The Fruit and Vegetable Industry: At a Crossroads?
A glimpse at the prospects for the fresh and processed produce sector over the next five to ten years reveals two strong messages; one based on a continuation of the worrying trends seen in the EU market over the last five years, the other based on a more optimistic note, revolving around new attitudes within the sector itself, and also a new market and regulatory environment. The international sector is at a crossroads, and can therefore go in one of two directions; to take the more attractive of these will require a firm understanding of new market dynamics.
Much of what will happen over the next five to ten years will be based around developments in the European market, which, together with the US and Japan, accounts for around 80% of world trade. Although there are interesting opportunities in markets such as the Middle East, Eastern Europe and the Former Soviet Union, the fact that the EU is now the single largest market means it assumes great overall strategic significance, although there will be new opportunities for sourcing, and to some extent marketing, in parts of Latin America and Asia too.
The three key unknowns however, China, India and Brazil, all aspire to be exporters of fresh produce rather than net importers. While they have all become important players in the processed sector, their role in fresh trade to date has been relatively limited. However, with their large raw material bases, further moves into the fresh produce sector could have a significant impact on world fruit flows. Of the major suppliers to the EU market, the prospects look especially good for third country "Best of Class" suppliers such as Chile, Argentina and Turkey, all of which have established themselves in the market and have expanding fruit supplies available.
New market dynamics emerging
The main threats to the future strength of the sector include a combination of continued over-production, distorted markets caused by inappropriate policy regimes, and a failure to understand new market dynamics. Over-production has been a curse on the industry in the last few years, and the point has been reached where most major product lines have seen significant increases in production, whilst consumption at the macro level has remained relatively static. This has put huge pressure on prices. There has been very little impact in capturing additional value in the supply chain, and this has reduced re-investment levels for areas such as NPD and technical innovation.
"The long-term direction of change is clear. It will favour liberalisation, market forces and genuine competitive advantage"
In terms of market regulation, the fruit and vegetable sector is not as heavily regulated as meat, dairy and/or cereals. To some extent the future will be influenced by what happens in other sectors. There is a change in the political mindset, in that agricultural trade deregulation cannot be allowed to hold back other areas of trade talks, as it has in the past. However, the basic stance of the EU Commission and Japan, despite what is said in public, is essentially protectionist. They line up against the US and Cairns Group, who are basically advocating a much freer trade environment, and this means that compromise is inevitable and progress slow. Some will hang on to what they have for as long as possible, but the long-term direction of change is clear. It will favour liberalisation, market forces and genuine competitive advantage.
In the produce sector, however, one issue dominates: the banana question, which has been rumbling on for most of the 1990s. Although the introduction of the "First Come, First Served" scheme might be seen as an uneasy peace breaking out, more delay in reaching a lasting solution seems almost inevitable. In the meantime the banana sector has faced a good deal of consolidation at customer level, low prices, lack of take-up in new markets, unfavourable exchange rates and, more recently, high fuel costs.
"Survival of the Fittest"
Over the last decade there has been a relentless move towards a reduced supply base, the need to give major retail customers greater continuity, replacement of traditional "deal making" with greater technical expertise, increased importance of food safety issues, costs driven out of the distribution system and the need to identify new sources and products. The maxim has become "Survival of the Fittest". Scale of activity has become critical. The growth and consolidation of the major retailers has become immense with the leading retailer in the world, Wal-Mart, having a turnover of some US$150bn, dwarfing all others, even the leading EU based retail groups.
One potential future scenario could be an industry dominated by the spectre of over-supply and little in the way of added value, a producer-led mentality characterised by extreme price pressure, fragmented supply base, static and distorted markets and an extremely aggressive customer base.
"The 'Category Captain' concept is still relatively new to the fresh produce sector"
The alternative however could be very different, but will require the industry to view its market position in a different light. The fact that the major retail customers now have such enormous technical and marketing clout can present major opportunity areas for those suppliers prepared to invest in the human, physical and financial resources required to service them. The development of the "Category Captain" concept is still relatively new to the fresh produce sector. However, for those that adopt its principles, there are exciting potential rewards in the form of increased sales, continuity of business and the development of new partnerships with retail customers, where the supplier has new levels of responsibility; something the industry has been calling for over many years.
Growth of foodservice and e-commerce
In the past, business has been largely about supplying to order, but with the growth and consolidation of the foodservice sector and the development of e-commerce, there will be new routes to market for fresh produce suppliers to consider. The level of medium-term economic growth expected in Latin America, Asia and even in the FSU will open up new areas of opportunity for go ahead suppliers, especially as the leading international retail chains look to develop their presence in these markets.
The impact of IT in all areas of the supply chain, not least in distribution and marketing (where there will be further opportunities to re-evaluate supply chain costs and alliances), will continue to present new areas of innovation for the sector. Economic factors will also have a radical impact on the market, not least in terms of the breakdown of the mass market in developed economies such as the EU, Japan and North America. This will produce a much more fragmented consumer base than in the past and present new opportunities for product and market segmentation. There will also be enormous growth in the number of "affluent consumers" in parts of Asia that will see food tastes and eating habits move well away from basic staple and traditional products, towards imported, semi processed and packaged food products.
It goes without saying that doing this at a competitive price is a pre requisite; not automatically the lowest price, but one which is perceived to give best value for money.
To some extent, production will have to move away from small-scale, inefficient, protected agriculture underpinned by subsidy, to much more professionally oriented farming operations, dealing in open competition, with a fair degree of scale and high degree of efficiency being key to overall success. In this sort of environment, evaluating the risk/ reward matrix on investment decisions becomes a much more challenging prospect. Whereas most fresh produce companies have made their money from operating in reasonably "safe" markets, albeit highly competitive ones, they will increasingly need to be thinking about operating in areas where the degree of inherent business risk is much higher. China, which perhaps presents the most exciting opportunity of all, also presents the highest degree of risk.
Clearly the "fresh produce world" will change dramatically over the next five to ten years. Amongst the winning characteristics will be access to finance, clear communication with supply chain partners, broad market coverage, innovation (not just in terms of the product, but also in terms of the customer service provided too), development of genuine partnerships and alliances with both major players at the POS and other suppliers too, a highly flexible approach and a clear move towards either a widely based product portfolio. Successful horti-business companies are likely to be those that take advantage of the opportunities that deregulation and a move towards comparative advantage will produce, those who can balance supply more closely to market demand and replace the traditional "producer led" approach with a more clearly defined "market led" strategy. The lip service often paid to cooperation with suppliers in other countries needs to give way to genuine actions.
Changing market dynamics will produce a series of new opportunities, especially as the enabling environment in emerging markets continues to improve. Experience suggests that fortune favours the bold, but at the same time, companies will need to be strong, proactive, forward-looking, open to change and prepared to think more strategically than in the past. This means balancing long and short-term considerations. The key to much of this is achieving industry and market deregulation, understanding the nature of market change over the mid to long term and the implications of this on the business. There is a lot to play for!
By John Giles, Promar International
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