AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

The Fresh Food Ambidextrous Challenge – Michael O’Keeffe Company Director, O’Keeffe & Associates

Balancing consistency and volatility is one of the biggest challenges facing fresh food – produce, meat and seafood – retailers and suppliers. The ultimate aim is to provide consistent supply and quality product all year round thus generating consumer confidence and repeat purchase, whilst simultaneously managing the volatility inherent in agricultural-based supply systems.

Start with consistency. Fifty-two weeks supply of a consistent quality product at a stable price encourages consumer confidence, repeat purchase habits, leading to demand growth. Such products lend themselves to brand development. Retail operations and merchandising activities are greatly enhanced. Planograms can be developed and executed across the retail chain. It is no accident that fresh food retailers globally, have encouraged suppliers to meet their requirements for 52 weeks of stability and consistency.

Integrated supply chains have been developed, with the growth of many categories, as suppliers and primary producers strive to align their businesses to retailer supply chains. During this process successful suppliers have been rewarded with volume growth which has underpinned their profitability.

All the above sounds logical and beneficial to retailers and suppliers.

However, there are a number of hidden but persuasive costs associated with stable fresh food marketing programs. By striving to mimic grocery and processed food categories, fresh food retailers and their suppliers can stumble into a number of pitfalls. The potential unique emotional links with the consumer can be constrained, if the grocery model is blindly adopted.

First, extending the growing season to maintain supply consistency can lead to cost increases for primary producers. Modelling in the melon and lamb production systems indicates that the increased price received does not typically compensate the grower for reduced yields/output. Growers who produce out of their optimum season are either unaware of their true costs or aim to “please” their retail customers. Primary production in the optimum growing season for each region is the most profitable option for farmers – and delivers the optimum eating experience to consumers.

Second, the reduced quality that is usually associated with shoulder-season production fails to fully meet consumer expectations thus dampening demand. Variable quality during the shoulder seasons undermines the whole reason behind consistent 52 week supply. It is pointless to invest in a marketing program when the product fails to delight consumers with respect to flavour and taste. Consumer confidence is destroyed in produce for example, when the alluring colour of the product has absolutely no relation to the disappointing flavour on the inside.

Third, a commitment to year-round consistency also has subtle but important volatility management implications. With some products volatility can be partly managed through storage (such as apples), as part of the ripening process (bananas), or during the production process (feedlot lambs or cattle). Many products, on the other hand, are distinguished by extreme volatility and variability. Products with:

  • A short shelf life, such as tomatoes or strawberries,
  • Volatile or seasonal growing patterns such as zucchini, melons or lamb,
  • Yield volatility such as potatoes,
  • Quality variability within the crop such as stone fruit,
  • Volatility as a result of carcass balance in the meat industry.

Supply as well as demand volatility is an inherent feature of these products, it has to be managed and does not go away, regardless of consistency efforts. It should also be noted that climate change is likely to increase supply volatility – the balancing challenge will continue.

Volatility leads to opportunity for some players. Morrisons Supermarkets in the UK and Harris Farm Markets in Sydney, are examples of retailers who have business designs that leverage volatility. Other retailers such as Tesco and Woolworths, whose mantra is to impose consistency, need to be mindful that they do not create volatility related opportunities for their more nimble competitors.

Fresh food firms need to be ambidextrous, the skills required to live in an integrated supply chain world which dictates consistency, are different to juggling in a volatile world. A “consistency” world requires marketing and branding, collaboration and planning over longer time frames. Volatility requires market intelligence, flexibility and speed. Balancing these two different perspectives within a single organisation culture is not easy – but will lead to a distinct competitive advantage.

For example, Overwaitea Food Group, a regional supermarket chain in Western Canada, in a joint venture with Vantage Foods, has built a system that successfully balances consistency and volatility in the meat category. Vantage Foods provides case-ready meat products to Overwaitea supermarkets, under the Overwaitea Western Family brand. Overwaitea is responsible for procurement of primals into the system and Vantage manages meat aging and packing on behalf of Overwaitea.

This business model means that Overwaitea is able to exploit beef market volatility and simultaneously build brand consistency for consumers. The system, rather than any individual firm provides the balance.

Seasonality provides another mechanism to better balance consistency and volatility. If the requirement for 52 week supply is relaxed then re-injecting seasonality opens the possibility for more profitable primary production and higher levels of consumer satisfaction. Both suppliers and retailers will be better able to balance consistency and volatility through seasonality.

About the author

Michael O’Keeffe is a company director and advisor to fresh food firms globally. Michael is Founding Coordinator of the Global Fresh Food Innovation Network, a group of fresh food companies from the UK, USA, Canada, and Australia who share best practice and innovation ideas.

Michael is Senior Visiting Research Fellow with the University of Kent in the UK, and is associate course director of the Produce, Meat and Food and Grocery Industry Executive Development Programs conducted at Mt Eliza.

Michael can be contacted at michael@okeeffeaa.com or +61 402 215 963