By Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University
As we take a moment to reflect on the last twenty years in the food marketing industry, several questions confront us.
Twenty years ago, who would have predicted...
- That supermarkets' "share of stomach" would shrink to less than 50 percent?
- That everyone - from drug stores to club stores to dollar stores to QVC and everyone in-between - would be selling food?
- And that the "Hicks from Bentonville, Arkansas" would become the largest food retailer in the United States?
And then there's the wholesale side of the business. Who would have predicted...
- That most supermarket operators would have abandoned procurement and distribution, outsourcing this function to wholesalers (even ones that service directly competitive retailers)?
- That the wholesaling industry would evolve into a duopoly?
- That a company such as C&S, whose product service is limited primarily to providing procurement and distribution services, would become the standard for the industry?
In general, the food marketing industry has experienced sweeping changes in the last 20 years but, with the exception of food brokers, no segment has experienced more change than the general line or broadline distributors.
Within the past five years, the two largest broadline wholesalers ceased to exist in their traditional broad line "pure play" formats. First, Fleming Companies, Inc. went out of business and, more recently, Supervalu has made extensive forays into the retailing channel with its recent purchase of significant parts of Albertsons. As of today, C&S Wholesale Grocers, with expected sales of $19B in 2006, is the largest national "pure play" wholesaler.
During this time frame, the broadline wholesaler evolved from a simple purveyor of goods and supplies to a full service backend supplier of goods and services; i.e., marketing, finance, human resource services, data processing/analysis, business planning, real estate, etc.
Economies of scale are driving food distribution and sales today. The "new" Supervalu is an example of a company that understands that leveraging of costs and buying power is one of the better ways to compete against the giants, such as Wal-Mart. Sure, it's important that stores differentiate themselves, but consumers "vote" with dollars and their votes indicate that price is the most important point of differentiation.
On the other hand, another challenge facing mass distributors today is their loss of business segments to specialized distributors. Examples include meat, organic and standard produce, ethnic, deli, bakery, specialty products and GM/HBC. In many cases, price is not the issue. Instead, it is product selection and perceived quality.
Until a few years ago, traditional distributors had "people on the street" to assist in purchasing and selling, but that is not the case today. As the traditional distributors have moved away from direct service, their competitors (Sysco, U.S. Food Service, McLane, local meat, produce, deli and bakery suppliers) have become more aggressive in the "direct" approach. Also, some merchants (Ball's in Kansas City as an example) are moving aggressively into organic and locally grown meat and produce. These merchants want to control the supply chain and to do so, they self-distribute these items. Naturally, the movement of these products into self-distribution represents a significant loss of sales to the traditional distributor.
Discussion Questions: Do food wholesalers, as we know them, have a future? If so, what form and function will they assume?
Any discussion of the future needs to include the continuing shift of "share of stomach" from food retailers to food service providers. Driven mostly by the ongoing need for convenience, food service operators and convenience stores continue to evolve and to take share from traditional retailing. The strategies and systems utilized by Sysco and U.S. Food Service in the meals prepared and/or consumed "away from home" will be integral to understanding the future of food wholesaling.
Likewise, the efforts of McLane Co., Inc. in serving convenience stores represents an opportunity for "benchmarking" by the more traditional wholesaling players. In fact, McLane was ranked as the number one U.S. wholesale grocer in 2004 by FMI with sales of $18.698B (2005 = $24B).
Finally, any assessment of the future needs to highlight the changing face of America. The Hispanic market with all of its cultures and sizes, as well as the Asian market, represent new frontiers for food wholesalers.