Thursday, 17 July 2014

FarmDrop - The Online version of a Farmer's Market. Will it work?

 FarmDrop aims to connect producers and consumers using all the latest  online retailing ideas. It is a digital version of the traditional stall found at farmers’ markets, and has been set up by Ben Pugh a former city worker, and Ben Patten. Currently the business is trying to raise £400,000 through a crowd funding initiative, and has already received £301,000 in pledges from 105 investors.

Is FarmDrop a good investment? Will it, as the two Bens hope, turn out to be “the food system of the future”.

At first blush it all looks very simple. Consumers sign up to their local FarmDrop, order their goods on line, and pick them up at a fixed central point on the same day every week.

Producers fulfil the orders and deliver them to the central point.

And a “Keeper” mans the pick up point, ensuring that customers are given their goods.

Money wise, producers receive 80% of the retail price, the Keeper 10% and the brains behind the idea also get 10%.

At present there are 17 Drops either open or in development.

The FarmDrop website summarises the benefits of the idea as follows:
Consumers receive local produce, and the satisfaction of knowing they are supporting farmers. Keepers also support farmers and earn money in the process. Producers receive the lion’s share of the retail price.

The business model raises some issues. Its definition of local is broad with producers needing to be within 100 mile radius of the central point. Some might feel that this is not very local at all. Wholesalers can be used, which adds a further layer of complication, and is at odds with the idea of wholeheartedly supporting producers.

The biggest issue is that FarmDrop has underestimated the pivotal role of the Keeper without whom the idea collapses. The Keeper is charged with signing up producers to support the Drop, recruiting the customers, and troubleshooting any problems that might emerge either from producers or customers. Their financial return from putting in all this effort is modest. The example quoted by the operation says that keepers could earn £640 per month for 7 hours work a week, 5 hours manning the drop and 2 hours on admin. That comes out at £23 per hour and takes no account of the time, petrol, or telephone costs spent setting up the drop, enrolling producers, and signing up customers, work which is likely to be ongoing as some customers and producers will inevitably drop out of the system and need to be replaced.

The return to the operators of the business is the same as the Keeper’s but their involvement seems to be limited to setting up the website, and doing some training. The founders assert that “we stand for fairness”. The allocation of reward for the hard pressed Keeper does not sound at all fair.

It would be good if FarmDrop could reassess the way the model works, for a successful method of enabling producers to reduce reliance on supermarkets is to be welcomed.

Unless they address either the load being put on the Keeper’s shoulders, or increase the financial return the Keeper receives, FarmDrop will  remain a very small business, and investors will be disappointed.






Friday, 11 July 2014

Not Only Consumers Love Aldi and Lidl - Suppliers Do Too

You might think that discounter retail prices are so low that suppliers’ profits from serving them are thin to the point of non existent.

Not so. Yes it is true that Aldi and Lidl negotiate hard, and a recent article in the Financial Times suggests that margins are of the order of 5-10% lower than for traditional supermarkets. But the discount model means that there are many upsides.

The keys are the limited range of products on offer and selling at the same price every day. Aldi and Lidl stock around 3,000 lines compared with a standard supermarket range of 40,000-50,000. This means that suppliers can manufacture long runs of product instead of incurring cost by stopping the line to change to another variant. Everyday low pricing means that volumes are consistent and easier to forecast, as opposed to volatile and unpredictable, which is the case when goods are sold on promotion. Because there are few promotions there are few demands for add ons like promotional support. And listing fees seem to be a rarity.

Aldi and Lidl tend to be loyal to their suppliers and the narrow range and everyday price mean that suppliers need fewer people to manage the account, and waste little time in meetings.

Discounters operate efficiently and this philosophy benefits suppliers. No costly chopping and changing in manufacturing, no cash draining peaks and troughs in volumes, no wild and expensive ideas about promotions, no rug pulling at the last minute when an activity seems to have been agreed, and minimum numbers of meetings – it all adds up to a financially beneficial relationship.

Add to that the enormous growth potential that discounters offer, and it becomes clear why suppliers find that dealing with the likes of Aldi and Lidl a satisfactory experience.




  

Tuesday, 8 July 2014

Online Grocery Shopping - Being Realistic About Growth Prospects

The Institute of Grocery Distribution has just updated its 5year growth forecast for the UK grocery market., and predicts a slower rate of growth than in the last 5 years, down from 19.5% to 16.3%.

It remains, though, exceedingly bullish about the prospects for online, convinced that sales will more than double by 2019, an average increase of nearly 18% per annum.

What will power this growth, they say, is the roll out of grocery click and collect to more locations, greater competition to raise standards since Morrisons entry ( a tribute to the strategy that Morrisons have adopted), lower delivery charges, and more delivery subscription schemes.

The projections seem optimistic.

For starters, growth rates in online grocery shopping are falling. Ocado, which is an online only retailer reported growth slowing from plus 18% in the first quarter to plus 12.6% in the second. They also reported a modest reduction in the value of an average order, down from £117.99 to £117.53. Sainsbury’s online sales growth has dropped to 10% in the last quarter. Tesco’s Philip Clarke indicated at a recent conference that their online sales at Christmas were growing at around 10%.

Secondly, the projection seems to ignore the various forms of competition that online faces.

There is internal competition as parent supermarkets invest in making their bricks and mortar stores more attractive places to shop.

There is competition from discounters who continue to see growth accelerate, and who, if they can pull off the trick of offering ever more up market food with rock bottom prices may exceed the near doubling of sales forecasted by IGD.

And the trend towards convenience store shopping shows no signs of stopping.

Thus the shopper is being offered an ever more attractive selection of ways to buy their groceries.
As they ponder the best way of feeding themselves and their family they will be working out what best suits them at a particular time. It may be they want to browse the shelves in a supermarket and see immediately the quality of what they want to buy. It could be that they want the lowest price possible, or maybe a trip to the local convenience store for speed. Or it could be that tapping a shopping list into their smart phone is the easiest way to shop.

In this increasingly multi channel world, online shopping can only grow at the high rates projected if the numbers of people shopping that way doubles (and they spend roughly what is being spent now), or the same number shop online as now and double their spend, or some combination of both. All of which looks stretching.

This is not to suggest that offering shoppers the opportunity to shop on line is a waste of time, for clearly it has its attractions.

Rather it is to suggest that any forward projections, particularly if they involve heavy financial investment, should take a realistic view of likely sales growth.







Friday, 20 June 2014

UK "Big Four" Supermarkets - A Busted Business Model

The woes of the big 4 supermarkets continue to fascinate watchers of grocery businesses. Latest Kantar worldpanel data for the 12 weeks ending 25th May show Tesco sales down by 3.1%, Morrisons by 3.9%, and a struggling performance from Sainsbury, up 0.9%. Only ASDA seems to be holding up, managing to grow by a steady, if unspectacular 2.4%.

Meanwhile over at Aldi and Lidl sales keep soaring. Aldi’s usual trend performance of growing by over a third every quarter continues, and Lidl’s year on year growth has accelerated to 23%. Another low price player has started to make its presence felt - frozen food specialist Farmfoods grew by 27% over the same period.

A couple of commentators are beginning to draw parallels with the rise of low cost airlines. Easy Jet and Ryanair in the UK, and South West in the US operate with a basic service but extraordinarily low prices. Just like Aldi and Lidl they worked out where costs could be stripped out, and in so doing left the big carriers like BA, Air France and Lufthansa floundering.

And so it is with the “Big 4” Uk supermarkets. All have identified that what they are doing now is not working. Tesco, Morrisons and Asda have resorted to price reductions. Sainsbury hope that a superior quality own brand offering plus selective price reductions will help.

But reduced prices have to be paid for somewhere along the line, and the cost base has to be examined.
The challenge for the supermarkets is to identify what their shoppers would class as a “frill” which could be sacrificed to pay for low prices, and what is a critical part of the reason why they shop at a particular supermarket.

 This is where a good look at the value of online investment might be useful. Neither Aldi nor Lidl has an online offer and it does not seem to be holding them back. Morrisons poor performance has been laid at the door of no online, but the performance of all the other supermarkets would suggest that lack of online presence is not the root cause of the problem. Rather, the success of the big supermarkets in affluent times has led them to become greedy and bloated, and shoppers have rumbled them, finding that it is possible to eat well but much more cheaply. Yes, maybe there are fewer varieties of extra virgin olive oil or exotic tomatoes in Aldi, but look at how much is saved on the grocery bill. The airline analogy is probably along the lines of yes, I’ll get a meal on the flight and carry on a bigger bag, but it will cost me twice the price of a Ryanair ticket.

Online growth is slowing. From annual increases of 20% per annum or so, growth has now slowed to 12% (ONS). Sainsbury a couple of weeks ago reported annual growth of just 11%, and Tesco did not mention it at all which they would have done if the news was good. On line still represents just 3.7% of all food sales.
Where does the consumer stand in all this. No research has been published investigating a straight trade off between low prices and an enhanced online experience.

We do know is that consumer confidence is growing. The number of people who feel that they will be worse off in the next twelve months has dropped from 42% in May 2013 to 32% today. (IGD)We also know that people are expecting food prices to stabilise, possibly because of the publicity given to supermarket price drops. However, 55% of people still say that the amount of money spent on food is a very important factor.

There will be no let up in the price battle, and it has to be funded from somewhere. A huge hit to profit will not be acceptable to investors. Suppliers will of course feel the cosh.


But only a thorough re-evaluation of the major supermarket business model will address the challenge of new models now competing for the consumer grocery pound.

Tuesday, 10 June 2014

Convenience Stores Flourish as Consumer Behaviour Changes and Competition Increases

Not so long ago the bells were tolling to mark the death of the corner shop. Fine perhaps for papers chocolate and cigarettes, or for a pint of milk in extremis, but for quality and choice the only answer was a trip to the nearest big superstore. And so corner shop turnover dwindled to a level where many businesses could not make enough money to survive.

How times change. Pressures on the family budget and high petrol prices meant that going miles to a store and spending money on things that were not really needed or worse would end up in the bin suddenly seemed less attractive. How much more sensible to nip down to the local shop and buy just the essentials.

The change in behaviour on its own would not have accounted for the rise in convenience shopping. Enter the cut down versions of major supermarkets with a well thought through range offering the quality and freshness found in a larger store, and in a more attractive and hygienic environment (mostly).
Tesco Expresses and Sainsbury Locals sprung up all over the place and critically forced independent small stores to look again at their offer and accept that they had to up their game to survive.

Today, according to the Institute of Grocery Distribution, overall convenience store numbers are up by 1.3%, and whilst major supermarkets are still the driving force behind increased shop numbers, there are far fewer independents closing down. Convenience multiples like Tesco and Sainsbury still only account for 1 in 10 convenience stores, and nearly two thirds are either independents or affiliated to companies like Spar and Londis. (The rest are garage forecourts and Cooperatives).

The independents could do more to boost business. Although accounting for 1 in 10 stores, the big companies take £1 in every £5 spent so they are doing a better job in persuading people to visit them and spend more heavily.

Of course the independent seeking to grow must have the basics in place - cleanliness, freshness and a friendly face. The opportunity to build more business seems to lie in matching products in store to the needs of the type of customer who visits. “Tailored solutions” is the mantra, and  IGD cites as an example the Cooperative in Old Street London which is divided up into “Food for now”, “Food for later” and “Food for Tonight”.

What is heartening about the resurgence of the corner store is that demise is not inevitable, and those who understand their customers and see competition as a stimulus not a threat, stand a good chance of success.





Monday, 2 June 2014

Plummeting Cattle Farmgate Prices - What Can Producers Do?

Cattle farmgate prices are going from bad to worse. Supplies are plentiful and demand is low.

The strong pound means that imports are a cheap buy, and imports in March grew by 22%. Imports of frozen beef were up by 46%. More animals are coming forward for slaughter, and carcasses weigh an average of 8kg more than last year so the volume of beef production grew by 6.5% in March. On the demand side, consumers bought 4% less beef in the 12 weeks to April 27th because the retail price has been hiked up by 8%.

The response from the meat industry could be summarised as kicking the problem into the long grass. Eblex say that everything will be fine in the long term. Hybu Cig Cymru’s answer is to launch a review, NFU Scotland have arranged a meeting with the Scottish Association of Meat Wholesalers. The British Meat Processors Association has called for a long term vision for the supply chain, and meanwhile advises producers to get their costs down to better compete with imports.

The major retailers, who are ultimately responsible for the problem, having put their retail prices up as their costs have gone down, have as ever sheltered behind the British Retail Consortium who came up with the feeble response that retailers are using increased margins to ensure the sustainability of supply chains.

So what can producers do?  One school of thought says that ups and downs in pricing are part and parcel of beef production and the storm will pass. At the other extreme Farmers for Action feel that militancy might help and are planning to protest at a meat processor plant in the next few days.

A close eye must indeed be kept on costs. But to suggest as the BMPA does that costs should be kept down in order to keep prices down and imports at bay will not solve the problem. It is currency values which dictate the ebb and flow of imports – a strong pound means more imports.

Bashing the processors will not help either. Few processors are going to risk alienating the retailers they supply, no matter how much a retailer policy is hurting them.

The only section of the whole supply chain that retailers listen to are their customers, and sadly most customers are not so overwhelmingly convinced about the superiority of British beef that they will vote with their feet and go to another store or seek out the store manager and complain about foreign beef on the shelves. Yes, they say they like to buy British, but how many actively seek it out, or understand what information on the label tells them it is British.

British beef needs to be built into a strong brand, one that consumers feel they must seek out, and if necessary pay a bit more for because it is worth it.

Easy to say of course. Building a brand takes time, money and talented marketing people who can identify what is special about British beef, and communicate it in a compelling way.

It may be that the brand does not attempt to promote all British beef but segments of it. Ladies in Beef are keen to build a suckler beef brand. Many have suggested the idea of branding grass fed beef because of its higher essential fatty acid content. Branding is possible in beef, and has already been done with breeds. Waitrose promote Aberdeen Angus and Hereford beef, and Morrison’s support Shorthorn.

What is clear is that floating vague ideas will not work. Building brands is hard graft, and whether the consumer message is about grass fed, or suckler beef or something else, someone has to sit down, roll up their shirt sleeves, and work out what it is that will appeal to and motivate the general public.
And here is where producers could use their clout and lobby the many bodies who represent them, and are often funded by them, to start thinking about adding value to beef.

EBLEX, HCC, QMS, the NFU, the NBA, the Red Tractor people, the BMPA, breed societies, and the retailers who run producer groups all claim to support beef producers. Surely between all these bodies there is enough money in the system to support a brand building exercise, and somewhere a champion with the will to knock heads together and find a positive way forward.



Tuesday, 13 May 2014

Why Shoppers Like Aldi's Pricing Strategy

There is no stopping Aldi – or fellow discounter Lidl.  Sales in Aldi grew by 36% in the last twelve weeks, and those in Lidl by 20%. And this in a market which grew by just 1.9%, the lowest level for 11 years (Kantar Worldpanel).

We know that shoppers like the discounters’ low prices, but they also like the way they price.

To get value in the “big 4” supermarkets shoppers have to buy what’s on promotion. Often the products on offer are not the ones that they want, or the offer is not in a form that they want. Multi buys like buy 3 get one free, or get the second half price are particularly disliked by shoppers. Fine if the product in question is not perishable and likely to end up in the bin, or if it is something that is regularly bought, but too often that is not the case.

Kantar tells us that 45% of all sales made by the major supermarkets come from promotional offers, up from around 40%. Compare that with Aldi where just 3% of sales are on promotion.

So there is the draw for Aldi customers. Having worked out which products they like they can shop with confidence knowing that the price will be the same day in and day out. Contrast that with other grocers where prices can be hiked for a while just to be able to drop them later, and shoppers are never sure what might be available on promotion on a particular day.

Morrisons, Asda, and Tesco have cottoned on to this, and permanently (they claim) lowered prices.

While price is the main reason to go to discounters, the IGD has done some research on what other aspects shoppers find attractive. Some are surprised by the quality, some like the speed and ease of shopping, and the reduced range, others enjoy finding continental brands that are not available elsewhere. As the IGD says, discounters are moving mainstream. 51% of people have shopped in one in the last month, compared with 41% two years ago and 12% are saying that their main store is a discounter, up from 5%. Hence the worry among traditional grocers and the change in pricing strategy.