Food and drink companies don’t generally have an easy time. They have to work hard for their profit margins and be continually vigilant for the new growth areas and technologies that can give them a premium or lower their costs. That vigilance needs to pay off because the pressures are mounting on the food and drink industry’s margins.
One source of pressure is the continuing battle for market share at the supermarket checkout. Every bit of pain felt by Sainsbury’s, ASDA and Tesco is being transmitted back down the supply chain to food and drink companies. And, if the arrival of Wal Mart wasn’t enough the hype, and real marketing spend by supermarkets and others, being exerted to woo internet customers is also contributing to the pain of the UK’s food retail sector. When supermarket margins wobble food companies can expect to “feel their pain”.
Remember, every new internet food customer is one less customer at the checkout so it only needs a significant minority of existing customers to migrate towards the new internet ordering and delivery services for an impact to be seen in the checkout queue. Remember also that the Prime Minister, no less, has said that everyone in the UK will have internet access by 2005 – and that Alta Vista and BT have started a process which will inevitably lead to completely free internet access. We are not just talking about a different way of working now – this is more like a different way of living.
It’s too early to make dramatic predictions about how all this is going to turn out in the UK but, if examples like webvan in the USA are successful, the UK’s food retail scene is set to have even more change in the future. Webvan is an experiment being run by George Shaheen, former boss at Anderson Consulting (see www.webvan.com). Its financial and infrastructure commitment is solid and if its US customers want this sort of service it may only be a matter of time before UK food retailers will be even more squeezed than they are now as overheads and traditional costing structures make them.
How can food and drink companies resist the pressures on their margins that this restructuring of the retail scene will bring? There are several answers and one of them was exhibited by Diageo a few weeks ago when it announced a shift towards web-based supply chain activity. If this action has the same success as seen in other companies in the USA a potential cost saving of up to 10% is possible. Another answer is shown by the some of the smaller speciality food manufacturers who are trying to use the web to get a direct route to market (see, for example www.graftonvillagecheese.com and www.tjd.com). Usually in alliance with other SMEs this strategy allows direct sales to consumers and thus access to the distributor’s margin.
One thing is for sure, to that long list of raw materials supply, food technology, an retailers’ specifications which all food and drink companies have to consider daily, we can now add the internet. In classic terms, it’s both a threat and an opportunity.
Dr John Strak
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