There was a good article in today's New York Times called Supermarket Chains Narrow their Sites, which stated that Wegmans has experienced a 20% growth in local food sales in the past 12 months. I found this not the least bit surprising given that I am hearing more and more discussion amongst my coworkers and friends about buying local. In fact, earlier this week the GXS Marketing team had an offsite meeting at a local Virginia winery (See John Radko's post for details). All across the US local wineries are emerging in states never before known for wine production. Many of these new regional wineries are quite successful. With airfares and gas prices skyrocketing these days who can afford to fly to the Napa Valley to go wine tasting. But convenience is not the only driver for consumer interest in nearby wineries. Consumers enjoy the reassurance that comes with being able to view the origin of the wines they are consuming. Others enjoy the experience and variety that comes with tasting a local product not commonly available in stores.
In my last post I discussed the drivers behind the consumer market's desire to purchase locally grown food products. I identified eight benefits that consumers gain from buying local. But what about the grocery retailers? Do they benefit from this new trend? What about food producers and brand owners? Does local sourcing help or hinder their strategies?
Retailer Perspectives
Many retailers have viewed local merchandising strategies as an opportunity for differentiation. Chains such as Wegmans, Giant Foods (Ahold), Publix, Tesco, Waitrose and Sainsburys each feature locally grown categories in their stores. Just a few weeks ago, Wal-Mart announced a locally grown campaign in Oklahoma hoping to differentiate itself from other merchants within the local communities. Specialty retailer Whole Foods has perhaps invested the most in local sourcing strategies. Whole Foods has committed over $1 Million in loans to small producers throughout 12 states to raise and harvest organic, local food products.
Supplier Perspectives
Of course, small regional food producers will benefit from a trend towards local sourcing. What about the larger national brands? Just because a company is large does not prohibit it from producing and distributing locally grown products. The global food market has undergone considerable changes in the past few years. Perhaps, the most noticeable changes have been in the prices which have been rising dramatically in the past twelve months. There are various theories on the root cause of recent food inflation. Some believe the rapid growth of China and India has led to a surge in demand that has outpaced supply. Whatever the cause of rising prices is, food suppliers need to find new techniques for reducing the costs of their products. Reconfiguring supply chains to produce and sell locally may offer significantly reduced transportation, packaging and warehousing costs. As a result, large food suppliers may embrace local production as a means of maintaining lower costs and competitive prices.
Supply Chain Challenges
Is there a downside to retailers and suppliers? One might assume that shorter is simpler when it comes to supply chains. However, this is not necessarily the case. Retailers and food suppliers have spent the past few decades engineering complex international supply chains designed for mass production and high volume distribution. The local sourcing trend offers the opportunity to reduce transportation, warehousing and packaging costs by reducing food miles, but it introduces new challenges for grocery retailers. Retailers must employ regional merchandising strategies to stock local products on store shelves. More SKUs must be managed as hundreds of new products are introduced to offer consumers variety. Maintaining operational efficiencies with local sourcing models will be a key challenge for retailers. Wider variation in merchandise across stores and regions deteriorates the economies of scale retailers have enjoyed with national, mass market product lines. Supplier management becomes significantly challenging. Most locally grown products are harvested and produced by farmers or small businesses with 10 or fewer employees. The small businesses lack sophisticated pricing, ordering, invoicing and logistics capabilities that larger suppliers can offer businesses. Consequently, automation of routine purchasing, delivery and payment processes becomes more complex.
EDInomics of Local Food
The supply chain challenges introduced with local sourcing models provide an even stronger business case for the adoption of B2B technologies such as EDI and data synchronization.
- Data Sync – With more SKUs to manage, retailers gain further ROI from data synchronization technology. Data sync can be used to automate new product introduction, price and promotion schedules and product withdrawals. Both consumers and merchandising managers will need access to more information in digital format to make decisions about which products to buy. See my earlier post on how consumers will drive demand for data sync.
- EDI – Retailers will need to be more accommodating of small suppliers going forward as their product lines will provide crucial differentiation in the merchandising mix. A small organic vegetable farm will be less inclined to do business with a large grocer if their invoices are consistently paid late due to paperwork errors. Retailers can achieve consistency and automation of purchasing, receiving and invoicing processes using e-commerce technologies specifically designed for small businesses. Ideally, a retailer would offer a number of choices for small businesses ranging from accounting package integration to web-EDI portals to fax-to-EDI service bureaus.
Local food is just part of a larger long-tail type effect emerging in the food industry, but current market dynamics suggest that consumers will continue to embrace this trend. Retailers and their suppliers will need to adopt new supply chain techniques and increase investments in electronic commerce to profit from this new trend. The ability to successfully redesign supply networks for local merchandise will be one of the key factors that differentiates those who profit from the local trend from those who do not.
