Issue No 12, July 1999.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

2. The global marketplace: innovation, information and opportunities

Mr Howard Hall
Director, Pinnacle Management
One Park Road
Milton, Queensland 4064
Telephone: 07 3217 6466
Mobile: 0412 674 083
Facsimile: 07 3217 6905
Email: hhall@tpgi.com.au

[Howard Hall is a Director of Pinnacle Management, who are consultants in strategy, marketing, research and change management. The firm has been operating since 1989, advising clients in the food industry, agribusiness and health care. Howard consults to organisations in the area of international marketing and the design and management of agro-industrial chains. In 1997, he completed a number of international case studies in Europe on international supply chain management in the food industry for the Department of Primary Industries and Energy (now Agriculture, Fisheries and Forestry), Canberra.

These remarks were made by Mr Howard Hall as the featured speaker at the Information Supermarket 1999, held at the Carlton Cress Hotel Brisbane, 18-19 March 1999; The theme for the Conference and Trade Display was 'Relevant Information, Smarter Decisions, Viable Businesses, Profitability'. Many of the presentations were transmitted to regional centres throughout Queensland and all are available on video from:

Details of the Queensland Department of Primary Industries Publications are included in the Web site: http://www.dpi.qld.gov.au/catalogue/Welcome.html.]

These changes are affecting food and agribusiness products and a number of these are really worth considering in more depth.

In the first instance, there is a lot of political activity aimed at reducing trade barriers, whether they be tariff or non-tariff barriers. As a result, increasing numbers of products are now available on supermarket shelves and in restaurants all around the world. This is creating significantly increased competition in those markets.

As well as this, and just as importantly, some regions of the world are becoming strong production houses whilst other regions have very high population levels and high population growth, with more mouths than they can feed.

Hence, many parts of the world are very good at production and others have become increasingly reliant on imported food; these parts of the world are often great distances away from each other.

One good example is the Danish Pork Industry, which is reported to be 400% self-sufficient. For every 500 tonnes of pork produced in Denmark, 400 tonnes get exported outside the country. Similarly, in Australia, we export approximately 70% of our production of the major commodities such as beef, wheat and sugar.

On the other hand, Asia and the Middle East contain large population areas with rapidly expanding populations increasingly reliant on imported food.

As the distances between the sites of production and the sites of consumption increase, there is a need for:

• better communication,
• stronger relationships between the people who want to do business (including all those in the value chain from the producers to the consumers) and
• trust between these parties.

As a result of the decreasing barriers to trade referred to above and the increasing need of many areas of the world to import food, the number of products on the market for any particular use has increasing rapidly. Markets are becoming saturated.

Consumers therefore have large numbers of products in the supermarket or local restaurant from which to choose. Consumers are becoming more and more demanding and are expecting more from their suppliers and from the producers of food.

There are even movements appearing around the world today which have begun to address each individual consumer as a separate market. This mass individualisation means that producers and manufacturers will need to customise products for individual customers.

The traditional belief that the supply end of the value or 'supply' chain is in control is no longer valid. The commodity trading mentality that drove so many of the production houses of the world (where huge volumes of standardised products were sold to everyone around the world) no longer applies.

Consumer satisfaction will be the only success factor in the future.

As a result, customer specific 'supply' or 'demand' chains (depending on your approach and your terminology) will apply.

We need to consider the phenomenon of supply chains on two fronts.

On a research and development front, there is a lot of activity around the world focussed upon developing and then implementing increasing levels of capability, skills and expertise in the management of supply chains of a global nature.

Denmark, UK, The Netherlands, Canada, USA, Brazil, Thailand, Japan and also Australia have major coordination programs in place to develop and increase skills in supply chain management.

In Australia, that movement will be boosted by a program about to be released by the Prime Minister's Supermarket to Asia Council.

On a commercial front, global supply chains are already in existence and are proliferating at an increasing speed.

The major production areas, for example, in Europe, North America, South America, South Africa and Australia are being linked together by major retailers and major marketers around the world, into one chain of supply with standardised processes to deliver product to major population areas such as South East Asia.

If Australian producers and processors aren't thinking about joining these global supply chains, then somebody else from some other part of the world, already has.

Some evidence may help.

In 1996 information was available suggesting there were 67 new stores just opened or about to be opened in South East Asia by Japanese retailers such as Daiei, Seiyu, Sogo, and Jusco in South East Asia (see Figure 1).

The projected continuation of this trend did not eventuate as a result of the Asian currency crisis. However, the growth in global ownership of this major retailing sector has not stopped. Jusco is still there, but the Japanese global push has slowed as a result of the currency crisis. In their place, European and now American retailers are doing the same thing, probably on a larger scale.

Global players opening supermarkets in Asia include:

• Carrefour, a French company, with 1,000 food outlets world-wide,
• Royal Ahold, a Dutch company, with 3,500 food outlets and
• Delhaize, a Belgium company, with 1,800 food outlets.
• Dairy Farm International with 1350 outlets in Asia.

By March 1999, Royal Ahold had 117 food outlets in South East Asia. As well, there are 167 hypermarkets established in a number of countries around Asia and another 30 hypermarkets planned this year for Taiwan alone.

In comparison, our national retailing chain stores of Woolworths and Coles are relatively small in terms of global players with 600 and 400 outlets, respectively (see Figure 2). As far as we are aware, the Australian companies have no outlets or plans to establish large chains of outlets in South East Asia.

Traditional supply chains have many intermediaries between the producer (and his input provider) and the eventual consumer. What is happening increasingly is the shortening of the supply chain so fewer parties are involved. So far this has happened through the removal of some of the links in the chain.

This is now changing.

Major global retailers are already implementing supply chains where processors or packers in Australia (and other production areas of the world) carry out business directly with the retailer. The product will not change hands between the processor (or packer) and the supermarket. Figure 3 illustrates the traditional 'long' chain that has predominated for many years and, each side of it, the variations that are now increasingly becoming the norm, or the target model, for global players in the agri-food industry (see Figure 3).

In March 1999 a new venture was announced by one of the major Asian supermarket chains: the company has established a global procurement office in Sydney. They plan to have all procurement for their South East Asian supermarkets organised through the Sydney office. This company plans to streamline the supply chain to such an extent that an order can be received from Singapore on a Monday morning and the product can be air-freighted to arrive in Singapore by the Wednesday night. This approach is a challenge not only for the processor and the packer but also for the producer. They all need to keep up with the changes.

There is a clear trend in this business towards companies working very closely together in relationships or alliances. It contrasts with the traditional model whereby every company had a go for themselves.

• There is increasing complexity. As markets get bigger and extend globally, issues of complexity become part of life. There is too much complexity for one organisation to handle, working alone.
• There is also increasing demand from consumers, who expect products to be differentiated and tailored to their needs.
• Customers also look for constantly changing products, thus creating a continuously changing environment with all its associated uncertainty. This uncertainty is also difficult for one organisation to handle well.
• There is also an increase in the demand for information. Statistics and information are required at both ends of the chain.
• Lastly, as markets get more global in nature, there is more risk associated with the business.

Hence, parties working together in collaborative structures with contractual relationships between them, can spread the risk.

This new approach to business delivers the increased responsiveness and flexibility which a consumer-driven market demands.

This demand for responsiveness from the chain means that smaller, flexible and more closely aligned organisations can service the market well, if the organisations work together.

In 1998, a European University conducted global research on the impact of supply chains. A total of 700 food industry respondents world-wide were questioned.

Ninety-one per cent of these respondents believed that global food markets were going to be characterised over the next ten years by networks of companies working together working together in co-ordinated relationships, contrasting with the vertically integrated organisations of the past and currently in place.

Ninety-two per cent of these respondents were of the opinion that supply chain management is expected to be a major area of competitiveness, along with logistics planning. Logistics planning is impossible without strong ties with the parties involved, all the way back to the producer.

Hence, the future will be characterised by vertical coordination, relationship building and trust, in contrast to the current vertically integrated global organisations.

We recently heard of a major organisation which is apparently spending $40 billion to dismantle its integrated system, to enter supply chain relationships.

In the European research quoted above, respondents indicated that strong improvements had been achieved by using supply chain management principles, particularly the use of efficient information exchange along the supply chain. The level of customer satisfaction also improved with this approach.

There is also an interesting trend with respect to the consumer's attitude to issues such as the protection of the environment, the quality of products, care of the product and general animal welfare issues. 'Chain care' issues such as these are well addressed by supply chain management and consumers around the world nowadays are looking more attentively for these aspects in products.

In Europe 18 months ago I saw evidence that consumers were looking for information in the labelling of animal products on supermarket shelves to ascertain whether the product satisfied animal welfare issues.

One major change in the manner in which companies now do business together is the level of information sharing which now occurs between chain partners.

This is a particularly interesting issue in Australia. Traditionally, in this country we have not had a business culture that encourages the sharing of high levels of information or costs between companies. In other countries the developing business culture has supported knowledge sharing. There has been more effective use of the knowledge that has been developed through these structures and collaborative relationships.

The retail shelf value of a food product on the supermarket shelf has historically comprised of a proportion to represent the value of the physical product (perhaps 70%) and the remainder (30%), representing services, such as the marketing, information management, relationship management costs and so on. However, today these proportions are likely to have changed dramatically so that only 30% of the product's value on the supermarket shelf represents actual physical product and 70% of the product's value represents the services, such as marketing and other non-tangible components of the product.

It has been suggested that in the next 10 years, only 10% of the value of a retail product on the supermarket shelf or in a restaurant will comprise the actual value of the physical product. 90% will represent the value of the services, marketing and non-tangible components that contribute to the total offer that is on the shelf or in the restaurant.

This discussion has been focussed on how the producers, processors, packers, governments and support people within the supply chain's organisation can satisfy consumers needs.

Those who work together to supply world markets have to be good at understanding, and acting upon, commercial needs. They must change quickly, and they must transfer information more quickly and more efficiently than ever before, in order to be competitive.

The level of transparency and trust between parties doing business together around the world needs to be greatly enhanced from the traditional levels.

The reality is that if the consumer's need is not filled, someone else in some other supply chain will do so.

Competition in future will occur between supply chains rather than between products or companies. This is becoming obvious from the manner in which Ahold, Carrefour, Dairy Farm International and so on are organising their global chains.

The producer's role is more important now than it has ever been in the past. This role will focus more on service and the marketing components of the product. These aspects will need attention throughout the supply chain, but attention to service and marketing will apply first on the farm.

The producer will be concerned with adding value to the product but this will not only apply to the physical aspects but must, in future, also apply to the more important components of the eventual product's value, that is, the service and marketing aspects.

Producers in the future will be required to do much more tailoring of the product and the non-product aspects of an item, before it leaves the farm.

The level of physical product enhancement currently being carried out with fresh fruit and vegetables by some European producers is already substantial. More communication is needed between retailers, processors, importers, exporters and the producer.

Direct communication between producers and consumers is already occurring and will be important in every market in the future.

Everyone will need to be more responsible for delivering to the market what the customers are requesting, not just what the producer is comfortable producing.

It is important for all members of a supply chain, and especially the producers, to become more and more aware of, and to understand, what happens beyond the farm gate. The opportunity exists for producers to be more pro-active, to lead the search for information pertinent to the successful marketing of their product. The events in the supply chain beyond the farm gate will in future affect what happens on the farm.

What will this mean in the future for Australian primary producers, in terms of technology, research and skills?

The focus that Australian research and development programs in the past have had on farm production will no longer be adequate in terms of improving the economic viability of Australian primary production. The issues of how to do business beyond the farm gate, and in particular, issues relevant to business in the international trade environment, are critical knowledge areas which R&D programs in the future must address.

Even to compete on the home market in the future, we will need to be strong international competitors. As trade barriers are removed, this competition will be on our own market as well. For example, Woolworths or Coles supermarkets will have more and more imported products alongside the local products, competing for the same sale. To be competitive at home, a product will need to be as good as anything in the world because the world will have unlimited access to our market, as we will have to theirs.

The opportunities in business are in the realms of innovation not simply in production. This is a golden opportunity for producers.

Information and its use will be a critical ingredient to future competitiveness.

Current research and development activity in the global markets is focussed on the manner in which information will be transferred and efficiently used along the supply chain and how information and IT technology should be used in agribusiness trade. Areas of development include:

• the refinement of computer technology and communications,
• the most appropriate manner in which how to create direct consumer feedback to the chain,
• the use of multi-media systems and technology,
• the functioning of real time response computer systems,
• quick response ordering systems and so on.

For example, global sourcing/ordering systems are being set up in Sydney, as mentioned above. The chains will have to facilitate feedback to the producers on the performance of their products at the processing/packaging stage and at the retail point of sale.

Producers and processors will need to monitor the levels of demand for each type of product in their sphere of activity, as is already happening amongst some chains in Europe.

In the next 10 years, a major issue may be achieving sustainable market access, rather than the acquisition of premiums per se. Market access will be increasingly important because global chains, such as those involving the global supermarket chains mentioned above, will be capable of securing all the available supply for particular outlets in certain markets. Anyone not part of a particular chain would be precluded from accessing such markets, so long as the chain operates satisfactorily.

A representative from Royal Ahold was commissioned by the Prime Minister's Supermarket to Asia Council to make a presentation to the National Outlook Conference in Canberra in March 1999 on the manner in which 'Australian industry currently fits into the Asian markets'.

His concerns were:

• There is a lack of knowledge of Asian consumers and their needs in the Australian producer end of the chain
• People are relying on exporters or wholesalers to do the work and not spending enough energy working out how to do it themselves
• Fresh produce of inadequate quality, apparently of only domestic grade, is being exported from wholesale markets.

The opportunities, particularly for producers, are to investigate innovation and developments beyond the farm gate.

If producers are not aware of the market into which their product sells, they should initiate a pilot project to find out. The more one knows about the current market or potential markets, the more the producer can co-operate with processors, packers and exporters to service these customers more effectively.

If information is not getting to producers about the marketability of their current products, processes need to be put in place so this happens.

Producers must play a greater role than ever before in marketing, particularly in the areas of co-ordinating and encouraging value-adding on-farm, in both the product value and service areas.

There will obviously be opportunities available.

The opportunities are 'off the farm' in supply chain knowledge, information and computer technology have traditionally been considered the domain of experts other than producers.

The only real constraint to these opportunities is our unwillingness to tackle new challenges. Are we prepared to expose ourselves to the risk and uncertainty arising from change?

What should those in the production end of the supply chain do?

1. Producers should make themselves available so that processors, packers and exporters can introduce them into their supply chains.
2. Producers should acquaint themselves with customers.
3. Producers should take the opportunity to inform world markets, retailers and consumers about how products are actually produced, and what producers are responsible for, since markets are interested in these aspects of the supply chain. For example, the interest amongst consumers in organics and low residual foods indicates the consumer is interested in what occurs on the farm.
4. Producers need to realise that their involvement in supply chains will make the chains more competitive because it will increase the knowledge and understanding of the entire chain.
5. Producers need to be more involved in information and computer technology. Once involved, producers will realise not only how useful it can be but will realise how quickly the technology is growing and how important it is to remain up-to-date.
6. Producers should encourage governments, industry bodies and councils to provide programs and support to improve the training that producers need to remain globally competitive.

In many overseas countries, it is the industry which leads these developments and governments follow, supporting these industry developments.

Mr Howard Hall
Director, Pinnacle Management
One Park Road
Milton, Queensland 4064
Telephone: 07 3217 6466
Mobile: 0412 674 083
Facsimile: 07 3217 6905
Email: hhall@tpgi.com.au

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

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originally created by: GK; latest update 17 October 2001 by: RF