Everybody wants to get up curves as rapidly as possible these days so that it is rare to find one going in a different direction but I would like to share with you a curve I call the Consumer Proximity Curve. It is one, which over the years has often helped me to understand what is going on in international food markets and – more important still – appreciate what might happen next.
It is illustrated in the following chart.
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The first thing to notice about this curve is that there is no scale and secondly what is meant by “proximity of power” ? Dealing with the power axis first, I mean by this who has the control? – and how close is it to the consumer?. There is a doctoral thesis for somebody here but I would think that the degree of control would correlate closely with the margins being achieved at different periods of time. In Britain in the fifteenth and sixteenth centuries various bodies had the monopoly rights to import highly valued products such as spices and made considerable fortunes. The arrival of merchant ships on an irregular and uncertain basis created temporary monopolies even where
these were not protected by legal charter.
The absence of a scale measured in years is deliberate. In the case of Britain, which was the first country to industrialise, the development of steam power in the eighteenth and nineteenth centuries moved power into the hands of factory owners. Similarly, changes in transportation and communications technology (the combustion engine and the telephone in particular) gradually moved power away from the manufacturers during the second half of the twentieth century in favour of the retailers and this quantum change in technology seems to be an essential element in bringing about the onset of the next stage. Now four chains in the UK control most food sales. Where this level of concentration occurs it is usually accompanied by a high level of own label activity e.g. 45% in the UK. Manufacturers are having to pay “slotting fees” and commit to heavy advertising expenditure just to be present with their own products in some of the larger outlets.
Today in developed societies, consumers have both the income and the access to private transportation to permit them to consume the greater part of their food needs outside the home. Retailers have tried with some success to keep their share by opening in store coffee shops and introducing ready meals with a high level of pre-preparation and convenient in-home finishing but food service is growing faster than food retailing. The proximity of the centre of power has moved steadily closer to the consumer or rather the ambit of control of the consumer – surely the natural consequence of marketing, which puts the consumer’s interests first.
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By GlobalDataAll of this has happened in Britain over the space of four to five centuries. In Middle Eastern markets such as Saudi Arabia where IMES is heavily involved, the process has happened over a much shorter time span – about thirty to forty years and there is a degree of truncating and overlapping taking place with the movement of power to the retailers not over while the food service sector is growing strongly. We are still regularly approached by would be entrepreneurs who believe a new factory could be a licence to print money although their chosen sector is awash with surplus capacity.
In the Middle East there has been a recognition by leading Western retailers that they could perhaps benefit by exploiting favourable conditions, which no longer apply in Western Europe. The French multiple chain Continent is having considerable success in the UAE and, Sainsbury, currently under severe pressure in the UK, has just taken over a chain of supermarkets in Egypt.
The key technological change, which is now clearly driving developments at the lower end of the curve is the availability of low cost IT and especially data bases and electronic communications. There are some who maintain that this so-called “new paradigm” alone is holding up a US stock market, which should by now have undergone a correction. Spending in the US in 1997 on computers and telecommunications equipment accounted for 40% of the total investment in capital equipment by American firms. If all the additional equipment needed for gathering, processing and transmitting information is included the total accounts for 12% of America’s capital stock which is interestingly the same as the railways at the peak of their development in the late 19th Century.
Fibre optic cables plus agreed computer network standards are leading for the first time to a separation of distance from telecommunication costs. There are now estimated to be 6 billion computer chips operating in the world. These are dumb nodes like the neurons in our brains. Connected up they can be expected to yield ever smarter results.
The really intriguing questions are just how far can developments such as these go in moving power ever closer to the consumer? Are there any innovations currently identifiable, which are within the scope of behaviour predicted by the model and therefore likely to be adopted?
Except perhaps for the very largest manufacturers, benefiting from the lowest costs, other suppliers and retailers are having to rely more on better information to add value by targeting their products more closely to their chosen consumer groups. Sophisticated data bases such as those resulting from the rapid development of loyalty cards are allowing a better understanding of customer buying habits and permitting this targeted marketing. Such information is even being fed back by retailers to their suppliers through integrated intranets, a form of co-operation which would have been unimaginable twenty years ago but which had cut the average size of inventory held by the major British supermarket companies from 5.1 weeks in 1980 to 1.5 weeks in 1996. Although a new consortium of suppliers and retailers has been established in Europe (ECR) to save an estimated potential $33 billion yearly through the more efficient supply of food products, many manufacturers still believe that they should keep their distance from the powerful retail chains to avoid them bringing out own label versions of new products or even betraying them to rival producers in a bid to lower supply costs. However all of this may turn out to be only last ditch defensive measure by suppliers and retailers. The really critical developments may be the following.
Early systems of virtual supermarkets on the Internet with ordering and delivering are proving more popular than expected e.g. Tesco in the UK. Consumers appear to be willing to pay a small charge have their groceries delivered directly to their homes or even their offices (an approach used by Waitrose). Companies such as NetGrocer and PeaPod have similar schemes in the US. Consumers are no longer prepared to endure the hassle of supermarket shopping. In the US it is forecast that households regularly using online services to buy groceries and similar products will rise from 200,000 currently to 15-20 million by 2007. This will affect consumers at all levels of income and education and has been forecast to replace at least half the US average of 17 monthly shopping trips. The main problem areas are in converting the electronic order to a form where it can be assembled efficiently in the store and in achieving delivery when the consumer is present. Another effect of low cost electronic communications i.e. a greater level of home working will at least assist in resolving the delivery problem.
While some existing retailers have been quick to set up virtual on line outlets, other completely new organisations have entered retailing in only electronic form. The best known example is perhaps the new bookseller, Amazon whose stock price presently bears no relation to any earnings record. Some of these new entities are even outsourcing distribution. Is it stretching the imagination too far to foresee large production/storage/despatch centres serving on line retailers and even on line specialist food service suppliers under contract to the virtual stores? It is plausible to imagine some of the capital now tied up with the producers of branded food products will be redirected to these types of operation.
There are two very recent developments which offer a glimpse of the ultimate power scenario and these must be really scary for any retailer. They are the so-called “roboshoppers” (intelligent shopping agents) and electronic auctions.
Intelligent shopping agents are pieces of software which automatically and rapidly comb the Internet on behalf of the consumer to discover which on line retailer is prepared to supply the desired product at the lowest price. One such agent, Netbot’s Jango even has filters to overcome problems of comparing product offerings and sites blocking such automated approaches.
A related approach is that of the electronic auction where consumers bid for products on line. A new twist to this has been provided by Priceline who allow their users to name the price they are prepared to buy at. Priceline then endeavours to match the buyer with a seller, pocketing any difference as its margin. If that can be done for food then that may be about as far as it is possible to travel on the consumer proximity curve apart of course from a computer chip implanted in the brain and a drip feed!
