Issues such as sustainability, water use and plant breeding might be the vogue subjects at industry conferences, but arguably the most talked about development among importers and growers at the moment is that of direct supermarket sourcing.
When Asda went into partnership with International Produce (IP) six years ago, it started a trend that seems to be gaining momentum and popularity with other supermarkets of, as IP managing director Nick Scrase puts it, “cutting out the middle men, taking value out of the chain and then either giving that to customers, shareholders or growers”.
But as retailers re-examine their supply chains in the face of the ongoing price war, how far will they go with direct sourcing and where does all that leave fresh produce importers in future?
“Direct sourcing is here to stay and I can see it becoming the normal way of sourcing fresh produce within the next five years,” says one retail source. “It’s just massive. The direct sourcing model for Tesco is such that it’s using the UK to directly source for its European operations. It’s not a fad, and both Tesco and Asda have moved on monumentally since six years ago.”
Morrisons is perhaps the original practitioner of direct sourcing, with its own packhouses and a more integrated supply chain than other supermarkets, but it is only in the last five years that retailers have begun formulating a new way of working that they believe could leave both themselves and growers with extra cash. Both Asda and Tesco would seem to be seriously committed to direct supply, with Sainsbury’s apparently favouring an approach of working closely with growers to see where cost can be stripped out of the chain (see box).
Some of the fiercest debate is not over whether direct sourcing is happening but over the extent to which supermarkets are succeeding in their endeavours. One major supplier casts real doubt over whether the moves are paying off from a financial point of view, arguing that by cutting out the importer, supermarkets are simply loading the import costs onto themselves. “If you look at the Asda model, I don’t think it works,” he argues. “They take on the cost infrastructure of the importer and try to take the margin but there isn’t much margin there. As for Tesco, their approach doesn’t seem to be thought through. Sainsbury’s is being slightly more logical in standing there and understanding the supply chain costs, having a strategy of being closer to growers, driving out cost but without taking on a load of produce traders.”
The supplier points to recent market share figures - showing that Sainsbury’s and Morrisons have gained ground while Asda and Tesco have stood still - as evidence that the supermarkets employing direct sourcing strategies are making less progress than those maintaining their traditional models.
Another supplier takes the opposite view, arguing that Tesco is in fact leading the way and says that once it irons out all of the challenges, the system will work well. “More needs to be done to bring down import costs and consolidate loads,” he says. “If they get grapes from Chile, for instance, they should get garlic and sweet potatoes from there as well. It’ll take three to five years to come to fruition.” But with the will to succeed that emanates every aspect of the Tesco business, it will be sure to settle on a formula that enhances its bottom line, he adds.
A further major supplier believes the general concept of direct sourcing is far from perfect. “I think the logic behind why supermarkets are buying direct is somewhat flawed,” he says. “The reason is they think they can capture margin that I’m sceptical is really there. If they deal directly with source, they shoulder responsibility on trying to balance keeping growers in business.” However, the process is “embryonic” and will take several years before becoming a fully formed sourcing approach, he adds.
One argument importers frequently cite as being a reason why direct sourcing won’t work is staff expertise. The importers have decades of experience of managing the vagaries of the supply chain, dealing with growers and reacting to changes on the ground, they say. How can supermarkets address this? One source claims supermarkets are looking to recruit individuals with experience as an importer into their business.
Supermarkets face a difficult balancing act, and sceptics say they’ll find a whole new set of obstacles and challenges if they go down the direct sourcing path. For instance, they must ensure they do not help themselves to too much margin and make sure the grower feels well compensated, one supplier warns. If not, and in the current climate where sterling is weak and prices are low, they risk losing supply. “If they lose growers, to get them to come back to the UK market would be expensive for the retailers. They’ll have to pay a disproportionate amount to get them back.”
So where does all this leave the importer? Tesco emphasises that its strongest and most loyal suppliers and importers will actually grow and prosper alongside its direct sourcing model, and that Group Food Sourcing (GFS) gives existing suppliers the opportunity to support and be involved with its future service provision plans. GFS would also provide the channel for existing growers to develop broader businesses across the entire Tesco group, and not just its traditional UK or European markets.
Everyone agrees that modern suppliers need to bring a point of difference to succeed. “If you don’t add value then don’t expect to keep your business,” says one large supplier. Another says that you must “create something that is different”, adding cost or value.
Clearly, there will be winners and losers and suppliers either need to adapt or find new ways of prospering in the new environment. One business that has been set up specifically to tap into the opportunities presented by direct sourcing is Univeg Direct UK. The Spalding-based company was established in 2008 with the aim of becoming a “facilitator” to allow Univeg farms to interact directly with supermarket customers. “One of the benefits we’ve got is that we are growers,” says director Alan Forrester. “I’m excited by the opportunity that [direct sourcing] brings. We’ve introduced Univeg Direct UK to look at the opportunity that’s come out of being a grower supplying directly to the retailers. We saw change and that’s how we’ve responded.”
Univeg Direct UK can operate “with a much more effective supply structure”, according to Forrester, in a system that allows good returns to be passed back to the grower base.
Those businesses that are vertically integrated and have their own growing or packing operations look well set to succeed in the new climate, while those that do not will look to add value through customer service or other specialist service provision. It may yet be early days for direct sourcing, but the model, in its various forms, looks set to be here for the long term.
HOW THE BIG FOUR COMPARE WITH THEIR DIRECT SOURCING PLANS
Tesco
With a grocery market share almost double that of its closest competitor, all eyes are on the extent to which Tesco decides to pursue a direct sourcing approach. The supermarket made its move last year when it established Group Food Sourcing, a division with a five-year remit to examine its global supply strategy. GFS plans to establish a more vertically integrated supply chain, although the supermarket has been keen to stress that it is not taking a blanket approach and the best and most loyal suppliers will continue to grow and prosper alongside its direct sourcing model.
Asda
Arguably the pioneer of the modern direct sourcing model being considered by supermarkets, Asda made a firm statement of intent with its tie-up and subsequent buyout of International Produce. Seen as a risky move six years ago, other retailers are now looking at the Asda/IP model and questioning whether they should pursue a similar approach. Asda insists its tactic of cutting out the middle man is a successful one that allows it both to pay growers more and remain the cheapest grocer in the UK.
Sainsbury’s
Less is known about Sainsbury’s plans for direct sourcing than any of the other leading supermarkets. The retailer is well regarded among its supplier base for its close working relationships and will point to initiatives such as its Concept Orchards as evidence of its direct involvement on the farm. Sources close to the supermarket believe Sainsbury’s is adopting a “wait and see” approach to the kind of models operated by Tesco and Asda, while getting as close as it can to its own growers and working with them to strip cost out of the chain.
Morrisons
With a fresh food supply structure unlike other supermarkets, Morrisons has in a sense been sourcing direct for a long time. Owning its own packhouses gives Morrisons a more integrated feel - it also operates slaughterhouses and carves up whole animal carcasses in store - and the retailer has an individual structure that seems to work. However, in more of a nod to Asda’s approach, Morrisons has recently stepped up its work with Global Pacific Produce that is bringing in more fruit directly from a number of key production countries around the world.
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