The fresh produce industry is no stranger to the R word. The last 20 years have seen the number of suppliers to UK retailers disappear with increasing rapidity. The last five years in particular have seen the pace continue.
John Giles, divisional director of agrifood consultancy Promar International, says: “The UK supermarkets have long been admired for certain attributes; the way they seem to keep on growing, generate higher profit margins and the relative sophistication of their supply chain expertise among them. I think they are still looked at as best-in-class, and they have relied heavily on their suppliers to achieve that status. But inevitably there have been winners and losers in the process.
“Ten years ago there were lots of companies doing reasonably well out of their business with supermarkets in the UK. Now there are still a few, but lots more have either disappeared or are finding life very difficult.”
Asda was the first to reduce its supply base in dramatic fashion in 1999, when it appointed just one supplier for each of its imported top-fruit and citrus categories. This spread fear throughout the industry, which initially felt that the single supplier dream of the Leeds based UK number two was transferable to its counterparts at the top end of the multiple tree.
Despite Asda moving to integrate the vast majority of its fruit sourcing into one company, International Produce, with the notable casualty at this point appearing to be top-fruit supplier Hart Worldwide - which has recently had its contract extended but is still serving notice - no other UK retailer has followed its example to the letter. But every way you turn there appears to have been another supplier shaved off the preferred supplier list of each chain.
High profile omissions in the last month include MBM and Worldwide Fruit from the Sainsbury’s roster. At Tesco, there has been dramatic restructure across the whole of fresh produce, while the Morrisons/Safeway picture is more clear now than it was at the time of takeover, but undoubtedly far from crystalised.
There are indications that the single supplier route is unlikely to catch on, but the minimalistic outlook on sourcing will go as far as it can. Eric Baas of international agribank and trade watcher, Rabobank, says: “I think retailers have generally realised they can’t just rely on one source of supply, but they still want to work with a limited group of preferred suppliers and it’s a struggle for suppliers to be in that group.
“All this puts increasing pressure on suppliers and price. But that can only be in the short term - if pressure on suppliers is put on for too long then they will be in trouble. Suppliers that really depend on one retailer will have big problems.”
Giles says the fight is an international affair: “Everyone is obviously looking for a competitive advantage on a national and global level. The UK retailers have always been quite big fish in a relatively small pond and, as the world globalises, they have to compete against not only themselves, but retailers from other countries as well.
“There is a reduced global supply base to source from and Wal-Mart’s move into the global marketplace is just one example of added competition that has triggered big changes in attitudes.”
John Smith, md of vegetable supplier Greyfriars, has seen both sides of the process, having been delisted by Tesco in 2004, but gained business with Morrisons following the Safeway acquisition. “From a supplier perspective, it is important that we accept rationalisation as an inevitable part of the fresh produce landscape we are working in and that there is not a great deal we can do to influence it,” he says.
He adds that there is an inexorable force in play, which dictates that buyers are unable to fulfill their own requirements to visit all suppliers unless they reduce them in numbers to a minimum. “If that’s the way that the supermarkets are heading there is no point jibbing at it. It is entirely up to them and they are entitled to make their own commercial decisions. What we have to decide as suppliers is how we can evolve as companies and businesses to ensure that we have a part to play in the changing environment.”
Giles agrees: “Suppliers have to provide more than the consistency, high quality and price expectations that are a given now - they must add value to the relationship and share in the broader vision of their customer. For most produce companies, the task has been getting their products to depots. But the demand now is for a wider understanding of the direction the supermarket is heading in, its customers and how you, as a supplier can contribute to that.
“Admittedly this is increasingly challenging,” he says. “The day-to-day technicalities of the produce industry are time-consuming. But suppliers need to stand back and take a look at the retailer. If your customer is not successful, there’s no way you will be, and supermarkets want suppliers that buy into their own bigger success aspirations.”
There are a lot of things a supplier can think about doing to address this situation, says Smith, but it is only the brave who have so far taken practical steps to realign themselves to the harsher realities of the new marketplace.
Drowning in splendid isolation should not be an option, says Smith: “You can plough your own furrow. There is a lot of stewardship in this industry, people who say they’ve been working like this forever and they are not going to change their businesses now. But one by one suppliers are being picked off. So, if you stand back and take the option of doing nothing, at the end of the day you will not be able to say ‘we’ve tried everything’.
“One way of tackling this, in my opinion, is by forging intelligent strategic alliances. Identify common suppliers of your core product areas and form a block. If there is an axe falling, it may well be on those that chose to stay outside of the block. That is something we have actively encouraged as a company.
“Another option is to take that strategy down a different route and enlarge the range of products you are able to supply to your customers through strategic alliance, or diversify within your own business to become an additional line supplier and become more important to your customer. Greyfriars has moved from being a mushroom supplier into garlic and sweetcorn supply. The aim is that not only do we add value to our customers, we are able to stand alone.
“In all of these scenarios, while there are no more suppliers for the buyer to deal with, the existing supply base becomes more useful and diverse. I don’t think retail buyers would be opposed to that generally and I believe the opportunities are there.”
One criticism that has begun to gain weight in the last 12 months is that, in some cases, the pressure to cut costs can lead to a need to also cut corners. “Logically, if you rationalise the supply base and increase the volume that each supplier will be handling, there should be more potential for remaining suppliers to effect economies and reduce supply-chain costs, thus reducing the prices charged to the supermarket and theoretically allowing them to pass this on to the consumer,” says Smith.
“But it is a moot point whether the material cost savings are actually as big as some people think they might be and there is almost inevitably going to be some impact on quality levels eventually. In the drive for greater efficiencies, there will be areas where standards are compromised, but in this market the issue of attaining profitability in a highly competitive environment is top of the priority list.”
The UK multiple retailers have driven production standards to new levels around the world, and put themselves on a pedestal in the process. For many years they have been the ultimate customers for growers and created the benchmark all suppliers have to live up to. But as their priorities have changed, so has the perception.
“It would be a brave company that decided to give up on the UK market. Things change rapidly in retail and if the UK is not at the very forefront of developments in the sector, it is certainly not far behind. However, you could understand why companies might feel like turning their back sometimes,” says Giles.
He adds that, perversely maybe, the drive for efficiency has not had any negative effect on standards. “Downward pressure on prices has actually coincided with the huge increase in food safety standards in recent years,” he says.
“But as long as the major retailers continue to focus primarily on price as their main selling point, that pressure is going to rise. If the eventual result is that people have to cut corners, that would spell potential disaster for everybody. The stakes are so high in the food safety game that if one person gets it wrong, the whole industry will suffer.
“It is difficult to see a way that suppliers can escape the downward price pressure, without extremely robust arguments illustrating the problems that it could bring.”
Smith says that securing a contract with a UK retailer is still a tremendous opportunity for any grower or exporter, because of the volume of business it inevitably represents. Pockets of growers around the globe have begun to question the validity of depending on such a volatile marketplace.
Baas says: “Retailers want to have choice and suppliers have to be quite sharp. However suppliers need to remember there are other opportunities out there. Certainly over in the Netherlands, where Ahold has dominated for a long time, we’re seeing a rise once more in the smaller chains. They are starting to come up again and gain market share. From a supplier point of view, that’s got to be quite interesting. I would suggest suppliers will start to look further down the chain. That could provide alternatives for them.”
So who wins from the fixation on price and the desire to reduce suppliers to a minimum? Giles says: “If you’re a shareholder in Tesco, you are obviously delighted and the consumers through lower prices are having a fantastic time. The question of whether it is possible to reconcile the interests of shareholders and consumers is often raised. The simple answer is that the best way to please your shareholders is to consistently please your customers.
“How sensitive consumers are to whether grapes cost 65p or 70p, I’m not sure. But that is not the point these days. The supermarkets have singled out produce as a price-sensitive sector and they have to be seen to be competitive within it.
“The suppliers that have learnt to deal with the rationalisation process are happy too, for some it has revolutionised their business. While it would be too straightforward to think that these relationships are set in stone, the longer they are developed and nurtured properly, the harder it is for significant changes to be made.
“If you’re doing a very good job, why would your customer want to replace you?”
There are certainly a few suppliers around the world, Smith among them, who would like to know the answer to that question.
NEANDERTHAL APPROACH MUST CHANGE
in recent years, multiple retailers have begun to tackle a sector which fell far short of both what they required and what other food sectors frequently offered them, writes Jonathan Smith, managing director of Axis Management Consulting.
Firstly the fresh produce supply base was more fragmented than just about any other food sector. In many cases, retailers had more suppliers for any one item of fresh produce than they had for the entire breakfast cereal fixture.
Secondly, much of the fresh produce sector took a Neanderthal approach to working with the retailers in areas such as understanding the consumer and both category and product development.
While significant progress has been made down the rationalisation route, there is still a long way to go. The industry still contains many small operators with very narrow product ranges and in many cases their approach to working with the retailers remains primitive.
The process of change will continue to be very tough for all concerned. Clearly there will be winners and losers. The winners will be able to grow their businesses very successfully. However, this will be at the expense of the losers who face the loss of business and even their company failing.
Companies looking to avoid being losers need to take urgent action to avoid the cull. As a minimum, this means modernising their approach to working with retailers and developing the category as well as aggressively tackling costs. Working effectively on category development is not rocket science and is well within the reach of most suppliers. Survival may also involve merging or forming joint ventures with others players in the sector in order to be able to offer larger volumes and wider product ranges from a more efficient cost base.
An industry comprised of bigger and more efficient players, working effectively with the retailers to develop the sector, is clearly beneficial to both shareholders and consumers. The only people to suffer in the process will be those suppliers who do not make the grade.
With regards to quality, the experience of recent years, both in fresh produce and in other food sectors, is that the relentless retailer pressure for improved quality has driven standards up rather than down, and I can’t see that changing.
ADDED VALUE THE WAY FORWARD
Roger Welberry runs Holme Farm, an Asda vegetable supplier, and he admits that the retail pricing situation has forced the company to re-evaluate its operations. “We’re restructuring. We’ve opened a new factory for added-value products, doing things like roasted veg, cooked veg, products for ready meals, sliced and diced vegetables and prepared foods,” he says.
“What we’re doing is cutting back our growing area by around 500 acres. Instead of growing willy-nilly we’re just producing what we need. There’s no margin anymore in straightforward vegetables you’ve got to do something with it, process it or slice it.
“We’re not going to keep growing and taking land for the sake of it.” Welberry has invested £1 million in a state-of-the-art factory which will focus predominantly on the foodservice sector, illustrating his desire to consolidate Holme Farm’s position as a multi-sector company.
“We need to grow that side of the business. We’re still supplying Asda and that is going well, but the prepared business is where the growth is.
“There’s just no money in the normal lines. Asda is great, you do get a good margin, but with the rest of the market, I just don’t know how some of the others keep going. We’re refocusing onto more profitable areas.”
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