Cross-regional Climate Change Impacts and Adaptations – Business Supermarket Sector Case Study – Fresh Produce Supply 1 Executive Summary For this case study we have focused on fresh produce supply and retail. Limiting the study boundary to fresh produce helps define the market quite narrowly, making it more manageable by excluding the provision of other products and services within the supply chain. This case study was carried out between December 2004 and August 2005. While we believe that the organisations’ policies and practices as reported here were correct at that time they may have changed since. Climate change adaptation is not currently on board agendas and this is probably because it is not a risk that is going to affect supermarket survival within their generally short planning horizons. The board will be aware of climate change, due to legislation, energy and transport issues etc, but this is more likely to relate to mitigation than adaptation. However, the sector has well established mechanisms to monitor, plan for and respond to threats and opportunities in the short to medium-term and a proven track record of adapting to external change in the market place in the longer term. Farmers in the UK have been changing what they do for some years now in response to difficult market conditions and EU legislative changes. The capability to adapt to external challenges therefore exists within the sector, provided the signals for change are recognised and correctly interpreted. Weather influences both consumer demand for fresh produce (products, volumes, ability to purchase, etc) and retailers’ ability to supply (range, volumes, quality, price, etc). Supermarkets have developed a good understanding of the former. On the supply side risk control strategies include sourcing products from a range of growers and locations, spot buying on the world market and to some extent identifying and helping build capacity in new locations. Increasingly supermarkets are beginning to rely on a limited number of ‘first tier’ suppliers to monitor and manage the supply side risks arguing that it is the suppliers and growers who are in the best position to understand these risks and identify and implement effective management strategies. Dedicated supply chains allow traceability to ensure safety, quality, brand differentiation, risk management, and demonstration of ‘due diligence’. The retailers in turn are best placed to understand the demand side risks. Although this trend is driven by other more immediate drivers, it is building a more adaptable and responsive supply chain and therefore should have a positive impact on the sector’s ability to respond to climate change. Factors such as immediate history of grower reliability (including weather related problems), ability to meet quality and ethical standards, the political situation in supplier countries, cost of transport and short term consumer trends will have a greater influence Risk Solutions Page 1 Climate Change Impacts and Adaptation: D5119 D5119/Case Study Report - Supermarkets Issue 1 Cross-regional research programme Defra ref: B on sourcing strategies than longer term climate trends. Current strategies are, however, proving effective in responding to supply and demand challenges in the short term and there is no immediate reason to believe that these will not continue to be effective in the medium or longer term. This is not to say that climate change poses no risks (up or downside) and that there is not an opportunity to improve resilience. The main risk we see is that sub-optimal sourcing decisions will cause a creeping increase in costs of supply and increasing reliability problems ultimately affecting competitiveness and undermining the basic business model. By considering longer term trends in the weather, and their impact on growers and product supply, sourcing decisions can be made more robust to future change. Climate change considerations should be embedded in routine risk management and decision-making processes to ensure, among other things, that opportunties to build resilience at marginal cost (win wins) are identified. The challenges to making this a reality are: • ‘Selling’ the longer term benefit to decision-makers in supermarkets and, through them and directly, to key ‘first tier’ suppliers • Providing the basic climate change information required to support decisions in a straightforward to interpret and use format. Much of the supermarkets vulnerability to climate change arises from a need to maintain complex, global supply chains to meet consumer expectations. While we expect to see fresh produce on the supermarket shelves all year round, supermarkets will have to supply them at competitive prices to retain market share. Before solutions are adopted that require customers to accept limited supplies of seasonal product out of season, a concerted campaign of consumer education and awareness raising would be needed about the need for more sustainable sourcing strategies. 2 Introduction This case study report is structured as follows: • Description of the supermarket sector and the case study organisations − What characterises the sector; the market forces and supply networks etc, − Individual company strategies and the transferable lessons from these − What are the Key Success Factors (KSFs) for this sectors • How might climate change impact on the sector, • What decisions structures are adopted by the sector, how do these impact their ability to adapt to climate change impacts, and • How can the sector improve and build capacity for adaptation; what do others need to do to support this. Risk Solutions Page 2 Climate Change Impacts and Adaptation: D5119 D5119/Case Study Report - Supermarkets Issue 1 Cross-regional research programme Defra ref: B 3 Approach The project has used proven risk and business analysis techniques to build up a rich picture of the impacts of climate change, possible adaptations, willingness and ability to adapt, and barriers and incentives to adaptation in two case study business sectors: transport and major food retailing and their supply networks. Information has been gathered through interview and literature review, and a supermarket sector case study workshop on 1 June 2005. In the workshop we explored how the sector, with the support of policy makers can address the risks from climate change and build on its current strengths to improve its adaptive capacity. For the purposes of the case study we have focused on fresh produce supply and retail. Limiting the study boundary to fresh produce helps define the market quite narrowly, making it more manageable by excluding the provision of other products and services within the supply chain. The study examines how fresh produce retailers, suppliers and growers could build capacity in the broadest sense and not at solutions to specific technical issues. We have also concentrated on issues that supermarkets can tackle directly with their suppliers not externalities such as the loss of the national grid due to extreme weather over which they exert little control and that would impact every business in the UK. Managers, however, need to be aware of these risks and have responses in place to mitigate them as appropriate. 3.1 Selection of Case Studie Organisations Supermarkets are successful local and global businesses, at the forefront of developments in areas such as inventory management, logistics, marketing and supplier and customer relationship management. The sector comprises firms that are large and small, private and public, with UK and international ownership structures. They operate stores of a variety of different sizes and formats, serving a general or a niche customer base and selling a mixture of food and no-food products. An emphasis on shareholder value, innovation and fierce competition has resulted in a blurring of business boundaries, in short planning horizons and a strong focus on reducing cost and increasing market share. Supermarkets are highly adaptive and customer responsive with significant ability to influence their customers and supply chains. It is also a very diverse sector. In particular, the supermarket sector was selected because: • It has a big influence on the UK economy and patterns of societal interaction • Its policies will influence the entire supply chain from packaging to the reduction in the use of chemicals and fertilisers etc. • Its reaction to social amplification issues influences the response of NGOs, the media and consumers alike • It is highly influenced by the weather • It has not been addressed in previous work, and Risk Solutions Page 3 Climate Change Impacts and Adaptation: D5119 D5119/Case Study Report - Supermarkets Issue 1 Cross-regional research programme Defra ref: B • It represents quite distinct business models (e.g. the Asda and the Co-op case studies) but at the same time there are many transferable lessons that apply to other types of FMCG1 supply chains that are faced with similar risks (e.g. those from changing global markets, just-in-time and logistics). 4 The Sector 4.1 Key Features It is predicted that there will be only 10 major global food retailers by 2010. A similar trend of concentration is taking place in food processing and distribution, matching the scale of downstream players in order to counteract the power of the supermarkets and prevent their profits slipping down the food chain. The UK grocery market was worth £115bn in 2003, with groceries accounting for 13.4% of all household spending2. This makes it the third