More value from less food?
Can food retailers and their supply chains contribute to sustainable prosperity, CUSP co-investigator Charles Seaford asks, or will government have to intervene? (This blog was written for the Food Ethics Council.)
Dematerialisation of the economy – more value from each unit of ‘stuff’ – is a well-established trend in developed countries and could make a significant contribution to addressing our environmental problems – after all it is the gathering, processing and transporting of stuff that depletes resources and pollutes.[i] Nonetheless few environmentalists believe that the current pace of change is fast enough. Can business accelerate the trend on its own, or will it take further government intervention? And, in particular, what will food retailing and its supply chain do?
Our starting point at the Centre for Understanding Sustainable Prosperity is this will only happen if it increases profits or at the very least preserves them. Significant change will not result from moral pressure alone. It is true that some major investors are now pressuring the industry to perform against environmental criteria. For example a group of 40 have launched a campaign (‘FAIRR’) to encourage 16 global food companies to change the way they source protein, the idea being to reduce environmental and health impacts. However they are not relaxing their financial objectives. Strategy has to deliver both.
And some win win actions are already contributing – for example reducing waste during production and distribution reduces the total amount of stuff needed for a given sales volume. It is also true that rising commodity prices can drive down volumes, and food prices have been rising. But to go beyond efficiency improvements or responding to price movements and aim to reduce sales volume raises trickier strategic issues. Last night I threw away some fish because the smallest packet I could find in the supermarket was too big. How can setting out to stop this kind of thing, and more generally to sell less food, become part of a strategy that increases profits? What will make it worthwhile? For in the longer run, it is this that is going to produce the biggest environmental benefits.
There are all kinds of ways food retailers and their suppliers could add value and so reduce their dependence on volume, but do they stack up commercially? For example, can food manufacturers and retailers exploit the trends manifest in increased eating out and vegetable growing profitably?[ii] [iii] Can they help budget conscious shoppers spend less or more wisely and still make money? Can they do these things in an intensely price competitive industry? And, more fundamentally, do the incentives exist for innovation, other than in the kind of high value added niches that tend to be targeted by new entrants? For it is changes in the mass market that will make the difference. If the answer to these questions is yes, then we may see significant change in the industry, ultimately prompted by industry leaders who believe their industry should contribute to sustainability, and by those investors who are also encouraging strategies that deliver profits consistent with sustainability. However if the answer to these questions is no, then leaders will be constrained and minority investor pressure will not change strategies significantly. If that is the case, then, if we collectively want the industry to shift, we will have to rely on government to introduce the regulatory or fiscal changes needed to incentivise the necessary innovation.
In any industry, there are two incentives for radical innovation: defence against new entrants who might change the rules of the game, and the opportunity to create a first mover advantage over other incumbents (I exclude here incremental cost saving innovations such as automated check outs). At the top of the market the barriers to entry are quite low and there is a whole range of innovative food retailing, preparation and delivery concepts. As for the mass market, Lidl and Aldi are of course new entrants, but both were expansions of overseas chains and their competitive advantage is principally cost. It seems likely that there remain quite significant barriers to entry to the mass market for new value add concepts, explainingTesco, Morrisons, Sainsburys and Asda’s long term dominance. Arguably M&S and Waitrose are under more threat from some of the new concepts, but it is difficult to see how the big four and the discounters will be, at least for most of their activities . In the mass market at least, significant innovation will probably depend on being able to establish first mover advantage.
This does happen. The use of loyalty cards by Tesco is one of the best known examples; this exploited developments in IT to improve radically segmentation and merchandising; it took years for rivals to catch up. Could further exploitation of what is now much more advanced IT allow retailers to provide more value to their customers in ways that rivals cannot imitate, or cannot imitate quickly? Could this be linked to helping customer spend less or more wisely on food? Or, for a slightly more prosperous segment, could it help deliver greater convenience – and thus value – when shopping and preparing, reducing dependence on volume? (Historically the initial benefit of many successful innovations was making existing activities more convenient). Or to helping people enjoy the experience of cooking and eating more? Or to eating more healthily?
Are there opportunities in the shift to online retailing? After 20 years of effort[iv], the online food and grocery market is predicted to be only 4% of the total by 2018[v] and only 20% of shoppers do all or most of their grocery shopping online.[vi] Accenture report that 82% of millennials (born 1980-2000) – millennials – prefer physical to online shopping.[vii] Could a retailer create more convenient and enjoyable form of online shopping that paid its way – and helped provide the kind of customer benefits just described that could reduce dependence on volume? Given that online shopping is not location based and competition no longer depends on getting the best physical site, will there be more opportunity – and need – for brand differentiation amongst the big retailers? If so, could there be an opportunity for at least one mass retailer to build a brand based advantage from delivering more value from less stuff?
However even if online grows ten-fold, most food shopping will remain physical. So are there opportunities to improve staff skills in ways that are difficult to imitate? In particular can they be used in combination with IT to improve the shopping experience and the quality of purchasing?
Another way that businesses make money is by linking their brands to active consumption, that is to say consumption involving activity rather than consumption pure and simple. Nike is an obvious example. Perhaps not surprisingly, Google and advertising agency Ogilvy report that “Consumers choose the brands that engage them on their passions and interests 42% more often than they do those that simply urge them to buy the product being advertised.”[viii] When an enthusiasm is growing, there are obvious opportunities and this, of course, is in constant evolution. For example, the gardening products market is reported to have doubled between 1991 and 2006 (but has been somewhat static since). What scope is there for strongly associating a brand with cooking – not just through advertising but by providing information and training products that complement physical products, and help remove some of the barriers to wider take-up, such as negative self-perception?[x] Can a food retailer stimulate this trend? Can community based CSR programmes of the kind Kingfisher have run contribute to this?
I am not answering any of these questions in this article. However I am suggesting they – and similar questions – are worth answering. My focus has been mainly retail, but clearly there are similar, related questions for the whole supply chain. There is also a more fundamental question lying behind these questions: does the food industry genuinely want to try and answer questions of this type, so that they become capable of making more profit from selling less food? If the answer to that question is currently no, then what kind of intervention by government would change it to a yes? The problem cannot be solved without innovation, and innovation has to come from business itself – although sometimes in partnership with publicly funded agencies. The question is: what will stimulate this?
The classic answer is carrot and stick. That is government supports certain kinds of innovation through public agencies and grants, and it incentivises it by taxing and regulating existing products. Innovation to reduce vehicle emissions has been stimulated in this way. In the case of food, taxation is politically difficult – even the sugar tax ran into difficulties. Nonetheless it is possible that some mix of tax and subsidy combined with innovation support would work. Again, I am not presenting an answer but suggesting that an answer to this question may well be needed if food retailing’s potential for contributing to sustainable prosperity is to be fully realised.
In short, the suggestion is that the food industry, academics and NGO address the kinds of question raised in this article so they can shape the agenda in a positive way.