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2 Changing food marketing systems in western countries

M.T.G. Meutenberg andJ. Viaene

2.1 Introduction

Agricultural and food products have traditionally been marketed through institutionalized markets,suc h ascommodit y exchanges,auction s andwho ­ lesale markets. Pricesar eth e centralcoordinatio n mechanismsi n such mar­ kets.However ,agricultura lan dfoo d markets havechange d drastically in the last few decades. Perhaps the most fundamental change is the shift from production to market orientation.I n ordert o establish astron g competitive position in their market, agricultural and food companies have to produce goods andservice s which match the wants and needs of consumers. In this contextth ecoordinatio n ofcompan ydecision si n thefoo d marketingsyste m has become extremely important. Consumer orientation, competitive strength and marketing efficiency are key words in agricultural and food marketing. In conjunction with this development, food marketing systems have become more diverse and moresophisticated .

Thischapte ri sconcerne dwit h changesi nth efoo d marketing system,i n par­ ticular in the European Union (EU).First , aframewor k ofth e marketingsys ­ tem is proposed in order to analyse marketing and markets of agricultural andfoo d products.Afterward s developmentsi n the environmento fth e food marketing system are reviewed. Subsequently structural developments in food marketing systems areanalysed .Attentio n will bepai dt o actorsi n the marketing channel, such as farmers, wholesalers, the food industry and retailers. Marketing strategies which have become important in the Europeanfoo d marketing systems arereviewed .Th echapte r endswit h some conclusions.

2.2 Thefoo d marketing system:a framewor k

Direct marketing from farmer to consumer is the exception rather than the rulei n Westerncountries .Agricultura lmarketin g channels haveevolve dint o food marketing systems consisting of different actors, such asfarmer ,who ­ lesaler, the food industry and retailer.

Figure 2.1 Farmer Farmer Farmer Farmer Industry Basicpattern so f Consumer Middleman Wholesaler Wholesaler Farmer food marketing Consumer Retailer Industry Industry channels Consumer Retailer Retailer Consumer Consumer Changing foodmarketin gsystem si n westerncountrie s

These actors, sometimes organized in aspecifi c way, such as cooperatives, have emerged in the food marketing channel for reasons of effectiveness, efficiency or equity. Forinstance ,dair y cooperatives havebee nse tu pi n the past in order to: (a) increase marketing effectiveness, e.g. by productinno ­ vation and better product quality; (b) improve marketing efficiencye.g . by economies of scale in processing and logistics, and (c) enlarge equityb y strengthening farmers' bargaining power vis-à-vis other actors in the mar­ keting channel. The exchange process for food and agricultural products can take place through institutionalized markets, such as commodity exchanges, auctions andwholesal e markets. Other types of exchange processes,suc h asa direc t relationship between producer and retailer, arebecomin g more popular.Th e structure of markets and marketing channels has become more diverse and depends on the marketing strategy pursued by the actors of the food mar­ keting system. In some cases food marketing systems need specific inputs within the context of their product policy, and for that reason agribusiness companies, such as mixed feed or seed companies, are becoming a part of the system. In other cases food marketing systems shrink by excluding or integrating companies,e.g .th e exclusion orintegratio n ofa wholesalecom ­ panyi n the exchange process between producer and retailer.

The analysis of food marketing and markets should cover the system of actors involved in the marketing of a food product. In real life there is a greatvariet y offoo d marketing systems rangingfro m conventionalmarketing channels, whereactor s areconnecte d by markets andcoordinate d bymarke t prices,t o vertical marketing systems, where actors operate onth e basis ofa coordinated marketing plan.

Essentially an analysis of food marketing systems is based onth e following questions: Which marketing functions are performed? How is the perfor­ mance of these functions institutionalised? What kind of relationship exists betweenthes einstitutions ?Thi sframewor k canstructur eth e analysiso fcur ­ rent dynamic food marketing systems.

2.2.1 Functions

The performance of marketing functions should be based on a thorough knowledge of the environment of the marketing system.Variou s aspects of the environment can be differentiated: the general environment, which inf­ luences mediuman dlon gter m marketing policies ofa company ,an dth e task environment, which is relevant in a specific product-market combination. Within the general environment adistinctio n can be made between the eco­ nomic, demographic, social, political, physical and technological environ­ ments. On the demand side,trend s in the generalenvironmen t causechan ­ gesi n consumer wants and needs with respect to food products andservi ­ ces,and ,o nth esuppl yside ,ne wsystem so f production andinformation .Fo r instance, many agricultural and food companies are interested in future Chapter 2

developmentsi n biotechnology andi n their acceptance byconsumers . These environmental trends determine the opportunities for and threats to food marketing systemsi n the medium and/or long run.

Thetask environment of afoo d marketing system consists of: (a) consumers or customers, as well as consumer groups and lobby groups representing societalinterests , (b) competitors who operate in the sametarge t market; (c) agovernment , which both stimulates andregulate s agriculturalan dfoo d marketing. Every product/market combination has a specific task environ­ ment. However, task environments of many product-market combinations havedevelopment s in commonsinc ethe y resultfro mth e samegenera lenvi ­ ronment.Thes ecommo nchange si nth etas k environmentwil lb einclude d in our discussion ofth e generalenvironment .

2.2.2 Institutions

How should the fulfilment of marketing functions be institutionalized, in order to best serveth e chosentarge t group? Should companies differentia­ te or integrate specific marketing functions and which criteria should be applied for that purpose? In general,suc h decisions arebase d onth e crite­ riao f effectiveness, efficiency andequity. Theories about marketing channel structure use specific criteria which essentially are related to these three basic criteria. For instance, marketing theories about the length of marke­ ting channels, use efficiency/costs criteria (Stigler, 1951; Bucklin, 1965; Mallen,1977) .Effectivenes s criteria,suc ha ssale svolum ean dmargins ,hav e also been used in theories about channel length (Aspinwall, 1962). Equity criteria, in particular channel power, have been applied in the behavioural analysis of marketing channels (Stern, 1969; Brown et al., 1995).

2.2.3 Relationships

Therelationshi p between actors in the food marketing system is acorrelat e ofth e marketing strategy and marketing functions to beperformed .I n spot markets relationships between actors areweak .The y are close in food mar­ keting systems when marketing policies have to be coordinated precisely, such asi n the case of marketing private brand names. These relationships between actorsi n thefoo d marketing system can beinforma l or legally bin­ ding. Consequently, an analysis of food marketing systems has to consider the implications of changing marketing strategies for the relationship between actors in thesystem .

In summary,th e proposedframewor kfo r analysing changing food marketing systems perceives the actors involved in the marketing of food productsa s members of amarketing system which hast o respondt o changesi n its envi­ ronment with an effective marketing strategy. Also, autonomous develop­ ments within companies of the system, such as the development of new retail concepts, new processing technologies and breeding methods, will Changing foodmarketin gsystem si nwester n countries

have a strong impact on food marketing. Good relationships between the actors of afoo d marketing systemar e crucialfo r good performance.

Figure2. 2 Aframewor kfo rfoo d Economic, Demographics, Social marketingsystem s GENERAL TASK i—- Industry £ E N E 1 f N — Farmer V N V V ! v I I 1 I i R R —- Wholesaler R R 0 0 1 U 0 N Industry N N M ,v, N M E 1 E M E ! N — Wholesaler N E T Ï N ; 1 N T 1 T CONSUMER. rOMPrTTTCR _ (.lKll<ÎJW,(Nr, L:!ffcVibIS GENERAL Political, Physical, Technological

2.3 Developmentsi n the environment ofth efoo d marketingsyste m

Changesi n the environment ofth e food marketing system are opportunities andthreat s for marketing strategies. We will discussthes echange sconcise ­ ly and elaborate sometopics .I n our exposition wefollo w the classification outlined in Section 2.2, of economic, demographic, social, political, physi­ calan dtechnologica l environments.

2.3.1 Economic environment

Theeconomi c environment influences marketing strategies of the foodsys ­ tem in various ways. Percapit a disposable income is abasi c determinant of food consumption. Its quantitative impact can be expressed in the income elasticityo ffoo ddemand .Incom e elasticities ofth edeman dfo r genericfoo d products aresmal li n Western countries.Thi si s one of the reasons for satu­ ration in food consumption: the well-known Engel's law states that with increasingincom eth e percentage ofconsumers 'disposabl eincom espen to n food decreases (seetabl e 2.1). However,i t should bekep ti n mindtha t con­ sumer demand for built-in services andfo r quality is moresensitiv e to inco­ mechange stha n the demandfo r food in terms ofvolume . Chapter2

Table 2.1 Year Food,drin k Total Food,drin k and Percapit aconsump ­ andtobacc o consumption tobacco asa % of tion offood ,drin k (ECU) (ECU) total consumption andtobacc oi n EL) (EEC), expressedi n 1982 J) 1137 5059 22,47% ECU and as a % of 1985 2> 1169 5613 20,83% thetota lconsump ­ 1989 2> 1661 8227 20,19% tioni n EEC 1993 3> 1852 9924 18,66%

!) EUR10 2) EUR12 3> EUR15 Source: Eurostat

Thevolum eo f grossdomesti c producti n the EU increased by2.75 %i n 1994, and by 3.0%i n both 1995 and 1996 (Centraal Planbureau, 1995, p. 38). It is expected that per capita income in Western countries andi n many other parts ofth e world will stillincreas e substantially yet. Somemiddl e andeas t European countries also realizedsubstantia lincrease si n gross nationalpro ­ duct, e.g. the gross domestic product of the Visegrad countries (Czech Republic, Hungary, Poland and Slovak Republic) increased by 4.0%i n both 1994an d 1995 %, and by4.5 %i n 1996 (Centraal Planbureau, 1995,p . 44). Theexpecte dfutur eincom egrowt hi n Westerncountrie s createsonl y modest opportunities for avolum e increase of per capita food demand, because of low income elasticities of demand. The Dutch Planning Bureau (Centraal Planbureau,1992 ,p . 160) projecteda nannua lincreas ei n food consumption in the Netherlands of between 1.6-2.6%fo r the period 1991-2015. Foodsale si n acountr y not only depend on average per capita disposa­ ble income, but also onincom e distribution. In fact, it is argued that inco­ medistributio n in many Western countries is becoming moreskewed .Whil e therei sa larg enumbe ro fconsumer swh oear nsubstantia lincome si nboom ­ ing Western economies, the number of low income consumers, such as unemployed people, immigrants and single mothers, is increasing. Greater income inequality increases opportunities for market segmentation in food marketing, such as by providing price conscious consumers with low prices or by providing quality conscious consumers with high quality products.

Another change in the economic environment of food marketing systemsi s the shift away from government intervention towards the primacy of the market.Thi si s reflected in changing agricultural policies.Thi s point willb e elaborated further in our discussion ofth e political environment.

2.3.2 Demographic environment

TheE U population isexpecte dt o increaseonl y slightly in the period 1995 to 2000, from 371.5 million to 375.0 million, and is projected to decrease in the first half of the next century, to 337.3 million by 2050 (Euromonitor, 1997,p . 128).Thi sstabilit y (albeitwit h asligh tdecreas ei n population size), reinforcesth etendenc ytoward s saturationi n EU food markets.However ,th e Changingfoo dmarketin gsystem si nwester n countries

total world population is expected to grow substantially from 5.7 billion in 1995 to 8.1 billion by 2025 (Bos et al., 1994), which will stimulate global food demand considerably. Another important demographic development is a greying population: whilei n the period 1990-199 5 the EU population increasedfro m 365.7 mil­ lion to 371.5 million, the number of persons aged 65year s and overincre ­ asedfro m 52.7 million to 56.0 million (Euromonitor, 1997,p . 123,128). Studiesi n the United States suggest that there is nofundamenta l diffe­ rence betweenth e food consumption pattern of elderly people and of other consumers, excepttha t they normally havea lower and less nutritious food intake and that they need less energy (Senauer, 1991). In the Netherlands the intake of calcium and phosphate by elderly people has been lower than the recommended quantities (Westenbrink, et al., 1989). The greater need of elderly people for food products accompanied by services, both in the stage of purchasing and of preparation,i s also important.

Other demographic developments in the EU which are relevant to food mar­ ketingsystem s includesmalle r families, better education anda nincreasing ­ ly multiracial society. Thetren dtoward s smaller families,wher e both partners havea job , sti­ mulatesth e demandfo r convenience and'awa yfro m home'consumption .I n 1991expenditur e on 'away from home' consumption in the EUwa s highest in Mediterranean countries: per capita expenditure on 'away from home' consumption in 1991amounte d to $760 in Spain, $600 in France and Italy and $460 in Germany and United Kingdom (quoted from Euromonitor by Gaasbeek, 1996, p. 9,10). However, it appears that expenditure on snacks andfas tfoo d is higher in Germany andth e UK than in Mediterranean coun­ tries.Th eMediterranea n consumers owethei r leading position in 'awayfro m home' consumption to frequent visits to restaurants and hotels. European markets for fast food andtakeawa y meals areexpanding . It hasals o been observedtha t per capita consumption of fresh products sucha smilk ,eggs , andpotatoes ,i snegativel ycorrelate dwit h householdsize . Whetherthi s isth e consequence ofa highe r consumption levelo r theconse ­ quenceo f morewast ei s notye t clear (De Hoog,1992) . Foodmarketin gsys ­ tems respond to the trend toward smaller households, where both partners have ajob , by providing better services such assmalle r packages and more attractive opening hours ofshops .Th emushroomin g offas tfoo d restaurants in Western countries isals o relatedt o demographic developments. Peoplear e becoming better educated. Forinstance , while 22.7 %o f the bread winners of Dutch households had at least high school education in 1983,thi s figure increased to 31.4%i n 1996 (AGB, 1992; GFK,1996) . As a result, consumers arebette r equippedt o understand andintegrat e informa­ tion from commercial and non-commercial sources. However, there is not necessarily a strong correlation between education and food consumption behaviour. Forinstance , no consistent relationship wasfoun d between the levelo f education andqualit y consciousness with respectt o meatconsump ­ tion (Steenkamp, 1989).

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Animportan t demographic developmenti n Western Europei stha t societyi s becoming increasingly multiracial, at least in the big cities. This develop­ mentstimulate s variety in food supply. It increases opportunities for ethnic food marketing.

2.3.3 SodaI environment

Socio-cultural changes in the Ell which are relevant for food consumption are substantial. Heilig (1993, p. 81) draws attention to three major trends in food preferences,whic har erelate dt o changingvalue san dlif e styles:th e replacement of simple traditional dishes prepared from raw products in the household with refined, industrially produced food; the disappearing sea­ sonal cycle in food consumption and atren d towards 'exotic' food. Future changes in values and lifestyles will have agrea t impact on food consump­ tion. Popcorn (1992) suggested social trends for the US economy, which seem relevant for the Western food consumer too: cashing out, cocooning, down-ageing, economics, fantasy adventure, 99 lives, save our society (S.O.S.), small indulgences, staying alive, and the vigilante consumer. 'Fantasy adventure' referst o opportunities for emotionalvalue si n food pro­ ducts (exotic food, regional products), '99 lives' refers to the fact that con­ sumers liket o havea rang eo ffood savailabl ewhic hfi t specific consumption situations. The 'S.O.S.'tren d stimulates the need for sustainably produced food, 'smallindulgences ' offer opportunities for delicatessen and speciality foods, 'staying alive' fosters consumer interest in healthy food, and the 'vigilante consumer' requires good quality andsaf e food. Wewil l discusstw o elements ofth e changingsocia lenvironmen t offoo d marketing systems, namely changes in values and changes in life styles. Thesesee m particularly relevantt o innovation in food marketing systems.

Changes in values

Valuesar eth e mentalrepresentation s ofimportan t life goalstha t consumers aretryin g to achieve. Rokeach (1973) makes a distinction between terminal values,th epreferre den dstat eo fbein g(e.g .freedom , self-respect,happiness ) andinstrumenta lvalues ,cognitiv e representations of preferredmode so fcon ­ ducto r behaviour (e.g.competent , courteous,self-reliant ) (seeTabl e2.2) .

Various studies have been made of the value systems of European consu­ mers. Onestud y observed muchsimilarit y in the ranking oftermina lvalues : happiness, nicefamily , aworl d of peace andtru e friendship ranked highest inth e Netherlands,Grea tBritain ,German yan dItaly .Interestingl y therewa s a substantial difference in the ranking of the value 'a beautiful world': 9th in the Netherlands,6t hi n Germany,9t hi nItal y andlowe rtha n 10thi nGrea t Britain (DeWaard , 1990,a squote d by Steenkamp, 1992, p. 14).

Discussing changingvalue si n Western civilization, Plummer arguestha t the self-fulfilment ethic,bette r quality of life,an d'wor kt o live'ar eo fincreasin g

11 Changing foodmarketin gsystem si nwester n countries

Table2. 2 InstrumentalValue s TerminalValue s Instrumentalan d (Preferred modes of behavior) (Preferreden dstate s o TerminalValue s accordingt o Competence SocialHarmon y Rokeach Compassion PersonalGratificatio n Sodality Self-actualization Integrity Security Lovean dAffectio n Personalcontentednes s

Source: Rokeach (1973) as quotedby Peter and Olson (1993, p.98)

importance (Plummer, as quoted by Engel et al. 1995, p. 627). Increasing importance ofthes evalue sinfluence s consumers'perceptio nan d evaluation of product and production systems,i n particular the importance ofsustai - nability (animalwelfare ,foo d safety, package waste and manure problems) in product evaluation. Consumers do not only demonstrate their environ­ mental concern by their food consumption behaviour, but also articulate their concern byjoinin g consumers'group s and environmental lobbies (e.g. Rifkin, 1992).Th eimpac t of these groups on environmentally friendly food production and marketing issubstantial .

Understanding the impact of values on food consumption is important for marketingstrategy .A mode lwhic hcentre so nth e relationship betweenvalu ­ es and product characteristics is the means-end chain model. According to Peteran dOlso n (1993, p. 100):'Researcher s havedevelope dsevera lmeans - end chain models of consumers' knowledge structure. Despite different ter­ minology, each modelinclude s the three levels of product meaning discus­ sed above - knowledge about attributes, consequences (benefits or risks), andvalues . Eachmeans-en d modelpropose stha t consumersfor m meaning­ ful associations that link product attributes with consequences andvalues. '

Attributes Consequences Values

Many means-endchai nanalyse s havebee n madefo r food products (e.g. van denAbeele ,1992) .

Changes in life styles

Lifestyles ,a summar yconstruc t defineda s 'patterns in whichpeople live and spendtime and money'(Engel , et al., 1995, p. 449), are related to con­ sumption patterns. While values are relatively enduring, life styles change morerapidl y (Engel,e t al., 1995,p .449) .The yar emeasure do nth e basiso f activities, interests and opinions of people. Food-related life styles have been analysed in some detail. For instance, it has been reported that the

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company GeneralFood sidentifie d asegmen t of health-conscious consumers andrepositione dit s Sankabran d ofdecaffeinate d coffeetoward stha t group of consumers (Engel,e t al., 1995,p . 454). Recently research hasbee ndon e byGruner t et al. onfoo d related life styles, defined as:'...non-produc t spe­ cific traits of people's purchasing motives,qualit y aspects,shoppin g habits, cooking methods, and consumption situations with regard to food.' (Grunert, et al. 1996,p .49) .O n the basiso f data from France,German yan d Great Britain these authors differentiated sevenfood-relate d life styles:th e uninvolved food consumer, the careless food consumer, the moderate food consumer,th e conservative food consumer,th e rationalfoo d consumer, the hedonistic food consumer,th e adventurous food consumer.Th eFrenc h con­ sumer appearedt o bea mor e hedonistic, and uninvolved or carelessconsu ­ mer, and the adventurous consumer was more important in Germany and Great Britain (Grunert, et al., op.cit.) .

Fischler (1993,p . 58) summarizedsocio-cultura ltrend si n foodconsumption : The socio-culturalcontex t ofculinar ysystem s ...whichtraditionall y determi­ nedwha t should beeaten , by whom,an dwhen , has rapidly changed.Socia l norms are eroding or loosening.I n all developed countries, market research showsth e existence of a trend towards apparently unstructured food intake. In France,fo r instance,i n agrowin g part ofth e population,th e structure of the traditional food pattern tends to become less constraining (length of meals, number of dishes,snacking ,skippin g courseso r meals,etc.). '

Thesesocio-cultura lchange screat eopportunitie s foran dthreat st oth efoo d marketing system. They stimulate new product development, repositioning of products andth e addition of services with the product.

2.3.4 Political environment

The following changes in the political environment of the food marketing system seem important for marketing strategies: (a) more open interna­ tional markets; (b) decreasing government support to agriculture; and (c) increasing concern of government about environment and healthissues . a) The rules to which member countries of the GATT are committed by the Uruguay Round,conclude d in December 1993, lead to more open world markets.Th emai n commitments are (seeAnania , 1997,p . 162): - reduction of marketinterventio n (measured bya nAggregat eMeasur e of Support) by20 %ove rth e six-yearimplementatio n period; - improved market access through replacement of non-tariff barriers by'equivalent 'tariffs ,an dthroug h reduction ofth etariff s unweigh­ ted average by at least 36%withi n a period of sixyears ; - reduction of subsidised exports by 21% andreductio n ofth e subsidy expenditure by 36%ove r aperio d of sixyear s uptil l 2001. b) TotalCommo n AgriculturalPolic y (CAP)-related expenditure amountedt o about 40 billion ECU in 1995,withi n an overall budget of about 75 bil­ lion ECU.Th e agricultural expenditure of the EUi s criticized by some

13 Changing foodmarketin gsystem si nwester n countries

member states because ofth e excessive costs ofth eCAP . The CAPrefor m of 1992,th e 'MacSharry' reform, consisted of three parts:a reductio n ofth e marketinterventio n pricefo r cerealsb yapproxi ­ mately 30 %, combined with compensatory income support payments per ha;a 1 5% reductio ni n the marketinterventio n pricefo r beef within three years; a number of accompanying measures related to environ­ mentallyfriendl y production,afforestatio n offar m landan dearl yretire­ ment schemes (SER,1996) . The costs of CAPwill , other things remainingequal, increas e asa result of the forthcoming EL) membership of some middle and east Europeanstates .A sa result , morechange sar ei n theoffin g andth e CAP will probably shift further from market intervention to income support. Totalagricultura lexpenditure s ofth e CAP areprojecte d byth e European Commission to increase from 43.3 million ECUi n 1990, to 50.0 billion ECU in 2005 (Commissieva nd eEuropes eGemeenschappen ,1997 ,p .95) . c) Governments arebecomin gincreasingl y concernedabou tth esustainabi - lity of the physical environment and the viability of rural areas. Agricultural policies arecomplemente d by ruralan denvironmenta l poli­ cies.Environmenta lpolicie s ofgovernment s compriseconstraint s to pro­ ductionan dmarketin g (environmental rights), eco-taxes, environmental covenants, and eco-labelling programmes.Ther ei s no one way solution for environmentalproblems . Manygovernment s combinedifferen t types of policies:'pus h strategies' which stimulate businesses to pursue envi­ ronmentally friendly methods of production and marketing;'pul l strate­ gies' which stimulate consumers to search for environmentally friendly productsan d'interfac e strategies'whic htr yt o makemarke tsuppl ymor e transparent with respectt o environmental friendliness.

2.3.5 Physical environment

Thedegradatio n of the ecological environment is a societal problem,whic h is relevantt o agriculture, the food industry and society at large. Manycon ­ sumers are aware of environmental problems, but are not knowledgeable in this respect, letalon ebehav ei n anenvironmentall y friendly way.Consumer s cannot distinguish the environmentalfriendlines s of aproduc t assuch .I t is a'credence 'attribut e which hast o bedifferentiate d in the market byinfor ­ mation provided with the product (such as by a label or a type of shop). Sinceenvironmenta lfriendlines s offers nohedonisti c utility, butsatisfactio n from socially responsible behaviour, this attribute is difficult to market. However, consumers appreciate environmental friendliness also, since this product attribute is perceived to beassociate d with animalfriendlines s and health (Oude Ophuis, 1992, p. 37) Limited consumer awareness andappre ­ ciation of environmentalfriendlines s offoo d products makesth e promotion of environmentally friendly behaviour by consumer groups and byenviron ­ mental lobbies important. In this context it should be notedtha t environmentalfriendlines s is not only difficult to evaluate for consumers but also for experts. Experts some-

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times havedifferen t opinions aboutth e urgencyo f environmentalproblems , such as globalwarming ,an d aboutth e methodology of measuring environ­ mental problems, e.g. life cycle analysis (e.g. Guinée, et al., 1993, asquo ­ ted in Simmons, p.254). Simmons (1996, p 252) argues: '..environmental problems cannot be defined exclusively in terms of objective physical pro­ cesses.Jus t asthe y havethei r origins in particular patterns of socialactivi ­ ty, sothei r significance andmeanin gfo r usi ssociall y negotiated.Th e'envi ­ ronment' is no longer something external to society but is, in a very real sense,implicate d in the complex patterns of socialan d economic activity in which weengage. '

Ecologicalaspect sar eparticularl y important for specificfoo d marketingsys ­ tems,suc ha sth e production andmarketin g of pigs and poultry.Th ewav eo f biotechnological inventions has also triggered discussion about the sustai- nability of food marketing systems.

2.3.6 Technological environment

Duringth e pastfift y yearsfoo d marketing systems haveexperience d agrea t many innovations, both process and product innovations. Technological developments areexpecte dt o changefutur efoo d marketing systems agrea t deal. New findings in the fields of information technology (IT), computer science,biotechnology , andtransportatio n methods will beintroduce d into the food marketing system. Key areas in food preservation and processing include irradiation, micro filtration, microwave pasteurisation, extrusion cooking and high-pressure processing. In addition, biotechnology offers a newspectru m of opportunities. Amajo r packaging trendi s packaging under modified and controlled atmosphere, preferably using recyclable or biode­ gradable materials. Thesetechnologica l developments create opportunities for new products and services, and are instrumental in decreasing marketing and production costs. Advances in information technology will also improve the speed and precision of exchange processes. Newexchang e methods, such asmarketin g throughth eInternet ,wil lemerge .Computerizatio n ofproductio nan dlogisti ­ calprocesse swil lfurthe r reduceproductio nan dmarketin g costsan dincreas e the flexibility offoo d marketing systems.Advance si n biotechnology enlarge opportunities for new products which fit specific needs, e.g. with respect to health and environment. However, many European consumers (or at least consumer groups) seemt o besuspiciou s about the health characteristics of food produced bymoder n biotechnological methods.Th eenormou s potential of newtechnologie s in food preservation, processing and packaging havet o beanalysed ,takin gint o account relations withth e consumeran dth e market structure (Viaene & Gellynck, 1996). It is of major importance to the food industry that consumer resistance and prejudice concerning innovation be overcome.I t is vitalt o know whether atechnologicall y newfoo d product or packaging respondst o consumers'need so rwil lb eaccepte d byth e consumer in ordert o determineit s economicfeasibility . Amajo rtas k liesi n closingth e

15 Changing foodmarketin gsystem si nwester n countries

communication gap between the scientist, technologist, and the consumer. The technological know-how has to be translated in understandable and acceptableterm sfo rth econsumer .Th econsume r hast o beabl et o makechoi ­ cesbase do ncredibl e andwidel y availableinformation .

2.4 Changingactor si n the food marketingsyste m

Changeso f actorsi n food marketing systems aret o a large extent arespon ­ se to a changing environment. Food marketing systems are also changing because of autonomous developments of actors themselves: companies invent new technologies and concepts which are transformed into pro­ duct/process innovations in the food marketingsystem . There is a great diversity of actors in Western food marketing systems. Nevertheless many actors show similar developments. An important one is the movetoward sconsume rorientation .Therefor ew estar t ourdiscussio no f actors in the food marketing system with the food retailer, being nearest to the consumer.

2.4.1 Food retailers

Trends in European food retailing since World War II basically concern the effectiveness and efficiency of policies, processes and organizations.

Effectiveness offood retailers: marketing polices

Food retail companies have become more market oriented. They areincre ­ asingly concernedwit h howt o servecustomer s bestthroug h specificmarke ­ ting policies. The width and depth of the product assortment are the cor­ nerstone ofth e marketing policy of afoo d retailer. This marketing policy is reflected in the type of store, such as supermarket, hypermarket, speciality shop or discount store (see Figure 2.3).

Figure2. 3 1=specialit ysho p Wide Storetyp ea s a 2=discoun tsho p function ofWidt h © © 3=traditiona lsupermarke t andDept ho f 4=discoun toriente d assortment © © market stall 5=hypermarke t nrpTii 6=qualit yoriente d DEPTHDeep Shallow hypermarket

® © Narrow

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Decisions with respect to the assortment, and its 'width and depth', have implications for other marketing instruments, such as price, promotion, location andopenin g hours. Forinstance ,th e wide and shallow assortment of discount stores goesalon g with a low retail price.Th e policy of anarro w and deep assortment byspecialit y shops leadst o high retailprices . Targeting of specific market segments, such as 'hurried consumers' or 'price-conscious consumers', is acor e element of many retailers' strategies. Positioningvis-à-vi s competitorsi n thetarge t market hasbecom ea strategi c issuetoo . Food retailers are constantly searching for new products and services, andadap tt o changing markets.Option sinclud e longer opening hours,deli ­ very at home, selling prepared meals and a location at convenient spots (e.g. petrol stations). While massdistributio n by supermarkets has becometh e dominant type offoo d retailing,th e speciality shop hasexpande dt o complement massdis ­ tribution bysupermarkets .Th eincreasin g attention paid byfoo d retailers to fresh produce is often implemented by setting up shops within the shop, which carry wide andsometime s even deep assortments. In this wayretail ­ ers respond to consumer demandfo r the convenience of one-stop shopping andt o the needfo r quality andvariety . Retailers benefit from newopportunitie s byintroducin g innovative retail formulas. Recent developments include home-delivery, drive-ins, automatic food dispensers,foo d shopsi n petrolan drailwa y stations.Thes ene wdistri ­ bution formulas offer awid e variety of choices and respond to the demand for availability of food wherever andwheneve r the consumer wishes.

Although retailing through the Internet is still at a very early stage in Europe,i t is expectedt o have potentialfo r the future.Th econsume r isals o becoming increasingly familiar with technology, which offers newopportu ­ nities for technology-based in-store promotions andadvertising .

Efficiency offood retailing; efficient logistics

Retailcost s per unit of product will (other things remaining equal) increase when assortments are broadened and services are increased. Consequently the shift towards larger supermarkets is reinforcing the efficiency drive of supermarkets. Lowpric estrategies , sucha sdiscounting ,als ostimulat e effi­ ciency andth e searchfo r low purchase prices byfoo d retailers. Efficiency improvements in food retailing are in particular pursued by logistical planning. The paramount importance of logistical efficiency is obvious in view of the large number of items per store and the number of outlets perfoo d chain.Ald i haveabou t 600 lines,Warehous e clubs typically about 3500, Carrefour about 5000 grocery lines, Casino about 9000, Sainsbury andTesc ostore s between 10,000an d 20,000 lines (Corstjens and Corstjens, 1995, p. 197). Albert Heijn, a food chain of the Dutch holding Ahotd, had 665 stores in 1997. Minimizing inventory costs, e.g. by conver­ ting storage floor space in supermarkets to sales floor space, by efficient

17 Changingfoo d marketing systemsi n western countries

transport routing, standardization of pallets and package size are devices to improve logistical efficiency. Technological innovations are helpful in this respect. For instance, advances in Information Technology, such as the use of bar-codes, scanning at check-outs and electronic data interchange have contributed to efficient sales monitoring and ordering processes. In logistical planning, concepts and models such as Just in Time (JIT), and route planning models contribute to higher efficiency. Logistical efforts of food retailers have decreased the lead time from supplier to food store substantially. (Table 2.3)

Table 2.3 Leadtime Supplier/DC DC/Store Lead-time from sup­ plier to distribution Past 120-48 hours 48-36 hours centre (DC) and from Present 48-24 hours 18-12 hours distribution centre Future 12- 4 hours 18- 4 hours (DC)t o store in the Dutch food chain Source: Wülemse, J.N. (1996) Albert Heijn

Logistical costs have also decreased through contracting-out of logistical functions. This is particularly the case in the UK, where already in 1989 spe­ cialist contractors were responsible for about 44% of retail logistics for gro­ cery multiples (Cooper, et al., 1994, p.114).

Low purchase prices are an important ingredient of a low-cost retail strate­ gy. The strong bargaining power of retail chains vis-à-vis suppliers is impor­ tant in this respect. In fact, food retail chains have substantial bargaining power because:

Table 2.4 Company Listing Turnover Net income Mkt. cap. European food retai­ billion US$ million US$ billion US$ ling groups:to p 10 by turnover Metro i Germany 31.19 235.72 4.97 Carrefour France 27.82 680.17 13.13 Promode s France 19.24 192.74 4.76 Karstadt Germany 17.51 123.01 3.09 J. Sainsbury UK 17.15 808.61 10.47 Ahold Netherlands 16.86 238.27 6.22 Tesco UK 15.25 573.8 9.11 P'Printemps France 14.97 290.46 6.81 Casino France 12.33 121.76 2.41

1 formerly Asko and Kaufhof Source: Poole (1997, p. 8) Adaptedfrom Financial Times (1996a)

18 Chapter 2

• food retail chains have become big companies purchasing products in otigopsonistic markets. As a result they are attractive clients for food manufacturers. In some cases concentration of purchasing by retail chains has been evenextende dt o internationalalliance s ofretai lcompanies ,suc ha s the German group Gedelfi, consisting of the chains DAGAB,Spar , Karstadt, Allkauf, Norma and Unigro (Patt, 1993,p . 86). • therei s asurplu s of production capacity in Western agriculture andfoo d industry. TheCA P ofth e EUha sstimulate d production. Notwithstanding the production limitation by quota (milk, sugar), and the recent shift from market support to income support, there is still productive over­ capacity. In the discussion paper of the European commission for the year 2000i t is arguedtha t overproduction in agriculture should befurt ­ her decreased by reducing price support (Commissie van de Europese Gemeenschappen, 1997). • most food producers supply products to the market which are only to a limited extent unique. Many innovations are modifications of existing products. Competitors imitate successful products before long. As a result food retailchain s canselec tfro m agrea t many alternatives. In viewo fth e strong bargaining power of retailchain si t isextremel y impor­ tant for food manufacturers to build aclos e relationship with food retailers. TheFoo dMarketin g Institute arguestha t this relationship should beguide d by the following principles: 'Focus on providing better value to consu­ mers,...Movefro m win/lose to win/win...Develop accurate andtimel y infor­ mation....Maximize value-adding processes....Develop a common and con­ sistent performance and reward system...'. ECR (Efficient Consumer Response) has become an important concept to frame the relationship between supplier and food retailers. The cost and financial savings to be made by ECRar e categorized as efficient assortment, efficient replenish­ ment, efficient promotion, and efficient product introduction (Kahn and McAlister, 1997,p . 64, 66). Themarke t shareo f ownbrand si s steadilyincreasing .Whil e ownbrand s in leading UKfoo d chains,suc ha sSainsbury ,Tesc oan d Marksan d Spencer, already accounted for moretha n 50%o f total turnover in 1991, this figure was still substantially lower in other West European countries (quoted by Corstjens and Corstjens, op. cit., p. 146, 149). Own brands increasingly dominate in many generic food and beverage categories. Own brands are lower priced, but nevertheless, because of low purchasing costs, carry attractive margins for retailers. Whilei n the past own brands wereintrodu ­ ced as the cheap alternative to many cheap producer brands, there is cur­ rently a growing tendency to position these as products of good quality, which are cheapertha n nationalbrands .

Figure 2.4 (Datamonitor, 1996) indicates how the market share of retailer brandsi n the food marketincrease d during the period 1975-1995.

19 Changingfoo dmarketin gsystem si nwester n countries

Figure2. 4 50_ Ownbran dshar eo f J | Retailer brandstak egrowin gshar eo fth efoo dmarke t TO grocery business -S 1995 vs197 5 £ 40 Source: Datamonitor (1996, p.40)

Organisation offood retailing: institutional dynamics

A dynamic organisational structure is also a characteristic of modern food retailing. Food retailing hasshifte d from smallindependen t outlets,groce ­ ry stores, greengrocers, butchers' shops or bakeries to large food chains. During the period 1984 - 1994, large and middle-sized distribution chains (both big retail companies and voluntary chains) continuously increased their market sharei n manyWester n countries.Thi sincreas ei n marketshar e is at the expense of the market share of the small independent andtradi ­ tional shops, whose share in the retail market decreased, e.g. the market share of small independents and traditional shops in Belgium decreased from 19.2%i n 1984t o 12.1%i n 1994,whil eth e marketshar eo fth etw o lar­ gest food retail groups (GIB and Delhaize) increased from 31% in 1982 to about 50% in 1996. The dominant type of enterprise in food retailing has becometh e food chain operating in national and international markets. Some food retail chains are in turn a member of a holding company which owns different types of retail chains, sometimes even other types of business. A minor group of smallindependent s remains competitive asspecialit y shops.

Wholesalersponsored voluntary chains, sucha sSpar , have becomeimportan t in food retailing:independen t food retailers often havea contractuall y bin­ ding relationship with a food wholesaler. This relationship between inde­ pendent retailersan da wholesale r combinesth e advantages ofcentra lplan ­ ning and purchasing by the wholesaler with the personal motivation of retailers who own their store. In some instances policies of wholesaler and retailers have not been coordinated sufficiently to make voluntary food chains competitive. Other independent food retailers havejoine d aretailer-sponsored volun-

20 Chapter2

tarychain, i n order to compete with large food chains. In this type of vol­ untary chain retailers not only cooperate in purchasing but also in marke­ ting strategy and management. Stillothe r independents havejoine d afranchise organization in order to survive. Afranchis e organization consists of: • afranchiser, e.g.McDonald' swhic hown sa franchiseconcep ti n fast-food selling,o ra bi g retailchai nwhic hown sa franchiseconcep ti n massfoo d retailing. • franchisees, independent entrepreneurs who leaseth efranchis econcept . Franchisers select franchisees on the basis of criteria which are related to the sales potential of the franchisee, such as location of the outlet and managerial capacities of the franchisee. Franchise contracts specify marke­ ting and management procedures to be implemented by the franchisee. Theseinclud e the product assortment, price level,service , store atmosphe­ rean dtrad e name.Franchisee spa ya nentranc efe ean droyaltie st oth efran ­ chiser. Aprecis e specification of the relationship is very helpfult o position afranchis e organization in its target market. Consumercooperatives in food retailing,whic h started in Rochdale UKi n 1844,ar estil limportan ti n Scandinavia andi n Switzerland andItaly , butar e only of minor importance in many other European countries. Internationalisation, both international expansion of retail companies andinternationa l purchasing agreements through buying groupsan dallian ­ ces, isanothe r organisationalfeatur e ofmoder nfoo d retailing. Retailchain s such as Aldi (Germany), Intermarché (France), Marks & Spencer (U.K.), Delhaize (Belgium) and Ahold (Netherlands) have internationalized sub­ stantially. This process reinforces competition in food retailing.

2.4.2 Food manufacturers

Thesiz eo fth e EU food,drin k andtobacc oindustr y issubstantial .It s growth rate, however, is decreasing (Table 2.5).

Table2. 5 1980 1985 1990 1992199 3 annual forecast TheE U food,drin k change annual andtobacc oindustr y (%) (%) (billions of ECUs, 1983-1988 1988-1992 1993-1997 currentprices ) Production 256 338 412 454 456 3.2 3.0 1.5 Exports to outside EU N.A. 25 25 28 25 2.3 4.2 3.5 Trade balance 1 4 5 7 5 Apparent consumption 255 334 407 447 452 2.1 3.0 1.5

Source: Heijbroek, etal. 1995, p. 25

21 Changing foodmarketin gsystem si nwester n countries

In 1988 Linda (1988, p.130) characterized the European food industry as follows: '(a) widely diversified,thi s process having dramatically accelerated since 1980; (b) diversification maytak e place in the form ofproduct exten­ sions,limite d to a single geographical area. ... more frequently the main objectivei st o enter aspatiall y distinct market geographic diversification; it is more appropriate to speak of afunctiona l diversification process propel­ led by multiple interdependent industrial commercial andfinancia lfactors ; (c) diversification isth e only reliable and practicalmean sfo r increasing the sizea swel la sth e globalpowe r of the firm; (d) in the present world ofglo­ balcompetition research and development is the realengine of competitive performance andgrowth .A sa matte r offact , R&Di sincreasingl y converging and commonly orientated, sincei t is possible and even economically neces­ saryt o split up the R&Doutpu t between awid e andgrowin g number of mar­ ketsector san dcountries ;(e ) with respectt o the performance offoo dmanu ­ facturing firms, it is evident that they are highly connected with the com­ petitiveness of marketstructures ,th e retailing anddistributiv e networks.' Mergers,join t companies andne wventure si n thefoo d manufacturingindus ­ tries represent the means for materializing the diversification process. Linda (1988, p. 143, 144) distinguished different degrees of diversification: (a) monosectoralfirms dealin g either in foods or in drinks only; (b) food and drinks conglomerates; (c) mega firms which are 'distribution and services' orientated; (d) Polycentric groups. Their growth is based upon two or more 'poles'o fdiversifie dactivity ,on eo fwhic hi sfoo dand/o r drinkmanufacturing .

Aboutte nyear s later, in 1997, it looksa si f thetren dtoward s diversification is being reversed.Companie s areincreasingl y focusing oncore competencies andexpandin gi n international markets. Forinstance ,th eAnglo-Dutc h mul­ tinational Unilever shedit s chemicalactivitie s andi s concentrating onfoo d and human-care products.Th e Dutch company Nutricia is focusing on baby- andhealt h foodsi n international markets.Th eU Kholdin g Hillsdownspecia ­ lisesi n chilled food production. It looks asi f such developments will lead to further concentration wit­ hin the food industry but this is not clear yet. Theto p 100foo d companies in Europe hada turnove r of 350 billion dollars in 1993,representin g 62%o f total production in the industry and the 15 largest had a market share of over 31% (Heijbroek, et al., 1995,p . 25).A recen t study concludes, '...tales ofa structura lrevolutio n in thefoo dindustr y areexaggerated ....I n fact,w e havefoun d it in only two countries, Denmark andth e Netherlands, andi na small number of subsectors...' (Gilpin,e t al., 1997,p . 21).

Internationalisation of the food industry is continuing. Food companies, such as Danone, Nestlé and Unilever have already been operating on an international scalefo r a long time. Today, companies which havetradition ­ ally set upthei r production plants and management facilities in the domes­ tic marketar eals o steadilyinternationalizin g businesses.A cas ei n pointar e dairy cooperatives,suc ha sM D foodsi n Denmark,Sodiaa li n France, Campina Melkunie in the Netherlands andAvonmor ei n Ireland.

22 Chapter 2

A characteristic oftoday' s foodindustr yi sth eimportanc e of product innova­ tion. Oneindicatio n ofthi s isth e facttha t the world's twenty leadingmanu ­ facturers ofpackage dfood sgenerate d 28% ofthei r currentannua lsale sfro m newproduct sintroduce di n the previousfiv eyear s(Datamonitor , 1996).

The relationship offoo dcompanie s with clientsi sintensifie d becauseo fspe ­ cific customer needs regarding products andservices .Whil efoo d companies in the USA,suc h as Kraft Foodan d GeneralMill s relied in the past on their productqualit y andpromotiona lskills ,the y nowtr y to basethei r position in the market on aclos e relationship with the customer in so-called customer business teams (Kahn, McAlister, 1997,p . 79). Outsourcing, onth e increasei n manysectors ,i s also gainingimportan ­ ce in food manufacturing. Examples include the out-sourcing of logistical operations andth eout-sourcin g offoo dcomponen t production byfoo dcom ­ panies which produce 'ready to eat' meals.

2.4.3 Wholesale companies

Wholesalers traditionally perform important functions in food marketing systems by 'sorting out, accumulation, allocation, and assorting', the ele­ ments of the sorting principle of Alderson (1957,p.195) .Wholesal ecompa ­ nies haveadapte dthemselve s to changesi n thefoo d marketing system. The needfo r 'sorting out' and'accumulation ' hasdecrease d because ofconcen ­ tration and standardization in agricultural production. Forinstance , in egg marketing there is no longer a need for an assembling wholesaler who col­ lects eggsfro m poultry farms sincefar m sizeha sincrease d substantially. In some sectors the wholesale functions of 'allocation' and 'assorting' have beenintegrate d by other channelactors , such asb yfoo d retailchains .

While losing business in somefoo d marketing systems, wholesalers remain important actors in many others.I n particular, they play an important role in markets for fresh produce and in markets with a heterogeneous product supply,suc ha scattl e markets.The yhav esometime s evenstrengthene d their market position, by responding appropriately to the market challenges. Typeso f evolution in wholesaling are: • big wholesale companies, which buyan d sella t aninternational ,some ­ timesgloba lscale .Thei rcor ecompetencie sar emarke tknowledge ,inter ­ national or even global relational networks and logistical capacities. They profit from more open international markets. Globally operating grain merchants area cas ei n point. • wholesale companies, which have aspecia l relationship with their sup­ pliers can be an attractive marketing partner because of their market knowledge andthei r logistical capacities. Food brokers and agentsope ­ rating on behalf of aforeig n food companyar eexamples . • wholesale companies specialising in specific aspects of the exchange process,suc h ascas han d carry wholesalers.Cas han d carry wholesalers operate in the food trade, e.g. Makro, but also in the flowertrade .

23 Changingfoo dmarketin gsystem si n western countries

wholesale companies which differentiate themselves by superior quality and/or services,sometime s evenb yow nbrands .Thi styp eo fwholesalin g is important in the winean d cheesetrade . wholesale companies with both forward and backward linkages in the food marketing system. Wholesaler sponsored voluntary chains already mentioned before,ar ea nexampl eo fforwar dintegratio n bywholesalers .

2.4.4 Farmers

The trends in West European agriculture are specialisation and concentra­ tion. Thenumbe r offarm si s steadily decreasing andfar m sizei sincreasing . Farmersspecializ e in milk production, pig raising,broile r production or flo­ wer growing. Specialisation is stimulated by economies of scale in produc­ tion. Thisi s accompanied by concentration into larger farms.Th e degree of specialisation and concentration in farming varies between countries and regions. Thetren d seemsimportan t in specific parts of Europe,suc h asth e Benelux countries, some parts of Germany,Italy , and France,wherea s other parts of Europe, such asth e Alpine regions, are still characterized by small mixedfarms .

Sincefamil y farms are often too smallt o develop individual marketing poli­ cies, they often join marketing cooperatives or build special relationships with wholesalers,foo d manufacturers or retailers.A t presentthes e relations­ hips arebecomin gincreasingl y basedo nth e market orientation offarmers . Societalconcer nabou tth eviabilit y of ruralcommunitie s andabou tecologi ­ cal problems caused by modern agricultural practices have stimulated inte­ resti n organic farming.I n view of the limited sizeo f organic farming, mar­ keting of ecologicalan d regional products is stilt a niche operation in many European countries.

2.4.5 Specific marketing institutions

In some food marketing systems specialised marketing institutions operate which perform specific marketing functions, sucha spric e discovery, oreve n the total marketing operation for an agricultural/food product on behalf of a group of farmers.

• Auctions contribute to the price discovery process in agricultural mar­ kets. Dutch auctions (auction starts at an offer price higher than any bidder is willing to pay and which is lowered until a bidder accepts the offer) areuse di n marketsfo r fresh horticultural products,flowers ,fruit s andvegetable s and fish. English auctions (auctions start at a low offer price; bids are publicly made;a bidde r who makesth e highest bidrecei ­ ves the offer) are used for selling other products including cattle. Auctions also fulfil an important logistical function by concentrating physicalsuppl y anddemand . Product differentiation and relationship-marketing diminish opportuni-

24 Chapter 2

ties for selling through auctions since no special relationship between supplier and buyer canb edeveloped .O n the other hand,bette rcommu ­ nication facilities increase the accessibility of the auction process,an d therefore the opportunity for auctioning a standardized product at an internationalscale .

• Futures markets havebee n populari n the US for alon gtim ea sa mecha­ nismfo r hedging pricerisks fo r commodities sucha scorn ,soybean san d wheat. Commodity futures exchanges are, asyet , of limited importance in European food marketing systems.Variou s developments in European food marketing systems maystimulat e theinteres t in commodity futures trading: - larger, more specialized farms whose income depends on one pro­ duct andwhic h operate in more open markets and receive less price support from theCAP . - larger food companies,whic h areconcerne d about pricerisks i n pur­ chasing agriculturalinputs . Futures markets havebee nstarted , or willstar t soon,i n manyEuropea n countries,includin g Hungary, Germany andSpain .

• Various marketing institutions perform marketing of agricultural pro­ ducts on behalf of producers. Important institutions in this respect are farmers' cooperatives. In some countries the relevant Marketing Boards market (or marketed) the product of aparticula r agricultural sector.

Coopératives started out as organizations, which tried to improve farmers' product prices byincreasin gth e bargaining power offarmers ,o r byintrodu ­ cing better quality and quality maintenance of food products.The yar e defi­ ned as user-owned and user-controlled businesses that distribute benefits onth e basis of use (Barton, 1989).Thre econcept s distinguish cooperatives from other businesses: a) the user-owner principle: persons who own and finance the cooperative arethos e that useit , b) the user-control principle: control of the cooperative is by those who use the cooperative and c) the user-benefits principle: benefits of the cooperative are distributed to its users on the basis of their use. Cropp and Engelsbe (1989) indicate poten­ tial classifications of cooperatives based onfunction s performed, structural arrangements, organizational or financial structure.

Theshif t towards marketorientatio n in food marketing requires cooperatives to adopt acustome r oriented marketing policy. Acornerston e of such policy is anagricultura lsuppl y of farmer-members which coincides with the marke­ ting concept of the cooperative processing or marketing company. Farmers' willingness to investi n the cooperative,i n particular in its markets andR& D is also essentialfo r the success of such apolicy . Adoption of modernmarke ­ ting and management procedures bycooperative sinfluence sth e cooperative structure.Th efollowin g organizational changes, duet o a number of factors including the shift toward marketorientation ,ca n be observed:

25 Changing foodmarketin gsystem si nwester n countries

• increasei n company size, • quality of management improves and the rights and responsibilities of top management arebette r defined; • specialfinancia lstructure sar edevelope dt o generateth e necessaryrisk- bearing capital for the cooperative enterprise. • some cooperatives havetransforme d their companies into limited com­ panies, whose shares, or at least a majority of shares,ar e in the hands of the cooperative union/farmer-members. These developments enhance a more rational and less emotional relations­ hip between farmers, in particular young and modern farmers, and their cooperative.

In various countries agricultural marketingboards and commodity boards contribute to the marketing of food and agricultural products of asector . Marketing boardswhic h areresponsibl efo r thetota l marketing operation of an agricultural or food product are the exception rather than the rule in Western countries. However, promotional boards which support the marke­ ting of generic food products havebee nse t upi n many Europeancountries . Sopexai n Francean dCM A in Germanyar eexamples . Product differentiation and large company size stimulate marketing efforts for the individualcom ­ pany brands atth e expense of marketing efforts for the generic products of asector .O n the other hand, newmarketin g problems areemergin gfo rsom e food products, such asth e poor image of meat, andthes e havet o betack ­ led by marketing activities ofth e sector.

Table 2.6 Market shares dairy fruit & meat farm credit gr; Market shares of (%) vegetables inputs agricultural coopera­ tives in the EU Belgium 50 70-90 20-30 - Denmark 93 20-25 66-93 64-59 87 Germany 55-60 60 30 50-60 - - Greece 20 12-51 5-30 49 Spain 35 15-40 20 - - 20 France 49 35-50 27-88 50-60 - 75 Ireland 100 - 30-70 70 69 Italy 38 41 10-15 15 - 15 Luxembourg 80 - 25-30 75-95 - 70 Netherlands 82 70-96 35 40-50 84 Austria 90 - 50 - - 60 Portugal 83-90 35 - - - - Finland 94 - 68 40-60 34 - Sweden 99 60 79-81 75 - 75 U.K. 98 35-45 ±20 20-25 - 20

Source: Bekkum, O.F. van en 6. van DijkEds., (1997, p. 29)

26 Chapter2

2.5 Basicstrategie s offoo dmarketin gsystem s

Changesi n the environment of food marketing systems andi n major actors ofthes esystem s havebee ndiscusse dabove .Man yo fthes echange sar erela ­ tedt o the shift offoo d marketing systemsfro m selling commodities to mar­ keting differentiated productswhic hsui tth e needso fa chose ntarge tgroup . Conditions which ensureth e success of such ashif t include market orienta­ tion and effective coordination of policies in the food marketing system.I n addition to these, some other strategic developments can be observed in food marketing systems.The y are briefly reviewed below.

2.5.1 Market orientation

Marketorientation ,'...th e organization wide generation of marketintelligen ­ ce, pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization wide responsiveness to it' (Kohli& Jaworski , 1990,p .6 ,Grunert ,e tal. , p.ll), hasbecom eindispensabl e in food marketing systems,sinc efoo d markets havebecom ebuyers 'markets . Amarke t orientation implies first of alltha t companies monitor andanalys e their target markets in a systematic way. In the past much information on agriculturalan dfoo d marketswa scollecte dan ddisseminate dfo rth e generic product, say butter or cheese. Since many companies in the food marketing system aretryin g to differentiate their product, information onspecifi c pro­ duct-market combinations hasbecom ea must . Marketsar emonitore d onth e basis of factory sales, household panel data and/or retail panel data. Many food companies usetast e panels and do 'ad hoc' consumer research.Marke t orientation of acompan y does not only imply systematic collection and pro­ cessing of market data, but also effective dissemination of information to decision makers.I n particular, agoo d balanceshoul db estruc k betweenkee ­ ping decision makersinforme d andavoidin ginformatio n overload. Companies which are market oriented and havea well-organize d market information system (consisting of adat a bank, statistical bank, modelban k anda retrieva l system),ar e still scarcei n food marketing systems (Grunert, et al., 1996, 13-17, 247). Clearly, poor market information systems are not unique to food marketing systems, but are a problem in many other indus­ tries too (Campenvan ,e t al., 1991). An essential element of market orientation is also that a company responds effectively to market changes. Such responsiveness depends both onth e attitude of management and onth e production and marketing capa­ citieso fa company,al lo fwhic hstil lrequir esubstantia limprovemen ti n food marketing systems.

2.5.2 Policy coordination, chain strategies

Marketorientatio n enhancescompanies 'abilit yt o producean dmarke tfood s and services which coincide with the needs and wants of specific target groups.I n ordert o serveth e needsan dwant s oftargete d consumergroups ,

27 Changing foodmarketin gsystem si nwester n countries

the decision making of actors in the food marketing system hast o bewell - coordinated. Coordination of supply and demand by market prices is often not precise enough in present markets and additional coordination mecha­ nisms are used, such as 'mutual adjustment, direct supervision, standardi­ zation ofwor k processes,standardizatio n of outputs,standardizatio n of ski­ lls/knowledge, standardization of norms' (Mintzberg, 1989;se efo r aconci ­ sediscussion :Doum aan dSchreuder , 1991, p. 37).Th echoic eo fa coordina ­ tion mechanism depends onth e transaction costsinvolved .

Coordination of policies in food marketing systems may leadt o ajoin t stra­ tegy of two or more subsequent companies in the system, say 'farmer plus marketing cooperative' or 'pig farmer plus slaughterhouse plus retailer'. Such coordination can be implemented in different ways, for instance through aninforma l ora contractua lagreement . Thedistinctio n in the mar­ keting channel literature between administered, contractual and corporate vertical marketing systems (see e.g. Stern, El-Ansary, 1992) has become relevant for food marketing systems too. Chain marketing,i.e . coordinated marketing policies of two or more subsequent companies in a marketing channel vis-à-vis a third party on the basis of consumer orientation, has becomeimportan t infoo d marketing.I n this context oneshoul d beawar eo f a potentially too rigid coordination, which might prevent an alert response to market opportunities andthreats . It shouldals o bekep ti n mindtha t effective policycoordinatio n doesno t necessarily include all actors of afoo d marketing system. Coordination may berestricte d to specific stageso fth e channel,sa ya compoun dfee dcompa ­ nyan d afarmer . Coordination mayals o focus on specific flows in thechan ­ nel, such asfocusin g onth e physical product flow in logistical planning.

2.5.3 Quality orientation

Increasei n foodsale sha st o beachieve di n Westerncountrie sthroug hincre ­ asing added value, such as higher nutritional value, better taste and more convenience. Therefore 'focusing' and 'product differentiation' seem better strategies than 'low cost production'.Thi s message has been understood by manyfoo dmarketin gsystem sbu ti sno ts o easilyimplemented .I t requiresno t only changes in capacities and structure of acompan y but also in company culture. Marketing strategies of companies should bebase do na goo d know­ ledge of consumers' quality orientation and quality perception (Steenkamp, 1989; Grunert, et al. 1996; Steenkamp and Van Trijp, 1996). Consumer led product development is a must (seeVa nTrij p and Steenkamp in this book). Quality controli n production andi n logisticalprocesse s (seeD e Sitter in this book) hasbecom eextremel yimportant . Procedures,suc ha squalit ycertifica ­ tion, Integral Quality Care Programs,an d Hazard Analysis of Critical Control Points (HACCP) are applied to maintain and guarantee product quality (see chapters byVa n Trijp andSteenkamp ,Hooglan de t al.i nthi s book). Product quality is also pursued by environmentally and animal friendly production methods. At the moment there is only limited demand for envi-

28 Chapter2

ronmentally friendly products, but it is steadily increasing. While there is greatvariatio n percountr y andtyp e of product,th e market shareo f organic food is in manyWester n countries below 5%o ftota l food consumption yet. Differentiation of food products on the basis of region of origin is another wayo fimprovin g thefoo d quality image.Th eE U hasenhance d marketing of regional products bygivin g some regions the exclusive right to market their product under a specific regional label, e.g. Parmesan cheese.Th e hopei s that regional labels areinstrumenta l in capitalizing onth e unique features of regionalproducts . Product differentiation by branding has a long tradition in food marke­ ting, such asi n marketing groceries, margarine and coffee. Currently there isgrowin ginteres t in brandingfres h producetoo . Unfortunately, somebasi c characteristics ofa brande d product,suc ha sconstan t quality andstabl e pri­ ces, are more difficult to implement for fresh produce than for groceries. Quality control and quality maintenance of branded fresh food might be expensivean dfluctuatin g prices might havea negative influence onconsu ­ mer loyalty to abrande d fresh food product.

2.5.4 Innovation

In some food marketing systems, such as those for dairy desserts,innova ­ tion hasbecom ea basi ccharacteristi c of marketing strategy:produc tassort ­ ments are renewed constantly, often by product modification. However, in manyfoo dcompanies ,produc tinnovatio n doesno tye tsee mt o bewel linte ­ grated in marketing strategies. Features of innovative strategies are market orientation, product involvement, R&D quality, but in particular manage­ ment commitment (Traill and Grunert, 1997). In many Western countries R&Dfo r agricultural products and - to a lesser extent - for food products usedt o bea secto r activity. Examplesar e government sponsored agricultur­ al research institutes, such as INRA in France, and industry sponsored research institutes, such as the Dutch Dairy Research Institute (NIZO). However, product development in food marketing systems is increasingly becoming anactivit y of individual companies, while industry research insti­ tutes arefocusin g on basican d pre-competitive research.

2.5.5 Segmentation

Fewfoo d companies market products and services to the average food con­ sumer. Mostcompanie s gofo r market segmentation, serving groups of con­ sumers with specific but similar wants, needs and behaviour with respect to a product or service: discount stores focus on price conscious consumers; some food companies target health-oriented consumers; fast-food marke­ ting systems serve convenience-oriented consumers. These developments refute the argument of Levitt (1983) that, driven by developments in tech­ nology and masscommunication , consumers tend to develop homogeneous preferences aroundth e world. Researchers haveals o expressedthei r doubts aboutthi s argument (Brunso, Grunert and Bredahl, 1996).I n this context it

29 Changing foodmarketin gsystem si nwester n countries

must be kepti n mindtha t the same person maybelon gt o different market segments, depending onth e situation: someone mayb econvenience-orien ­ ted during the week, but quality-oriented when entertaining guests. Increasing interest is paidt o the identification of national or cross-nation­ al consumer segments (Grunert et al., 1996,Steenkamp , 1992, 1997).

Small and medium-sized agribusinesses and farmers are also showing an increasing interest in special products and consumer groups, such asecolo ­ gicalfoo d and regional products.

2.5.6 Internationalisation

Internationaltradei nfoo dan dagricultura lproduct sha sa ver ylon gtradition . It is currently becoming a common feature of food businesses in western countries. Foodmarketin g systemsar ebecomin g moreconcerne dabou tthei r internationalcompetitiveness .Factor swhic hinfluenc einternationa lcompeti ­ tiveness aresummarize d byPorte r (1990) as'Facto r conditions,deman dcon ­ ditions, relatedan dsupportin g industries, firm strategy, structure and rival­ ry'.Th ecompetitivenes s of food marketing systems depends in particular on natural conditions (climate, soil, etc.),facto r costs,infrastructure , location, production, marketing skills, and quality of entrepreneurship. The potential impact of these factors on international competitiveness is influenced by government measures, such as import duties and agricultural protection. Internationalisation offoo dmarketin gsystem si sincreasin gfo r reasonsrevie ­ wedalready ,suc ha sth e progress being madei n the areaso fIT ,efficienc y of logisticalsystem san dfre etrade .Als ochange swithi nth efoo dmarketin gsys ­ temitsel f stimulate internationalization. Forinstance , asa resul t ofconcen ­ tration in food retailing, big food retail chains haveemerge d which haveth e purchasing powert o searchfo r foodsupplier s ininternationa lmarkets .

2.5.7 Market leadership

In various marketing theories market leadership is advocated asa nattracti ­ ve strategy. Portfolio-analysis carried out by the Boston Consulting Group suggeststha t aStrategi c Business Unit with arelativ e market share (market share over the market share of the largest competitor) of less than one should either quit the market ('dogs') or should invest in order to arrive at a relative market sharegreate r than one (known as'questio n marks'o r'pro ­ blem children'). It hasbee nargue dtha t marketleadershi pi sals oa desirabl estrateg yfo r food marketing systems.Th eadvantage s of sucha strateg y seemobvious .I n comparison to the competitors, a market leader has more experience with products and markets anda sa result profits morefro m 'economies ofscale ' in production, marketing and from customers' feedback. Alarg e production volume maymea ntha t a market leader is better placed to supply largebuy ­ ersan dt o develop national or international brands than his competitors. Thefeasibilit y of market leadership asa strateg y dependsals oo nth echo -

30 Chapter 2

sentarge tmarket :ca n wed obette rtha nou rcompetitor si na targe tmarke tan d istha t target substantialan d durable? Anumbe r of producers often focus on thesam emarket-segment ,sa yth e marketo ffast-foo dconsumers .I n thatcas e aclea rpositionin gi nth etarge tmarke ti snecessar yt o becomea marketleader . It canb ebase do nproduc tquality , branding,servic ean dpric elevel .Bein gth e firstsupplie ri n amarke ti sals ohelpfu lfo r becomingth e marketleader .

2.5.8 Re-engineering markets

Changing marketing strategies influence markets of food and agricultural products agrea t deal. Spot markets,wher e products are physically handled, loseimportance . Manyloca lspo t markets disappeared asa resul t ofa decre­ asing need for assembling products from small farmers. The tendency towards aclose r marketing relationship between big food producer and big retailer reducesth eimportanc e ofspo t marketstoo . However, (internation­ alspo tmarket sremai nimportan t for standardized agriculturalcommodities , such as grains and potatoes, and for live animals (pigs, cattle), fish and some horticultural products. Spot markets arestil l attractive for products if both the uncertainty or complexity andth e assetspecificit y of transactions, and consequently transaction costs,ar e low. Spot markets also stay in business by improving the efficiency of the exchange process. It is becoming easier to do business by electronic com­ munication without havingth e physicalproduc t at hand.Man yspo tmarket s are acquiring a more international scope because of better communication and logisticalfacilities . Downstream in the marketing channel spot markets lose importance sincea clos erelationshi p betweenactor si nth efoo d marketingsystem , such as between the food industry and food retailer, will bepreferre d over coor­ dination by market prices at spot markets.

2.6 Conclusions

Thepropose dframewor k offoo d marketing systemsappear st o bea use­ fulinstrumen t for the analysis of suchsystems .

Ouranalysi s demonstrates that environmentaltrend s - economic,demo ­ graphic, social,political ,physica lan dtechnologica l- havea substantia l impact on food marketing systems. The interaction between different trends,suc ha sbetwee neconomi c andsocia ltrend s onth e onehan dan d politicaltrend s onth e other, isimportan t in this context.

• Environmentaltrend s arecurrentl yinfluencin g food consumer behaviour a great deal: - food consumers place greater stress on vatue for money because of changes in values,a sa result of more product information and bet­ ter education respectively. Lacko f meaningfulvalu et o the consumer

31 Changingfoo dmarketin gsystem si nwester ncountrie s

leadst o low productacceptance . - the demand for convenience in shopping, cooking and consumption is increasing because of changes in lifestyles and values. Demographic changes, such as a smaller household size and more womenworkin g outsideth e homear eals oimportan t in this respect. - consumer concern about health and sustainability is causing agro ­ wing interest in safe and sustainably produced food. Consumer groups and environmental lobbies are strengthening thistrend . - consumer appreciation of variety and an increasingly multiracial Western society stimulate consumer demand for variety in the food assortment on offer.

Trendsi n thetechnologica lan d politicalenvironment s offoo d marketing systems havecreate d opportunities for newproduct s andne wprocesses . In particular the following trends seem important: - developments in IT have created new opportunities for collecting, processingan ddisseminatin g information.Thes ewil l leadt o impro­ vementsi n the efficiency offoo d marketing systems,bu t alsot o hig­ her product quality and better quality maintenance. - new processing technologies and breeding methods createopportu ­ nities for product innovation. Consumers' distrust of specific tech­ nologies, such as biotechnology, have becomeimportan t aspects in the product innovation process. - while food markets in Western countries have become less regulated because of changing EL)policie s andinternationa l trade agreements (GATT/WTO),ther ei s moregovernmen tinterventio n in the sphereso f foodproductio nan dmarketin ga sa resul to fenvironmenta lproblems .

The actors in the food marketing system have evolved into bigger com­ panies,whic h pay more attention to strategic issues, such asthei r mis­ sion andcor ecompetencies . Strategies sucha smarke t orientation, poli­ cy coordination, chain strategies, quality orientation, innovation, seg­ mentation, internationalisation and market leadership, have become important in food marketing systems. Markets are being re-engineered as a result of organisational changes and policy changes among the actors ofth e food marketingsystem .

Changesi n food marketing systems andthei r environment create oppor­ tunities for new products andservices .Innovatio n has becomea strate ­ gicissu e of food marketing systems.I n this respecti t is important that some consumers' needs,suc ha sth e needfo r convenience andth e need for sustainably producedfood , are not always compatible.I t is expected that advances in research methods and technology will diminish this incompatibility of productattributes . However, moreeffor t still needst o be made on informing consumers about the positive features of new technologies, such asbiotechnology , which are regarded with suspicion bya grea t manyconsumers .

32 Chapter 2

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