Twenty Years of Competition Reshape the U.S. Food
Marketing System
Companies have devised
a number of strategies to lower costs and stand
out from the competition.
Steve Martinez
and Phil
Kaufman
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Warehouse
club stores, drugstores, and other nontraditional
foodstores have increased their share
of food sales, leading traditional foodstores
to compete to retain their share of
consumers’ food purchases.
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Advances
in communication technology and increasingly
diverse
consumer preferences have led to more
customized food marketing strategies. |
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Food
companies are touting their socially
responsible corporate
practices as a way to attract customers. |
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This
article is drawn from . . . |
The
U.S. Food Marketing System: Recent Developments,
1997-2006, by Steve W. Martinez, ERR-42, USDA,
Economic Research Service, May 2007.
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You
may also be interested in . . . |
The
Impact of Big-Box Stores on Retail Food Prices
and the Consumer Price Index, by
Ephraim Leibtag, ERR-33, USDA, Economic Research
Service, December 2006.
ERS
Briefing Room on the Food Marketing System
in the U.S.
ERS
Briefing Room on Global Food Markets
|
The past 20 years have brought
significant changes in structure and competition
in the U.S. food marketing system. Wal-Mart opened
its first supercenter in 1988, offering food items
as well as department store merchandise. Since then,
the company has become the Nation’s leading
retailer of grocery products. Warehouse clubs, dollar
stores, drugstores, and natural and organic foodstores
have also made their mark in the food industry,
each with a unique mix of products, services, and
pricing strategies. Foreign-owned retailers and
restaurants and other foodservice options also are
sources of competition for U.S. consumers’
food dollars.
Traditional grocers are finding
ways to survive in the new marketplace with cost-cutting
and marketing strategies to differentiate them-selves
from the competition. Traditional food retailers
are experimenting with new store formats and upscale
store brands.
More fragmented advertising venues
and consumers’ desire to express their individuality
are enabling greater segmentation of customers based
on specific preferences. Appealing to the social
consciousness of consumers offers companies another
means of standing out from the competition and diversifying
their product offerings. As food companies strive
to maintain market share in the domestic food economy,
largely limited by population growth, consumers
are the beneficiaries of this heightened competition
through diverse product offerings, new and improved
services, and competitive prices.
Nontraditional Foodstores
Make Inroads Into the Food-at-Home Market
The influx of retailers not traditionally
involved in food sales has been one of the most
important developments over the past two decades.
Supercenters, for example, offer a wide variety
of food and nonfood merchandise, often at lower
prices than traditional foodstores, such as supermarket
chains, convenience stores, and specialty foodstores.
Warehouse clubs, including Costco and Sam’s
Club, compete by catering to small businesses and
to middle- to upper-income consumers, offering a
limited variety of products and a grocery section
dedicated to large-size packages and bulk sales.
Drugstores, including CVS, Walgreens, and Rite Aid,
attract consumers with a pharmacy, snack and convenience
foods, and, in some stores, frozen and refrigerated
items. Dollar stores, such as Dollar General, Dollar
Tree, and Family Dollar, appeal to bargain and low-income
shoppers with products priced at $1 or $2.
Nontraditional outlets have increased
their share of U.S. food purchases for at-home use,
from 13.8 percent in 1988 to 32.6 percent in 2006.
Most of this growth was due to supercenters and
warehouse club stores, which accounted for 17.9
percent of food-at-home expenditures in 2006.
“Fresh” Formats,
Globalization, and Foodservice Outlets Add to Competitive
Mix
In addition to the influx of nontraditional
retailers, other sources of competition in the U.S.
food industry come from the foodservice sector,
globalization, and “fresh format” stores
that emphasize perishables, typically ethnic, natural,
and organic products. From 1999 to 2006, sales at
the two largest publicly traded fresh-format stores,
Whole Foods and Wild Oats, grew by 275 and 64 percent,
respectively, compared with a 22-percent increase
for all grocery stores.
Traditional grocery retailers
continue to face indirect competition from the food-away-from-home
segment, which captured 48.9 percent of total U.S.
food expenditures in 2006, up from 45.4 percent
in 1988. In addition to their traditional menu items,
foodservice companies have added a host of new products
in response to health-conscious consumers, such
as McDonald’s apple, grape, and walnut salad,
and KFC’s roasted-chicken choices.
Foodservice chains are also competing
by improving service. Many of these full-service
restaurants, such as Outback Steakhouse and Carraba’s
Italian Grill, have emphasized take-out orders by
adding reserved parking spaces and special entrances.
In 2004, full-service chains’ take-out sales
accounted for an estimated 10 percent of their total
sales, growing at roughly twice the rate of their
total sales over the previous 3 years. Limited-service
restaurants, such as Burger King and McDonald’s,
have extended their hours of operation and expanded
their breakfast menus.
Some of the fastest growing foodservice
chains have been those catering to consumer preferences
for “casual indulgence” with more upscale
items, such as specialty coffee and breads, gourmet
ingredients, and organic and natural prepared foods.
They include limited-service chains such as Starbucks,
Panera Bread, and Quiznos Sub. In 1987, Starbucks
began its rapid ascent by selling quality beverages
tailored to individual tastes and by promoting an
image of luxury and sophistication. The company
continues to grow, opening 1,065 new stores in 2007,
compared with 11 in 1988 and 357 in 1998.
Globalization has meant that domestic
retailers face increasing competition from foreign
retailers operating in the United States. U.S. sales
by foreign grocery retailers, including Ahold (Netherlands),
Delhaize Group (Belgium), and A&P (Germany),
totaled $85.6 billion in 2005, or 17.7 percent of
foodstore sales, up from $22.1 billion (6.8 percent)
of foodstore sales in 1988. Tesco, the United Kingdom’s
largest grocery retailer, is the most recent entrant
into the U.S. food retailing market (see box, “British
Retailer Enters U.S. Food Fight”).
Traditional Food Retailers
Bite Back With Differentiation Strategies . . .
In response to an eroding market
share, traditional grocers are expanding the number
and types of product offerings, designing new store
formats, and using innovative in-store technologies.
Leading supermarket chains are expanding their private
label (store brand) and organic product lines. Store
brands originally were positioned as less costly
alternatives to name brands but retailers now are
introducing premium store brands, such as Food Lion’s
Taste of Inspirations and Kroger’s Private
Selections. Publix recently opened its first GreenWise
store that features organic produce, meats with
no added hormones, and healthful prepared foods,
along with select conventional items. The store
is named after Publix’s line of private label
organic and natural food products. Kroger (Naturally
Preferred), Giant Food (Nature’s Promise),
and Shaw’s (Wild Harvest) also offer corporate-brand
organic or natural products.
Many traditional retailers are
designing stores that offer consumers an upscale
shopping experience. Safeway is opening “lifestyle”
stores featuring high-quality produce, accent lighting,
products organized by meal solutions, and additional
offerings such as classes on cooking and flower
arranging. Kroger Marketplace, which is twice as
big as a regular Kroger store, features a Starbucks
coffee bar and Donato’s Pizza stand. The stores
also have more nonfood merchandise such as bath
towels, bed linens, office supplies, and patio furniture.
A&P is expanding its upscale Fresh Market concept,
featuring natural and organic produce and restaurant-style
hot and chilled foods.
Supermarkets also are adding more
goods priced at $1, fuel pumps, and prepared deli
foods. As supermarkets compete with the foodservice
sector, the annual sales of prepared foods sold
in supermarkets are growing at about 4 to 4.5 percent,
compared with 2 to 2.5 percent for their other food
items.
Innovative, time-saving technologies
offer another means for traditional grocers to differentiate
themselves from competitors. One of the fastest
growing technological applications in new grocery
stores is self-checkout lanes. In 2005, nearly 56
percent of food retailers used self-checkout systems,
up from 38 percent in 2004. More advanced technological
applications in some stores include in-store self-scanning
with automated checkouts, and biometric technology
that allows preregistered customers to pay at checkout
by scanning a finger.
. . . and Cost-Cutting
Strategies
Traditional food retailers are
responding to the lower prices of the “big-box”
stores such as supercenters with a number of strategies
to improve efficiency and lower operating costs.
These include consolidation through mergers and
acquisitions to capture economies of scale, and
restructuring operations to increase efficiency
and cut costs. In grocery retailing, consolidation
has moderated following sharp increases in national
concentration since 1997.
To improve inventory control and
monitor sales, traditional food retailers emulated
Wal-Mart’s innovative logistics system, which
created an online network for collaboration and
data sharing with suppliers. The result has been
more efficient management practices and increased
consistency in product and invoice data used by
food suppliers, which allowed retailers to reduce
out-of-stock items and excess store inventory.
U.S. Bureau of Labor Statistics
data indicate that labor productivity (output per
hour) in grocery stores has been on the rise since
1998, following years of decline. This may reflect
consolidation in the retail grocery sector, more
rapid adoption of new technology, and other efficiency-enhancing
moves. Rising labor productivity has helped traditional
retailers compete better with price-oriented competitors
by reducing labor costs, which account for about
half of operating costs.
Is There a Resurgence
in the Traditional Retail Food Sector?
As savvy retailers learn to compete
in a slowly growing domestic food economy, recent
sales figures point to a possible resurgence by
traditional outlets. Since 2003, there has been
a slowdown in the loss of market share for this
category. According to Willard Bishop, a food company
consulting firm, the share of grocery sales accounted
for by traditional supermarkets fell by only 0.6
percentage points in 2006, compared with 3.4 and
1.9
percentage points in 2004 and 2005, respectively.
Another factor pointing to a possible
resurgence by conventional food retailers is a slowdown
in the growth of Wal-Mart supercenters. The company
expects to open 25 fewer U.S. supercenters in 2008
and 30 fewer in 2009, compared with each previous
year. This follows a longterm upward trend in supercenter
openings since 1991. Instead, the company plans
to concentrate on investments in its international
operations.
Food Marketers Use New
Media To Target Consumers
The share of food and beverage
(excluding alcohol) manufacturers’ media budgets
spent on TV advertising fell from 81 percent in
1990 to 64 percent in 2006, illustrating a fragmenting
of food advertising media over recent decades. The
decline may reflect TV commercial-skipping technologies,
such as TiVo, difficulty in measuring ads’
effectiveness, and the growing variety of advertising
options, including Internet sites and video games.
The Internet accounts for only
2 percent of food manufacturers’ advertising
expenditures, but it is becoming increasingly important
in targeting children, with games and contests built
around the brands. Other Internet options include
search-related advertising and social networking
sites, such as MySpace and Facebook, which allow
advertisers to reach a specific demographic segment.
Some companies are turning to video
games, cell phones, in-store advertising, and product
placement in entertainment programs to tout their
brands. To attract teenagers, Coca-Cola is creating
a cell-phone networking site for its Sprite brand,
similar to online social networking sites. Kroger
announced plans to offer in-store television broadcasts
that, besides delivering information on new products
and promotions, will allow food manufacturers to
air commercials. Each store will have programs specific
to its location. Food company brands are also featured
in movies and at sports events, such as the National
Association of Stock Car Racing‘s (NASCAR)
Nextel Cup. PepsiCo Inc.’s Mountain Dew recently
financed a documentary on snowboarding, and the
brand could be seen occasionally in the movie.
Another factor contributing to
more customized marketing and product offerings
is changing consumer preferences. The convergence
of labor-force participation rates between men and
women has increased the value of households’
time and convenience foods. New information about
the relationship between diet and health has led
to increased demand for more healthful foods. As
wealthier consumers seek new experiences and ways
to broaden their tastes, new niche products allow
consumers to express their individuality and social
position through food purchases.
Product proliferation, in part,
serves the needs and desires of different consumer
segments. Each year, thousands of new food and beverage
products are introduced. From 1988 to 2007, the
number of new product introductions rose by 181
percent. Based on new product claims tracked by
Datamonitor, a leading international supplier of
information on new packaged products, health and
convenience-related attributes accounted for 7 of
the top 10 subject categories for claims on packages
in 2007. Five of these categories have ranked in
the top 10 since 2001, including “natural,”
“organic,” “single serving,”
“quick,” and “fresh.” From
2003 to 2007, “upscale” ranked as the
leading new product claim category, including “unique”
and “premium” products.
Food Companies Tout Their
Socially Responsible Activities
Food manufacturers, retailers,
and foodservice establishments also see greater
social responsibility as a way to gain a competitive
edge. One of the biggest developments in the global
business world over the past 10 years has been the
emergence of the Corporate Social Responsibility
(CSR) movement. CSR shifts the emphasis from traditional
government regulation of corporate conduct to the
promotion of corporate disclosure of activities
that address social issues. In part, this is a response
to more socially conscious consumers, who are increasingly
aware of the effect that their consumption choices
have on others. CSR also offers companies another
means of segmenting the market based on consumer
preferences for products, such as Fair Trade coffee
and American Humane CertifiedTM
foods (certification program of the American Humane
Association).
As part of CSR, firms engage in
socially beneficial activities that extend beyond
government mandates. Slaughter plants, for example,
must adhere to Federal requirements for the handling
of animals such as access to water, abuse prevention,
and other factors related to humane treatment. However,
meat companies are also applying voluntary animal
handling guidelines that exceed Federal requirements,
such as minimum pen space, and handling methods
that reduce animal stress.
One indication of the importance
of the CSR movement is the voluntary reporting by
corporations of information that goes beyond what
is required by law. Many of the largest companies
have started producing social, environmental, or
sustainability reports in addition to their traditional
financial reports. In 2005, 32 of the 100 top U.S.
companies published stand-alone CSR reports. Among
leading food companies in 2006, CSR reporting was
more extensive in food manufacturing and foodservice.
Since 2006, Wal-Mart, the leading U.S. grocery retailer,
and Kroger, the second leading U.S. grocery retailer,
have introduced their own dedicated CSR reports.
Among leading food companies,
the most common CSR-related topics are environment,
community development, and nutrition. Other common
areas of reporting included animal welfare and contributions
to education. Several food companies, including
Pepsico, Tyson Foods, Ahold, and Starbucks, report
a Global Reporting Initiative (GRI) index in their
CSR reports, which provides standardized guidelines
for reporting progress on corporate economic, environmental,
and social performance (labor, human rights, society,
and product responsibility practices).
Competitive Forces Have
Marketing and Policy Implications
Intense competition over the past
two decades in the U.S. food marketing system has
spurred innovations and cost efficiencies. Consumers
have access to a wider range of products, services,
and store formats that appeal to their preferences
for convenience and quality. U.S. consumers are
enjoying the new stores and an array of value-added
products—such as fully prepared Italian stuffed
shrimp, low-carb mashed cauliflower, and Japanese-style
tempeh, among many others—at relatively modest
price increases. The CPI for food and beverages
in the U.S. increased by an annual average of 2.9
percent from 1987 to 2006, compared with 3.1 percent
for all retail items (except food and beverages).
Over the same period, the share of disposable income
spent on food declined from 11.5 percent to 9.9
percent.
Consolidation in the U.S. food
marketing system can provide a means for attaining
cost efficiencies, but can also change bargaining
power between buyers and sellers, which is monitored
by government agencies. Antitrust policy decisions
regarding mergers and acquisitions can become more
complicated as stores use strategies to compete
with alternative formats. For example, in 2007,
the Federal Trade Commission contested natural and
organic retailer Whole Foods Market’s acquisition
of Wild Oats on the grounds that consumers would
be harmed in geographic areas where both previously
competed. The Commission also argued that other
retailers that sold organic foods were not close
substitutes to the merging stores. Whole Foods argued
that the organic market had expanded to include
traditional supermarkets that have increased their
organic product offerings and opened stores similar
to Whole Foods. The judge ruled in favor of Whole
Foods.
Growing awareness by food companies
of how they are perceived by consumers has important
marketing implications for the entire supply chain.
Companies that engage in corporate social responsibility
reporting in areas such as animal welfare create
additional marketing opportunities through adoption
of alternative production practices. Burger King
and Hardee’s recently announced that they
will purchase a percentage of their pork from suppliers
that do not use gestation-sow stalls, which can
constrict movement. However, the feasibility of
adjustments in production methods will depend on
the additional costs involved and whether consumers
will pay higher prices for products produced in
a more socially responsible manner.
Continually evolving consumer
preferences, advances in communication technology,
and the increasing diversity of food outlets over
the past 20 years have contributed to the shift
from mass to more customized products and services.
Specializing in certain segments provides a means
for firms to compete in a slowly growing food market.
British
Retailer Enters U.S. Food Fight |
In November 2007, British
retailer Tesco became part of the U.S. food
retailing landscape with the opening of its
Fresh & Easy Neighborhood Market stores
in southern California and Las Vegas, NV.
Tesco is a formidable competitor that ranks
as the leading grocery retailer in the United
Kingdom and third-largest retailer in the
world, after Wal-Mart and Carrefour (France).
Tesco competes in a mature market in the U.K.
that has grown very little over the past 20
years. But Tesco has expanded to account for
over 30 percent of U.K. grocery retail sales.
Tesco’s U.S. stores
average about 10,000 square feet in floor
space, about the size of a large convenience
store, and considerably smaller than an American
supermarket. The U.S. Tescos feature an extended
selection of prepared meals and entrees for
time-pressed consumers. In addition to offering
convenience, the products emphasize health
concerns with labels like “no transfats,”
“no artificial colors,” and “no
preservatives.” The smaller stores are
tailored to meet local consumer needs and
to reduce time spent shopping for traditional
grocery items. About half of current U.S.
offerings sold at Tesco stores are the Fresh
& Easy store brand, many of which address
environmental, local agriculture, and animal
welfare concerns on their labels.
Initially, Tesco plans to
open 200 stores by the end of 2008, mostly
in Las Vegas, NV; Phoenix, AZ; and southern
California. The speed at which Tesco is planning
to open its stores is testimony to the intense
competition in the U.S. food retail market.
The faster Tesco can open its new stores,
the less time competitors will have to replicate
the concept before it gains a foothold in
the U.S. market. Tesco unveiled the new stores
under a shroud of secrecy. For example, at
one location, the company tested the layout
of a mock store by building it inside of a
warehouse hidden from view and shipping the
food in from the U.S. East Coast.
The eventual impact of this
British vendor remains unknown. Other European
retailers, such as Sainsbury’s, Marks
& Spencer, and Carrefour, have been unsuccessful
in their efforts to compete in the U.S. market
with European store formats. However, Tesco
was apparently affecting the U.S. grocery
sector even before its first store opened.
Kroger, which competes in the same U.S. markets
that Tesco has targeted, has been opening
more of its Fresh Fare stores, which are smaller
than a typical supermarket but larger than
Fresh & Easy. Safeway indicated that it,
too, might consider smaller format stores
similar to Fresh & Easy. |
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