In the early 20th century, most types of farm products were sold
as commodities on the open market. Sellers brought their hogs or
cattle to centralized terminals, or their grain to country elevators,
where current prices were paid on the spot. The rule of the day
was “pushing” large volumes of standardized commodities
through the supply chain, which kept costs down. This system worked
well as long as consumers sought basic staples for cooking meals
in their own kitchens.
Today, many consumers demand and have available a wide assortment
of prepared foods, including complete meals purchased at restaurants
and supermarket deli counters. Changing U.S. demographics—more
mature consumers, greater ethnic diversity, and larger incomes—are
driving changes in consumer demand for food products. Today’s
time-pressed consumer is using his or her higher level of income
to purchase more convenience, while looking for quality, variety,
and value.
Changing consumer preferences, along with technological advances
and other changes in the economy, offer agribusiness companies
new opportunities. Understanding the diverse preferences of consumers
moves to the forefront and “pulls” products through
the supply chain. Communicating consumer preferences back through
the food system to prompt the needed adjustments in a cost-effective
manner becomes the challenge.
Catering to Today’s Consumer
So what does the modern consumer want in terms of food? Convenience
is clearly important for many of today’s consumers. Food
products, such as bagged salads and grab-and-go breakfast sandwiches,
demonstrate Americans’ desire to get food on the table (or
into the car) fast. For example, the poultry industry has prospered
in recent decades, in part, by providing convenience (see “The
U.S. Broiler Industry”). The National Chicken Council reports
that in 1974 only 6 percent of broilers were marketed to foodservice
operators and retailers as further processed products (e.g., patties,
breaded strips, and nuggets). By 1989, the share of further processed
products grew to 24 percent and increased to 46.5 percent in 2001.
Also, chicken sold cut-up in pieces—a more convenient product
as opposed to whole roasters—rose from 28 percent of broilers
marketed in 1971 to 42.5 percent in 2001.
Fully prepared meals, either from the supermarket deli or a foodservice
establishment, are the ultimate in convenience. Spending on snacks
and meals prepared by foodservice establishments now accounts for
about half of total U.S. food spending, and is expected to grow
more quickly than spending for at-home foods over the next 15 to
20 years. The supermarket deli has also been a fast-growing outlet
for prepared meals and snacks in recent years. In 2000, 81 percent
of supermarkets had delis; sales at delis increased by 6.1 percent
in that same year to $13 billion.
However, today’s consumer wants more than just convenient
foods. He or she is also looking for ethnic variety. Thus, while
Swanson sparked a cultural phenomenon by introducing the foil-covered
TV dinner in 1953 (turkey, cornbread dressing and gravy, buttered
peas, and sweet potatoes), today’s selection of “TV
dinners” includes chicken quesadillas and potato skins in
a microwave-ready container.
Retailers are responding to the desire for diverse cuisines in
a number of ways. For example, Nash-Finch Company, a Fortune 500
food retailer and distributor, is developing a new Hispanic-oriented
supermarket concept for four pilot stores in the upper Midwest.
However, marketing of ethnic foods is not limited to niche retail
outlets. Many supermarket chains, such as Safeway and Shoppers
Food Warehouse, often have whole or partial aisles devoted to Hispanic
and Asian items.
Another consumer segment seeks out organic and natural food products.
The Natural Marketing Institute reports that sales of organic foods
reached $7.8 billion in 2000, a 20-percent increase over sales
of $6.5 billion in 1999. Specialized retailers, such as natural
food supermarkets, are benefiting from this trend. Natural food
supermarkets offer less-processed foods and more foods free of
preservatives, hormones, and artificial ingredients. Natural food
supermarket chains, such as Whole Foods Market and Wild Oats Markets,
grew rapidly in the 1990s through mergers and acquisitions.
Variety is showing up in the fast food segment of the restaurant
industry as well. For example, McDonald’s began as a fast
food concept in 1948. The menu had just six products—hamburgers,
cheeseburgers, fries, soft drinks, coffee, and shakes. Says the
company, “this limited menu concept triggered the ‘fast
food’ concept, because focusing on just a few items that
were prepared with standardized procedures made food service a
model of efficiency.” Today, the company still aims to be
efficient, but restaurants affiliated with the chain now tend to
offer over four dozen foods, including yogurt parfait, grilled
chicken salad, and bagels.
Efficiency allows food companies to give consumers something else
they are demanding—value. Some consumers need or want good
price deals on their groceries and away-from-home eating and will
search for lower prices. This means the food system must not only
supply the foods in demand but also seek efficiencies to control
costs.
The U.S. Broiler
Industry:
A Historical Account of “Consumer-Driven Agriculture”
The U.S. broiler industry got its start in
the 1920s. After World War I, the practice of dining out
increased and provided the impetus for higher class eating
places to add variety to their menus. Featuring broilers
(young chickens), especially in the winter, became common
practice.
The typical poultry meat in the first third
of the 20th century, however, came from rather tough-meated
older hens and young roosters that were byproducts
of raising chickens for egg laying. The widespread practice of allowing birds
to range in the barnyard hardened muscle fiber, yielding meat that was dry
and strongly flavored. Also, much of the supply in some seasons were birds
stored frozen in the “New York dressed” state—a bird bled
and plucked, but with head, feet, and organs intact. Upon thawing, drainage
from these birds and conditions surrounding their evisceration in the meat
market or at home were quite unappealing to consumers and handlers.
Red meat rationing during World War II provided the spark needed to propel
the industry forward. Poultry was not rationed, and broiler production increased
to fill the void left by red-meat rationing. Broilers soon demonstrated their
potential as a money-making business. After the war, as red meats returned
to normal availability, a period of intense activity and investments ensued
to develop strains of chickens bred for their meat qualities. Rapid technological
advances in the 10-year period following the war lowered retail chicken prices
by 30-40 percent from the 1920s to the mid-1950s, compared with price increases
of 75-90 percent for red meats in the same period.
In
1948, A&P's "Chicken-of-Tomorrow Program" went
national. Forty finalists from 25 states competed
for the contest's $5,000 first prize.
The “Chicken-of-Tomorrow Program,” a
contest for breeders sponsored by the Great Atlantic & Pacific
Tea Company (A&P), illustrates the intense interest in
quality improvement through genetics. A&P was aware of
the profit potential from chickens bred for their meat qualities,
emphasizing yield from breasts, thighs, and drumsticks. Starting
in 1945, these annual contests reinforced the efforts of
leading breeders, with an eye on designing a product for
the consumer.
Supermarkets that featured pre-packaged meats, low prices,
and advertising replaced many butcher shops. Featuring broilers
at sensationally low prices had much to do with the broadening
of the market. In addition, the ease of handling eviscerated
chickens made broilers a highly convenient item for both
retailers and consumers. By the mid-1950’s, the chicken
industry had moved from a specialty item targeted to the
dining-out market to a mass market for everyday home meals.
A rise in the number of families with two wage earners prompted consumers to
seek quick and tasty food. The chicken TV dinner featuring fried chicken became
increasingly popular. In line with the Nation’s desire for fast, inexpensive
food with consistent taste, the introduction of fast food reshaped the broiler
industry. In 1963, Henny-Penny Corporation, which had 250 chicken take-out
franchises, had enough volume to begin requesting certain product specifications
from its suppliers. By 1971, Kentucky Fried Chicken, whose first franchised
outlet opened in 1952, had 3,500 franchised or company-owned outlets worldwide.
By the early 1970s, companies had become dissatisfied with the wide price swings
of commodity chicken production and stepped up their production of further
processed items. As women continued to enter the workforce, the demand for
easy-to-cook products continued to grow. From 1970 to 1990, the share of broilers
marketed as whole birds fell from 70 percent to 18 percent.
Throughout its rather brief history, the broiler industry has remained primarily
consumer oriented, moving further from chickens that were primarily a byproduct
of egg laying to flavorful whole roasters, cut-up parts, and a wide variety
of further processed products.
Sources: Tobin, Bernard F., and Henry B. Arthur. Dynamics of Adjustment
in the Broiler Industry. Boston: Division of Research, Graduate School
of Business Administration, Harvard University, 1964. Strausberg, S.F. From
Hills and Hollers: Rise of the Poultry Industry in Arkansas. Arkansas
Agricultural Experiment Station Special Report 170. Arkansas Agricultural Experiment
Station, University of Arkansas, 1995.
Behind the Scenes of a Consumer-Driven Marketing System
Many important changes in the food system are not directly visible
to consumers. Instead, these changes are reflected in the variety,
quality, and quantities of food products available. Companies not
only have to develop and produce a larger number of goods but must
also get the right products to grocers and foodservice establishments
on time, in the right quantities, and at economical prices.
Wal-Mart was one of the first firms to implement supply chain
management techniques to efficiently handle large product volumes
targeted to consumer preferences. These cost-cutting and information
managing techniques helped the chain lower its prices and grow
into the Nation’s largest general merchandise retailer. In
1988, it entered food retailing with the opening of its first supercenter,
combining a large discount general merchandise store with a self-contained
supermarket. By bringing its business strategy to the food sector,
the company quickly became a leader in food retailing. Based on
their buying clout, companies such as Wal-Mart and McDonald’s
wield a heavy influence on the business practices and products
of their suppliers and rivals (see “The Wal-Mart Factor”).
To emulate the success of nontraditional formats such as the Wal-Mart
supercenters, traditional grocery retailers launched the Efficient
Consumer Response (ECR) initiative in 1993. The goal of the program
is to better serve the consumer and hold down costs through better
information sharing and inventory management.
Serving today’s consumers is a challenge for both grocers
and their suppliers. About 10,000 new food and beverage products
were introduced in 2002. Retailers must decide which new products
to make room for and keep on their grocery shelves. For example,
according to The Food Industry Center at the University of Minnesota,
the yogurt section of a typical supermarket stocks more than 50
individual products, each product being a different combination
of brand, flavor, and package size. To minimize spoilage and stock
the items that consumers want, retailers must choose the right
assortment of yogurt products for each store.
ECR initiatives emphasize information sharing and collaboration
between grocers and their suppliers. Retailers work with suppliers
to select the optimal mix of products to display on store shelves.
To replenish store shelves, retailers inform suppliers as soon
as goods leave a store, which helps suppliers to better manage
store inventory. New products are jointly developed by manufacturers
and retailers to improve the chances of product success.
The Wal-Mart Factor
Leading food companies can influence
their suppliers’ business practices and products and are often
imitated by their rivals. Wal-Mart, the Nation’s leading
grocery retailer, has made two requests of its suppliers
in recent years.
All of Wal-Mart’s supercenters feature only case-ready
meats, which are packaged, priced, and labeled by the
processor for store display. This retail
strategy has eliminated all in-store meat-cutting operations. Wal-Mart has
also set specific quality and safety requirements for
its meats. Target and Kmart
have done the same. In response, leading traditional food retailers such as
Kroger have placed similar requirements on meat producers
to meet protocols for safety
and quality, in addition to case-ready packaging.
According to InformationWeek.com, by January 2005 Wal-Mart will require
100 of its key suppliers to collaborate in tracking pallets of goods
by using radio-frequency
identification. For instance, Kraft will need to affix tags on pallets of macaroni
and cheese going to Wal-Mart. Each tag will contain a chip with an antenna
that is activated by a reader to send or receive information. An advantage
of tags
over bar codes is that tags can be read when the item is not in sight allowing
reading of large quantities rapidly. For example, placing a reader at the entrance
to a distribution center or stockroom will make tracking easier and more automated.
McDonald’s, one of the largest purchasers of beef, chicken, and pork in
the United States, was among the first companies to establish its own set of
animal welfare guidelines. To limit confusion associated with multiple company-specific
guidelines and ease compliance, supermarkets and chain restaurants established
uniform guidelines for the humane treatment of poultry, beef and dairy cattle,
and swine. Recently, KFC (formerly Kentucky Fried Chicken), the world’s
largest chicken restaurant chain, became the first restaurant to adopt these
uniform guidelines.
More recently, McDonald’s announced a global policy requesting
that its meat suppliers phase out growth-promoting antibiotics that
are used in human
medicine by the end of 2004. Suppliers that directly control animal production,
such as Tyson Foods, must certify compliance with the policy and maintain
records of antibiotic use for audits and review. Indirect suppliers,
including most
beef and pork suppliers, are required to certify compliance and maintain
records of
antibiotic use if they wish to be considered as preferred suppliers.
ECR initiatives continue to evolve as issues of trust and information
sharing are worked out. A newer initiative, referred to a Collaborative
Planning, Forecasting, and Replenishment, shares many of the same
goals as ECR. In concept, retailers share data from retail scanners
with manufacturers instantaneously, often over the Internet, and
enter into inventory replenishment agreements. Manufacturers and
retailers use the data to forecast sales and jointly tailor orders
and deliveries. Via scan-based trading, manufacturers also receive
instantaneous information on product sales and adjust deliveries
to keep store shelves stocked. The manufacturer owns the products
on retailers’ shelves until the products are sold, which
frees up the retailers’ capital.
In a competitive food market, foodservice companies cannot rest
on their laurels. They launched their own program of supply chain
management initiatives, the Efficient Foodservice Response (EFR),
to reduce supply chain inefficiencies. The most widely publicized
EFR objective is promoting the use of standard product identification
codes, especially in the form of bar codes—a practice already
common in food retailing. Longrun plans for EFR include the adoption
of many initiatives also being explored by food retailers, such
as electronic sharing of inventory data between restaurants and
their suppliers.
To keep costs low, companies may also adjust the size and scope
of their operations. For example, many traditional retailers, such
as Safeway and Kroger, are building larger supermarkets to supply
more goods and services. In 2001, the median number of items stocked
by supermarkets was 37,000, compared with 13,000 in 1980. While
convenient for consumers, these larger stores also have high costs
for overhead and labor. To successfully compete with discount retailers,
such as Wal-Mart and Costco, traditional food retailers must hold
down the average cost of handling products. Mergers and acquisitions
may give traditional retailers the sales volumes necessary to negotiate
price reductions and enter into long-term agreements with suppliers.
Larger chains can also spread costs, such as advertising and developing
store-branded goods, over more products and more stores, reducing
the average cost of the investment per store and per product.
Mergers and acquisitions in the retail grocery industry have
resulted in larger chains that command a greater share of total
industry sales. The nationwide market share of the four largest
grocery chains reached 31.9 percent in 2001, compared with 18.4
percent in 1987.
The Business of Agriculture
Today’s farm operations are mirroring the dynamics of the
food system it serves. Keeping pace with the diverse needs and
preferences of their customers has become a daunting task. Farms
now specialize in the production of certain types of agricultural
products, using the newest technologies.
Present-day farmers must deliver products in the quantities and
with the qualities required to meet the needs of large-scale processors
that produce branded products and foodservice ingredients. Several
meat processors now offer case-ready, branded meats to satisfy
large-scale retailers. To achieve product uniformity, many processors
seek greater control over breeding and raising animals. For example,
genetics affects the uniformity of hog size, weight, and specific
quality attributes required for branded products, such as Smithfield’s
Lean Generation pork. Farmers who grow hogs for Smithfield are
required to use hogs bred from a particular genetic line, National
Pig Development (NPD), the name of the company that originally
developed the breed. NPD hogs are the leanest hogs in U.S. large-scale
production.
Similarly, growing potatoes for fast food french fries requires
an assured supply of high-quality potatoes, which require more
irrigation, fertilizer, and other chemicals than many other crops.
McCain Foods, the world’s largest french fry processor, employs
an agronomist to work with contract potato growers to improve the
quality and yield of their crops.
A growing consumer segment cares not only about what’s
produced, but how it’s produced. A proliferation of guilt-free,
or eco-labels, on food products appeals to these consumers’ quest
for products that make them feel good about themselves. Consumers
pay a premium for an eco-label, which is a seal or logo indicating
that a food product has met a set of environmental or social standards.
Examples include “dolphin-safe” tuna, “environmentally-friendly” pork,
and the increasingly popular Fair Trade Certified coffee, which
means that more coffee profit goes to small farmers.
Seed companies are developing seeds that produce crops such as
corn, soybeans, canola, and tomatoes with improved taste, health
benefits, and freshness. For example, Monsanto plans to introduce
seed that produces corn and canola fortified with omega-3, a fatty
acid beneficial to human health. These developments make identity
preservation and separation imperative, which places additional
costs on the marketing of farm products.
Worldwide concerns over food quality and safety call for the ability
to “traceback” the sources of, or ingredients in, food
products. These concerns place pressures on food companies to provide
more complete information about the sources of inputs in their
products. In response, new technologies are being developed to
electronically identify animals. For example, Global Animal Management,
Inc., has tested microchips that can track hogs from birth to slaughter.
Open markets may be less efficient for exchanging products that
are differentiated or require maintaining the specific identities
of buyers and sellers. To meet the new and diverse needs of their
customers, farmers may align with specific trading partners through
contracts, alliances, or perhaps vertical integration. Vertical
integration entails common ownership of farm production and processing
stages by a single company, such as Cal-Maine Foods, which owns
chicken feed manufacturing facilities, and egg production and packing
operations.
In some industries, such as hog, cattle, and grain production,
contract arrangements are becoming increasingly important as closer
relationships are formed. Solving quality problems and ensuring
traceback capabilities may require processors to monitor production,
receive third-party certification, or control production inputs.
For example, it is difficult to identify and verify by visual inspection
the genetic strain of an animal, how it was handled, whether it
was fed organic grain, and other quality attributes. Consequently,
processors may enter into contracting arrangements to gain additional
control over animal production.
Farmers are also banding together to control food production
through more than one stage of production and marketing, usually
through some level of processing. These so-called “new generation” cooperatives
allow farmers to respond to consumer demands and capture returns
from further processed products. The Dakota Growers Pasta Company
began as a new generation cooperative formed by wheat growers in
North Dakota, Minnesota, and Montana. The company owns a plant
that processes durum wheat into flour and pasta. Other examples
include Iowa Quality Beef Supply Cooperative, Prairie Farmers Cooperative,
and Prairie Farms Dairy, Inc.
Our food system brings new challenges and risks to the farm sector
and to food processors and distributors. With these challenges
come an abundance of opportunities as diverse as the demands of
today’s consumers.