Trends in U S Fresh Produce Marketing DR

Trends in U. S. Fresh Produce Marketing DR. ROBERTA COOK Dept. of Ag and Resource Economics University of California Davis Fresh Produce and Floral Council Luncheon September 2004

TOTAL 2003 U. S. FOOD* SYSTEM: $943. 3 BILLION u $498. 3 billion food retailing (excluding non-food grocery store sales) n u 53% of total $445 billion food service (including $17. 8 B foodservice sales made by food retailers) n n 47% of total around 844, 000 outlets *Excludes alcoholic beverages and other grocery Sources: ERS/USDA and The Food Institute

U. S. FOOD EXPENDITURES as a SHARE of DISPOSABLE PERSONAL INCOME, 1970 -2003 13. 8 13. 4 At-home Away-from-home 12. 0 11. 8 11. 7 11. 5 11. 6 11. 2 11. 1 11. 3 11. 0 10. 8 11. 1 11. 0 Source: ERS/USDA 10. 3 10. 1 10. 2 10. 1

U. S. Grocery Industry New Product Introductions, 1988 -2003 23, 181 22, 572 22, 374 20, 076 19, 572 19, 458 19, 331 17, 566 18, 043 16, 695 16, 143 16, 562 13, 244 10, 558 Source: The Food Institute Report, 2 -2 -04; Column totals in white represent combined food and nonfood new product introductions.

Trends in US Food Expenditures CAGR

US Foodservice Segment Shares, 2003 1% Fast-Food Full-Service Restaurant Source: ERS/USDA 2004

FOODSERVICE OPPORTUNITIES FOR FRESH PRODUCE u u u Since 1992 consumer spending at restaurants is up 56% Consumers are trading up, contributing to higher sales in full service restaurants and fast casual (like Baja Fresh, Chipotle, Panera) Consumers search for VALUE, 62% say they are “willing to spend more time and money for better quality food. ” 91% of consumers say “It’s worth it to wait a little for food customized to my liking. ” Foodservice fresh produce and fresh-cut demand rising.

Sources of Takeout* Food in the US, Supermarkets Gaining! 1996 2004 Fast-food rest. Supermarket Source: FMI Trends in the Supermarket 2003, 2004 Restaurant Supermarket Restaurant *Takeout only, not all foodservice

US Estimated Fresh-cut Produce Sales, All Marketing Channels, $ Billion $ billion $4 plus at retail Source: Over Dole 60% estimated to be sold via foodservice channels Sources: IFPA and IRI

U. S. Fresh Fruit and Vegetable Value Chain, 2002 Estimated Billions of Dollars institutional wholesalers produce and general-line wholesalers $5. 9 imports farms $19. 2 $40. 0 food service establishments shippers $3. 4 exports integrated wholesaleretailers $39. 7 supermarkets $81 and other consumers retail outlets farm & public markets Source: Estimated by Dr. Roberta Cook, UC Davis, based on numerous public and private sources $1. 3

U. S. SUPERMARKET FRESH-CUT SALAD SALES, Million $ Source: IRI

US Fresh-Cut Vegetable Facts • Fresh-cut veggies represented 31% of all pre-packaged produce retail sales in 2003. • Carrots were about half the $1. 3 billion fresh-cut veggie category, followed by spinach ($108 million), potatoes ($87 million), celery ($85 million) and mixed vegetables ($69 million) • 77% of consumers purchase fresh-cut veggies, but on average, only once every 9 weeks Source: IRI

US Fresh-Cut Fruit Facts • Fresh-cut fruit is still a small share of total freshcut sales, retail sales were estimated by IRI at $238 million in 2002, with total fresh-cut sales (incl. foodservice) estimated at at least $600 million. Forecast by IRI to reach $1 billion by 2008. Household penetration of only 17% in 2003. • Great potential for fruit in both retail and foodservice channels • Mc. Donald’s offering apple slices as alternative to French Fries in Happy Meals • Quick-service restaurants and fast casual segment keep adding fresh produce, including fresh-cut

Supermarket Trips Per US Household Per Year Source: Coca-Cola Retailing Research Council of N. America 2004

US Supermarket Share Continues to Decline for Key Grocery Categories (% Shoppers Who Generally Buy That Item at the Supermarket) 2004 2001 Source: FMI Trends in the US, Consumer Attitudes and the Supermarket, 2004

Top Factors in US Consumer Selection of Primary Supermarkets, 2004 Items on sale or specials Store layout Fast Checkout Personal safety outside the store Accurate shelf tags Use-before/sell-by-date marked Convenient location Courteous/friendly employees Low prices High-quality meat High-quality fruit/veg. Clean, neat store Source: FMI Trends 2004

Quality of Shopping Experience by Channel, TRI*M Index (Differences of 3 or more are signficant) Source: Coca-Cola Retailing Research Council of N. America 2004

Quality of Shopping Experience by SUPERMARKET TYPE, TRI*M Index (Differences of 3 or more are signficant) Source: Coca-Cola Retailing Research Council of N. America 2004

US Store Format Growth Trends and 2003 Sales* Traditional Nontraditional Total C-Stores GRAND TOTAL 2003 Sales $Million 2003 # Stores $422, 791 $235, 100 $93, 518 $754, 408 41, 530 40, 721 129, 000 213, 981 2003 $ 2008 $ % Share 56. 3 31. 3 12. 4 100. 0 48. 3 39. 7 12. 0 100. 0 • Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Traditional Grocery Channel 2003 Sales $Million Total Traditional Conventional Superstore Food/Drug Combo Limited Assortment Super Warehouse Other (Small Grocery) 2003 # Stores 2003 $ 2008 $ % Share $422, 791 41, 530 56. 3 48. 3 $97, 110 12, 450 12. 9 11. 6 $164, 268 $114, 400 $16, 107 $14, 331 8, 100 5, 000 3, 150 530 21. 9 15. 2 2. 1 1. 9 18. 5 13. 1 2. 1 1. 6 $16, 575 12, 500 2. 2 1. 5 * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc. Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Traditional Grocery Channel Total Store Area Average Total SKUs Total Traditional Average Weekly Sales $ Grocery & Consumables % of Sales 195, 777 100 Conventional 25, 800 22, 000 150, 000 100 Superstore 51, 200 30, 000 390, 000 100 Food/Drug Combo 55, 700 52, 000 440, 000 100 Limited Assortment 11, 200 1, 900 98, 333 100 Super Warehouse 59, 500 33, 000 520, 000 100 9, 000 3, 000 25, 500 100 Other (Small Grocery) * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc. Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Nontraditional Grocery Channel 2003 Sales 2003 # 2003 $ 2008 $ $Million Stores % Share Total Nontraditional $235, 100 40, 721 31. 3 39. 7 Wholesale Club $51, 953 1, 030 6. 9 8. 7 Supercenter $85, 155 1, 840 11. 3 17. 0 Dollar Store $10, 686 15, 000 1. 4 2. 9 Drug $33, 189 18, 500 4. 4 5. 2 Mass Merchandise $49, 873 4, 170 6. 6 5. 3 Military $4, 243 181 0. 6 * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc. Source: Competitive Edge, June 2004

US Store Format Growth Trends and 2003 Sales* Nontraditional Grocery Channel Total Store Area Average Total SKUs Total Nontraditional Average Weekly Sales $ Grocery & Consumables % of Sales 124, 466 Wholesale Club 135, 000 5, 500 970, 000 59** Supercenter 190, 000 125, 000 890, 000 60** Dollar Store 8, 000 4, 000 13, 700 66 12, 000 20, 000 34, 500 34 100, 000 95, 000 230, 000 29, 400 15, 000 450, 800 Drug Mass Merchandise Military 23** 100 * Grocery sales only, excludes electronics, prescription drugs, toys, jewelry, sporting goods, etc. ** Does not include gasoline sales Source: Competitive Edge, June 2004

SUPERCENTER INDUSTRY SALES and UNITS, 19932007, (About 35 -40% estimated to be grocery-equivalent) units Sales *forecast Source: The Food Institute’s Food Industry Review 2003

Domestic and International U. S. Membership Club Sales and Unit Growth Slowing, 19932007, (61% estimated to be grocery-equivalent) units Sales in $ billion *forecast Source: The Food Institute’s Food Industry Review 2003

Competing in a Value-Driven Market • Channel blurring has caused the retail landscape to be overstored. • Plus, foodservice channels compete with all forms of food retailing which tend to offer ingredients to prepare instead of meals to eat. • Retail Home Meal Replacement helping somewhat and fresh produce value-added products benefiting.

Competing in a Value-Driven Market • Grocery retailers have been losing share to foodservice for decades, now to value retailers • Conventional grocery retailers must identify value propositions they can own if they are to remain competitive! (fresh produce can be a point of differentiation) • Bottom line: more structural change expected in the US grocery industry and more pressure on suppliers!

The Revealing Percentages Conven’l Super Disc. Club Grocery Center Drug Store Gross Oper Exp 25. 3 21. 8 25. 0 17. 5 20. 0 16. 0 11. 0 7. 5 Net Margin 3. 5 7. 5 4. 0 3. 5 (Before taxes) Source: Glen Terbeek

U. S. FOOD BUSINESS MERGERS & ACQUISITIONS 1981 -2003 Source: The Food Institute’s Food Industry Review, 2003

U. S. Grocery Retail Concentration* Percent of U. S. grocery store sales Sources: ERS/USDA; US Retail Census, firm annual reports 58 47 33 *Includes grocery-equivalent supercenter sales ONLY. Excludes sales of c-stores with gas. Excludes the portion of any grocery chain’s sales corresponding to their drug store, jewelry store or other non-grocery store sales.

U. S. Fruit and Vegetable Supply-Side Marketing Structure Becoming Less Fragmented, 2002 Fruit, berry and nut farms* 26, 571 Vegetable and melon farms* Number of fresh shippers 15, 355 5, 000 Total chains, grocers, wholesalers 1, 079 Retail 267 *Selling overchains $50, 000/yr. ; Total of 107, 707 fruit, berry, nut farms and Produce wholesalers 59, 044 total vegetable and melon farms, all sizes – US 2002 Census of Ag 188

Stock Price Performance, Top 5 US Grocery Retailers 1/1/99 – 2/23/04 Chain Wal-Mart Kroger % Change + 48% -32% Safeway Albertson’s Ahold Dow -61% -57% -75% +15%

Return on Asset Comparison, Top 4 US Grocery Retailers ROA = Profit/Sales X Sales/Assets Wal-Mart 9. 04% 3. 48% 2. 60 Kroger 5. 18% 1. 96% 2. 64 Safeway 1. 61% 0. 78% 2. 06 Albertson’s 4. 11% 1. 74% 2. 36

Conventional Retail Chains Reconsidering their Models • The experience from the merger trend of the late 1990’s has shown that getting bigger wasn’t enough to meet the new competitive benchmark imposed by Wal-Mart’s success in logistics, data management and cost reduction. • President of Safeway just announced a move to net, net pricing, moving away from allowances, following on the Wal-Mart model. But, as always, fresh produce lags grocery.

Conventional Retail Chains Reconsidering their Models • The challenge for retailers is to effectively utilize scanner, customer loyalty card and other data in order to identify the right product mixes at the individual store level. • Food retailing is inherently local, and as retailers get larger and consumers more diverse, intensive data management is critical!

The Future Wal-Mart will be the mainstream retailer for the foreseeable future but there will also be lots of new winners. New price driven retailers will increase competition for Wal-Mart and Wal-Mart’s growth may slow as it tackles issues faced with expansion in urban areas (high land costs, unions, local regulatory policies). Consumer research conducted by The Hartman Group indicates that consumers don’t express excitement or devotion about shopping at Wal-Mart. Many just view it as a way to save on staples without taking over their shopping lives. Lukewarm support creates opportunities for competitors.

The Future The winners will compete on various dimensions of value: price, product, service, and selection. There a number of formats successfully defining “white space” market opportunities. Examples include Trader Joe’s, Whole Foods, Dollar Stores, and conventional chains like Wegman’s and HEB, as well as independents. Retailers can deliver value to consumers at both the high and low ends of the price spectrum, depending on product selection and quality levels, and format design, by understanding the needs and wants of target segments for specific shopping occasions. The middle, unclearly defined ground – retailers with no clear value proposition – will be increasingly challenged.

Products Distinguishing Themselves More Through Aesthetics, Adding Emotional Value to Practical Use – Food Especially! • “Quality is yesterday’s news. Today we focus on the emotional impact of the product. ” (Dilbert comic strip) • Research from Cornell and U of Colo. show that income level is positively associated with experiential over material possessions. (Van Boven and Gilovich) • Ego – Starbuck’s – an affordable luxury for all income levels

Products Distinguishing Themselves More Through Aesthetics, Adding Emotional Value to Practical Use – Food Especially! • Travel; eating out, increasingly in restaurants providing more memorable experiences; and differentiated foods purchased at retail are gaining. “Upscale” positioning may be bundled with several perceived emotional values organics benefit. Fresh produce is a part of the trend. • But, to afford these “extras” people are often making a greater effort to economize in their routine grocery purchases, hence, growth in value retailers.

Consumers are Becoming More Eclectic: Unabashed Wal-Mart Shopper Speaks The writer found a brown stretch top with a ruffle drizzling down the V- neck, for about $9, and jeans made of two-inch-wide strips of washed corduroy, denim and a blue lace print, reminiscent of Dolce & Gabbana, $17. 98, at Wal-Mart. She wore them with Celine platforms, $420. Value Propositions and Needs! This also applies to food. Flavor Density re calories. EATING OCCASIONS MATTER! Adapted from Food Marketing Institute 2002

Pounds per capita US PER CAPITA VEGETABLE CONSUMPTION, POUNDS, 1976 -2004 F 438 359 126 119 76 49 115 90 150 46 176 ‘ 04 Source: USDA/ERS, Vegetables and Specialties Outlook, July 2004 (Excl. potatoes)

Pounds per capita US PER CAPITA FRUIT CONSUMPTION, POUNDS 1976 -2002 264 283 87 102 96 78 29 55 Source: USDA/ERS, Oct. 2003 24 76

Shoppers’ concern about nutritional content and evaluation of diet 62 45 Source: FMI Trends in the US Consumer Attitudes and the Supermarket 2004

Changes for healthier diet Source: FMI US Consumer Trends and the Supermarket 2004

U. S. DEMOGRAPHIC INDICATORS, 2002 u u u 111. 3 million households 289 million inhabitants 2. 6 persons average household size Average household income of $57, 852 Median household income of $42, 409 Average household food spending of $5, 375 (including $3, 099 at-home and $2, 276 away -from-home) Sources: US Bureau of Census; Food Institute Demographics of Consumer Spending 2004 for food spending only

SEGMENTATION/TARGET MARKETS • Variables commonly used to categorize consumer differences to focus marketing activities – geographic – demographic – psychographic--based on attitudes & activities • STATUS SEEKERS, CHASE & GRABITS, ENVIRONMENTALISTS » Mass individualization! » Problem solving is key! » Understanding needs and constraints in individual eating occasions essential!

US Household Composition, 2002 Ave. Household Size: 2. 5 People Other 15% 29% 50% 6% Single Parent Husband & Wife with Children under 18 19% of Total Households Source: Demographics of Consumer Food Spending 2004, The Food Institute

U. S. Per Capita Food Expenditures, 2002, by household size – Small households spend more per capita! Food at home Food away from home Source: Demographics of Consumer Food Spending 2004, The Food Institute

DISTRIBUTION of US HOUSEHOLDS, SHARE of TOTAL AT HOME FOOD EXPENDITURES/INCOME LEVEL and FRESH PRODUCE EXPENDITURES, 2002 $520 /32% $235 /13% Share of households Average fresh produce expenditures per income group $ $384 /16% % of total at home food expenditures contributed by each income group $342/21% $303 /18% Source: Demographics of Consumer Food Spending 2004, The Food Institute

Consumer Food Expenditures, by Household Income Level 2002 Source: Demographics of Consumer Food Spending 2004, The Food Institute

US Fresh Produce Consumption by Race 2002, $ Per Household Vegetables Fruits Source: Demographics of Consumer Food Spending 2004, The Food Institute

U. S. Hispanic Population Projections, Millions Source: US Bureau of Census

Hispanic Population Boom, 2000 (U. S. Census) 2050 (Projected)

Conclusions

Streamlining the Distribution Channel How best practice retailers are using information: § Identifying and merchandising product affinities associated with popular items. § Grooming vendor capability to provide useful insights. Source: Willard Bishop Consulting, Ltd.

Streamlining the Distribution Channel New tools using data-mining capabilities are entering the market to provide: § Cost-effective consumer-centric business processes üCustomer purchase patterns üProduct promotions Source: Willard Bishop Consulting, Ltd.

SHELF CAPTAINS • Leading, technologically savvy vendors—sometimes brokers • Take category interface responsibility for section • May work in retailers’ headquarters • Recommend shelf sets, product placement • Very influential to category management

Basic Strategies for Shippers • Low-cost grower/shipper • Differentiated year-round grower/shipper marketing a premium product or product with identifiable preferred characteristics that are commercially perceived and valued • First strategy increasingly difficult as buyers push more demands and services upstream to suppliers • Increasingly shippers must add value and at the lowest cost – need strong core competencies!

CONCLUSIONS: The Future? • More and more, large year-round grower-shippers may become the sourcing entities for retailers, procuring volume above and beyond their own via geographic diversification, including imports. • Smaller seasonal players will need to find niche markets.

Fierce competition places multiple demands on fresh produce suppliers while product perishability continues to limit bargaining power. . . So more shipper/supplier consolidation to come! Quality: • taste! • freshness • temperature • shelf-life • nutrition value • consistency Flexibility Quantity Specific requirements Costs • packaging • pallets • size • tailor-made Shippers Safety: microbial and pesticides Tracking and tracing On-time delivery Source: Adapted from Rabobank Mexico 60