Retailing flour products

The background

Although the flour millers in New Zealand are vertically integrated with their own bakeries, most consumers shop at supermarkets to buy their bread and flour products; this means most of these products are sold through large retail chains. This makes the supermarket chains very powerful as they control the final stage of the farm to fork story.

These retail chains respond to consumer demands to provide value for money when buying their food. This response involves constantly monitoring and reviewing their mix of products and pricing. The competitive environment created between retail chains puts pressure on prices, which is transferred down the supply chain to secondary (flour millers and bakers) and primary (farmers) producers. Sometimes this results in ‘price wars’ where the price of basic foods such as bread and milk is forced down as the big retailers compete for customers.

As the supermarkets become more powerful and popular, the smaller retailers who are unable to respond to the lower pricing structures (low margin / high volume business model) eventually end up closing their doors – there has been a massive reduction in the number of small retail outlets on the high street, including bakers, over the last 10 years. The only exceptions to this include corner dairies and 'local' stores who are able to command a higher margin because of their convenience.

Bread, flour and the consumer

In New Zealand, as in most advanced economies, consumers expect that bread, like other products, are available in the shops all day every day. This poses a challenge not only for retailers, but for other sections of the supply chain such as bakers and millers. Bread must now be baked, and transported fresh to supermarkets, 7 days a week. Retailers must now be able to accurately forecast demand. If they order too little, they will lose money and risk losing customers. If they order too much, product remains unsold on shelves, shelf life is eroded, product maybe scrapped or put on special, and they lose money. These fluctuations in demand must be communicated effectively if a smooth supply chain of flour to bakery to store is to be maintained.

Historically most bread sold in New Zealand was branded (TipTop, Quality Bakers, Rivermill etc.) but more recently there has been an increased use of "own label" branding by the retailers. This can be either economy or budget brands but has also been used for premium offerings as well. This is both good and bad for the major bakery companies because on the one hand there is less need to erode their own brand value by cost cutting as part of retail promotions, but on the other hand the retailers can spread their purchasing volume to multiple suppliers thus increasing competition and pressure on margins. More recently the trend has been to invest and develop in-store bakeries; The merits of not only fresh everyday/all day bread and cakes, but the emotional feel-good factor to the consumer of the fresh baked bread aroma wafting through the store has not escaped the notice of our retailers!

Sometimes bread or other staple products such as flour, sugar, milk, butter etc are sold 'below cost', which means it is sold for less than it costs to make and deliver. This is called a 'loss leader' and may be used by retailers to attract customers into their store. The idea is that once in the store customers will buy other more profitable foods, with the nett effect that the store will make a profit.

These promotions in stores are invariably funded by the supplier not the retailer. So for example offers such as "Two for the price of one" or "two for $5" or other special offer promotional pricing are funded by the supplier at no cost to the retailer; The advantage to the supplier being the maintenance of volume for their production facilities or increasing brand awareness to the consumer. For the retailer it is a cost free way of attracting people to the store.

The psychology of supermarkets

The supermarkets need to ensure the right environment to maximise the revenue for each customer. Things such as lighting, layout of the store, music and even colour schemes are designed to enhance the buying process. Most stores for example will have the fresh fruit and vegetables at the point of entry as these are amongst the highest margin products; Staple foods and products are generally located at the perimeters of the store - subliminally directing customers around the store past the temptations at the end of each aisle. According to research, even the direction of travel through a supermarket is important - on average customers spend $2 more per visit if they travel counter-clockwise! Supermarket trolleys have even been fitted with GPS receivers to track movements & time spent in stores as part of research.

As part of their KPI's (Key Performance Indicators) retailers will measure things like spend per visit and even checkout processing times (for example factors such as speed of transactions, number of customers, accuracy of till balancing all the way down to the number of delete keys hit on each shift are measured). The use of loyalty cards has enabled the retailers to profile their customers and measure and monitor spending patterns - such information is then used to create sales forecasts as well as personalise or target promotions.

Suppliers are charged a premium for stocking their products at eye level on the shelves (or lower shelves for children oriented products!) or end of aisles. Even at the checkout there is one last chance to get you to spend just one more dollar or two on an impulse buy chocolate bar, magazine or chewing gum as you wait in the queue

So what does the future hold?

To ensure that retailers are able to maintain the "everyday low price" promises that flood the advertising world, they are having to work harder and smarter to counter the impact of such developments as budget own label brands, price pressure, supply chain integration, changing consumer behaviour and general increases in operating costs. This has led to the practice of category management.

Category management is the treatment of individual products in groups or categories of products and having marketing plans and strategies developed for each category and even on an individual store basis in some cases. This process involves much closer co-operation between supplier and retailer, and hence could be said to be changing the relationship from adversarial to collaborative with a greater exchange of information, data sharing and joint business building. The realisation that the promotion of a product from one supplier, only served to reduce the sales of a competing product and did not increase overall sales revenue for the retailer, was the driver behind category management.

By adopting a greater co-operation with suppliers, retailers are able to harness the supplier's product knowledge of a category to grow the market and its value (for both retailer and supplier) rather than just swap volume between suppliers.

Generally there are four areas of focus in the category management philosophy:

Customer Focus - This ensures continuing review and monitoring of consumer taste and behaviour to ensure the right products are available in the right place at the right time and at the right price.

Cross-Functional Focus - This ensures all staff in the business develop an awareness, flexibility and responsiveness to changing customer demands

Supply Chain Integration - Ensuring suppliers are utilising the most cost effective methods for least cost distribution or raw material purchasing. In some cases supermarkets are increasing centralised distribution networks or integrating themselves into transport companies to consolidate distribution costs.

Technology focus - The ability to deliver products that meet consumer expectations requires a constant flow of information up and down the supply chain to ensure the right decisions are made at every stage. There has been a huge development of electronic data interchange between suppliers and retailers to reduce significantly the cost of errors in the supply chain. There has been a massive increase in the linking of ERP/MRP systems between retailers and suppliers to ensure a truly 'Just in Time' supply chain model.