Monday, 25 March 2013

Organic Sales Still Dropping - What Will Restore Growth?

The Soil Association’s recently published Organic Market Report shows that sales of organic products fell by 1.5% in 2012.

There are pockets of strength, particularly where brands are well known and promoted. Combined sales of specialist retailers Ocado, Abel and Cole and Riverford Organics grew their sales by 10%.  Rachel’s Dairy, noted for its yoghurts, grew by 15% and Yeo Valley who sell a range of dairy products grew by 6.6%.

 Under 35’s spent more on organic products than ever before. Sales to catering outlets are up.

But some core markets still struggle. Supermarket sales of pork, eggs, and poultry dropped by 30%, horticulture products (fruit and veg) dropped by 8%, milk sales are down 4%, lamb down 2%, and beef down 1%.

So what of the future. The Soil Association admits that difficult economic circumstances have hindered organic sales and we know that money will be short for a few years yet.  And herein lies the problem. Whilst many consumers like the idea of buying organic, they struggle to convince themselves that the organic premium is worth paying on a regular basis.

This nettle has to be grasped if supporters of organic produce want to see sustained growth.

It is not enough for the Soil Association to chastise government for not doing enough and lambast the big multiple retailers for turning their back on organics.

The government cannot address the fundamental issue of consumer demand. Scotland’s Organic Action Plan, cited by the Soil Association as a template that the English government should follow, is helpful in that it provides support for farmers to convert to organic and makes funds available for businesses to promote their products. But the Scottish plan acknowledges that at the end of the day it is consumers who are key to success.

Multiple retailers are close to consumers but in a low growth, highly competitive environment they will not offer up precious shelf space to products whose sales don’t justify it.

There are just two ways to overcome the consumer issue. Either, communicate a compelling reason to justify the organic premium –or - reduce the premium.

The first route is difficult. The organic story is a complicated one to tell, and getting across the idea that organic is an integrated way of producing food is difficult when funds are limited and consumers are used to picking up messages in sound bites or in 140 characters on Twitter.

So is there any mileage in the second route, namely reduce the price premium. This would be ideal because many consumers like the idea of buying organic. Indeed some 80% do so, but too infrequently to affect growth.

Reducing the price premium requires increasing yields.  And to increase yields requires solid science, and science needs funding. At the moment there appears to be just one project tackling production issues – a Duchy Originals sponsored initiative led by the Soil Association with the help of the Organic Research Centre at Elm Farm. Whilst welcome, its progress will be slow. Starting May 2012, it is not due to complete its initial findings until May 2015. Only at this point will it decide on research priorities.

Here is the question. Would the considerable funds currently available across British governments, the EU, the Soil Association itself, the industry groups Organic UK and the Organic trade Board be better spent on broadening and speeding up scientific work.

This is not to overlook the task of communicating with consumers.This is probably most effective when done by strong, trusted brands. The success of Rachel's, Yeo Valley, and Riverford shows that when done well the organic story translates into solid sales growth.

Wednesday, 6 March 2013

Online Grocery Shopping - Supermarket Giant Morrisons View on the Challenges

Dalton Phillips, CEO of Morrisons, speaking on Radio 4 about his company’s future prospects, has given a clear analysis of the challenges food retailers face when considering going into online grocery shopping.

The basic problem, he says, is that when it comes to online, the mechanics involved in the cost of shopping transfer from the shopper to the supermarket.

The shopper going to a supermarket pays the time cost of going round the aisles loading products into the trolley, the time cost of wheeling the goods out to out to the car and loading up, and  the time and transport costs of getting the product home. Should the shopper arrive home with the wrong products they have to lump it – no getting on the phone or computer to complain that what they wanted has not arrived, no “goodwill” compensatory money changes hands to soothe disgruntlement.

Once the shopper orders on line all of those costs pass to the supermarket. The supermarket has to have the staff to process the order, pick the goods, load them onto the van, deliver to the customer’s house, deal with complaints. They have to buy or lease the vans, and bear the petrol and insurance costs of going around the country to deliver. We know from various industry studies that the cost of processing an on line order is about £15. Yet the shopper pays about £5, less if placing a big order.

Dalton Phillips point is that someone has to pick up the tab for all this additional cost, and none of the options is palatable. The competitive jungle that is the grocery sector means that costs cannot be passed back to shoppers in the form of higher prices. Equally, a hit to profit margins is unlikely to please investors.
What Dalton Phillips perhaps has not accepted is that embracing online grocery shopping means a structural and permanent change to the way profits are made by the grocery trade. At the moment online is a small part of supermarket sales, and so the profit drain is largely disguised, but this will change if the sector grows as predicted.

 Morrisons may not have much choice in whether or not they offer an online service. On line is something that today’s food shoppers want and to ignore the trend is to risk being sidelined, perhaps not today or tomorrow but certainly in the longer term. British retailing history is littered with examples of big businesses which ignored trends, got stuck in the past and collapsed. Comet, Jessops and Blockbuster spring to mind.

The challenge for Morrisons and any other business developing an online facility is to work out how to adjust business performance to take account of the reduced profit margin which comes from an online presence.

Friday, 1 March 2013

Horsemeat Scandal - Catering Trade Getting Off Too Lightly

It is the major retailers who have had the most opprobrium heaped on them in the horsemeat scandal. And this is fair enough given that most food bought comes from supermarkets. The adverse publicity has had an effect. The furore has led to a shift in sourcing policy from Tesco who have committed to closer working relationships with farmers. If Tesco delivers on their promises this can only be good for all in the food chain from farmer to consumers, and where they lead others will follow.

By contrast catering suppliers, those hundreds of thousands of premises who feed us outside of the home, have got off lightly . Even news of local authorities withdrawing meat fed to children has caused barely a ripple, yet up and down the country from fast food outlets like Burger King, through up market caterers like Sodexho who ironically supply Royal Ascot, Compass, one of the biggest catering companies in the world, IKEA with their restaurants claiming to provide family friendly meals, multi- national giant Whitbread who owns Brewer’s Fayre, Beefeater and Premier Inns,  and local authorities from Scotland to South west England, and across Wales have all had to change what they provide to customers because they were failing in their duty of care to those they are feeding
Every one of these companies and the local authorities has blamed their suppliers. No one has searched their consciences to see whether demands to save money or increase profits might have been a factor in things going so wrong.

Few will be punished. Assiduous followers of the scandal might defect from Burger King to McDonalds, who despite providing food at the lower price end of the spectrum seem to have emerged with their sourcing integrity intact. Families might avoid the meat balls in IKEA restaurants, for a day or two.

The rest of the catering trade will experience no adverse comeback because, with over 420,000 outlets, it is highly fragmented  and  largely uncontrolled. It is also has few recognised consumer brands so there is little for the media to get its teeth into and inflict reputational damage, as in the case of supermarkets.

So what can be done to ensure that caterers are serving what they purport to serve?

They could for starters be obliged to tell consumers at point of eating where the food comes from. People might think twice if the beef, bacon, or ham comes from anywhere but Britain.

The Food Standards Agency could focus their analyses on the catering trade, on the grounds that in the short term at least supermarkets will be bending over backwards to ensure that their supply chain is scandal free.

Local authorities could actually be local when it comes to sourcing the food they supply, much of which goes to the vulnerable – the very young or the old and sick.

Crusading foodie types could focus attention on the catering trade with as much vigour as they do the supermarkets.

And as for us , the general populace, we too could play a part as opposed to leaving it up to everyone else – and actually ask those supplying food when we eat out to give a full account of what they are serving to us.

What is served up in catering establishments does matter. We spend £48 billion on food and non alcoholic drinks consumed outside the home. £2.5bn is spent on food procurement by the public sector, most going to those who have little choice of eating establishment. The number of times we eat out is growing despite the recession.

Yet we have little reassurance if any as to the quality and provenance of the vast majority of the food we eat when away from home.