RETAILING: THE END POINT OF THE GRAIN CHAIN

The retail background

The relationship between customers and retailers controls the food chain in general, and this also applies to the grain chain. In the UK, most consumers shop at supermarkets, either in person or on-line, which means most grain products such as bread and breakfast cereals are sold through large multiple retailers. This makes the supermarket chains very powerful.

Retailers respond to consumer demands and all consumers want value for money when buying food. Retailers have different ways of responding to this in their mix of products and pricing. The competitive environment tends to put pressure on prices, which is transferred down the grain chain, sometimes breaking out in ‘supermarket wars’ when the prices of everyday foods such as bread and milk plummet as the big retailers (Tesco, Sainsbury's, Asda, Morrisons etc) compete for customers. As the supermarkets become more powerful and popular, small businesses decline – there has been a massive reduction in the number of small businesses on the high street, including bakers, over the last 10 years.

Bread and the consumer

Consumers demand that bread, like other products, is available all day. This poses a challenge for retailers, and for other sections of the chain such as bakers. Bread must now be baked, and transported to supermarkets, 7 days a week. Retailers must anticipate exactly how much bread is going to be sold. If they order too little, they lose money and risk losing customers to the competition. If they order too much, there is wastage and they lose money.

Most bread sold in the UK is branded (e.g. Hovis, Kingsmill, Warburtons etc.). Products can often be labelled as ‘value’ (cheapest brands) or ‘premium’ (the more expensive branded products). Sometimes bread is sold at 'below cost', which means it is sold for less than it costs to make and deliver the bread. This is called a 'loss leader' and may be used tactically by retailers to entice customers in. The idea is that customers will buy other, more profitable foods while they are in the store, so overall the store will make a profit.

The grain chain is affected by how much people spend overall on food shopping. In the UK, expenditure on food eaten at home remains at a fairly static level, but spending on eating out is growing. Therefore, as a proportion of total consumer expenditure, food eaten at home is steadily falling. In fact, catering now accounts for as much of household expenditure as food eaten at home. Within a static market, spending on staple foods (such as bread and breakfast cereals) tends to decline relative to spending on 'added value' goods as manufacturers and retailers respond to changes in consumer demands and lifestyle.

Between 2008 and 2009, household expenditure on food and drink rose from £85,680 million to £89,931 million. Spending on bread rose from £1,852 million to £1,898 million; cakes and pastries from 1,337 million to £1,372 million; biscuits from £2,140 million to £2,275 million; and breakfast cereals from £1,422 million to £1,515 million. Over the same period, the rate of price inflation for food was well below the overall rate of inflation.

(Source: Kantar Worldpanel)

Responding to the challenges: category management

Category management has become an important retailer response to major developments in the food retail sector over the past decade. These developments include the rise of the ‘value’ segment, price competition, supply chain integration, changing consumer shopping behaviour and rising operating costs.

Category management responds to these challenges using four main principles.

• Customer focus: category management encourages retailers to start with the consumer when making ranging and planning decisions. It requires much greater marketing input, relying heavily on intensive research into consumer attitudes and behaviour.
• Cross-functional teamwork: eradicating functional barriers is essential if a firm is to be flexible and responsive to changing customer needs. Category management cannot work without effective cross-functional teams.
• Supply chain integration: developing a responsive, integrated and low-cost supply chain is critical to successful category management. Achieving this requires closer, more co-operative relationships with key suppliers. This principle in particular impacts on the various suppliers involved in the grain chain.
• Application of new technology: category management can only be implemented if customer, marketing and trading data is made available through a modern IT infrastructure.

International consumers

The grain chain also relies on consumers beyond the UK – Britain's cereals are exported all over the world. In 2008/09, the UK exported 4.3 million tonnes of wheat and barley: This represents about 18% of the UK total wheat and barley crop. (Info regarding products contain grain used to be sourced from Food from Britain, which no longer exists)

Here are some quotes from three major purchasers.

• "The UK's assurance schemes put the British growers in an excellent position to compete in wheat export markets. The UK system can offer traceability from the farm to the customer."
  Giampolo Bernardi, Buying Director, Barilla, Italy.
• "The UK is now recognised (by China) as a source of quality malting barley."
  Mr Geng Zhaolin, Director General of the China Brewery Association and of the China National Council of Light Industry.
• "There is now a growing and consistent demand for British wheats in Italy. The UK has made noticeable progress in supplying homogenous quality wheats."
  Dott Loris Carani, Agrimeta, Italy, at the end of a visit to the UK.

The quality of the UK's cereal crops and its grain products are essential to its success at home and abroad, and all stages of the grain chain are important for ensuring this quality is maintained.

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