel are moving up,” he says. “Suppliers have two options - to pass the increases on to the customer, or to provide a more fit-for-purpose offer. Customers can accept this or put the price up, but this is a vicious circle as their customers will then go to a cheaper supplier.”
Examining the efficiency of the supply chain is crucial, Harris says. “For the very first time, a few suppliers are starting to look at whether the way it has been done in the past is the best way to do it,” he explains. “It is a very interesting time.
“For example, do button mushrooms need to be an exact size, or can these rules be relaxed in order to get the most competitive price? Can iceberg lettuces be sold packed into the box instead of wrapped by the head?” he asks. “Packaging and labour are two of the greatest expenses - if these can be reduced, prices will be more competitive.”
But it is very difficult to predict what is going to happen over the next few months. “We must show our customers other opportunities, turn around and keep asking questions - questioning every product with purchasers and finding out if we are purchasing the most competitive way and offer that to the customer,” says Harris.
Research at IGD suggests there are ways for suppliers to maintain their share of the market. “The current market is even more competitive than ever,” says Rothwell. “But suppliers need to recognise that consumers have more sophisticated palates than in the past, so they need to demonstrate value for money in their offer, while recognising that may mean products offering health, ethical or other benefits.
“Suppliers that can satisfy consumer demand for products with an ethical heritage or a story to tell in terms of production are well placed, and are not forced to compete solely on commodity costs,” Rothwell says. “For example, we have found that consumers have been disposed to buying more local foods over the past six months, as they are enticed by the combination of taste, heritage and the fact that such products help support local farmers or growers.”
At this stage, it is vitally important that fresh produce is marketed as value for money. “The important thing is to ensure that consumers don’t think of fresh produce as expensive,” says Jenney. “People will not stop buying fresh produce in general, but might stick to the standard line - organics, for example, are having a tough time,” he explains.
But moving forward, the fresh produce industry can reposition itself to take full advantage when the economy starts to pick up again. “For people always buying ready meals and takeaways, it will reinforce what good value for money fresh produce is and show that there are some great ways of cooking conveniently at home,” says Jenney.
“In general terms, the fresh produce industry is very innovative and a number of entrepreneurs are re-engineering their businesses,” he continues. “It is the ongoing challenge - how as a business you grab your share of the shopper’s basket. It is important that the industry keeps getting the message across that fresh produce is convenient and tasty.”
Harris agrees that suppliers must look at their business plan for the coming months to ensure maximum profitability. “This is what business is about - making sure the strategy is right for every climate,” he says. “It is always changing, but we must come up with solutions.”
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