Transcript Supply Chain Management in the UK Supermarket Sector for

Channel Management and
differentiation strategies: A case
study from the market for fresh
produce
Valeria Sodano
University of Naples
Federico II Italy
Martin Hingley
Harper Adams University UK
Presentation Outline
Theoretical grounding: incentives for
differentiation strategies
Channel structure and differentiation in
food channels/ fresh produce (fruit,
vegetable, salad)
Fresh produce markets and distribution in
the UK and Italy
Empirical: Vertical channel case study
Conclusions/ Recommendations
Theoretical grounding: incentives
for differentiation strategies
Achieving competitive advantage: cost
leadership or differentiation?
Differentiation offers market power and avoids
price competition
Industrial economic literature focuses on effects
of differentiation strategies on market structure,
firms’ performances and welfare effects (Beath
and Katsoulacos, 1991)
Horizontal and vertical differentiation
Summary of theoretical grounding
Differentiation is always a source of market
imperfection and welfare loss
Horizontal differentiation: these effects linked to
inefficient scales of production or to the
suboptimal product variety
Vertical (or mixed) case the negative welfare
effects linked to the oligopolistic structure
emerging as market equilibrium
When carrying out differentiation policies, firms
will be earning supernormal profits
Channel structure and
differentiation in food channels
Horizontal (inter-brand)
Vertical (supplier-retailer) competition:
Problems of channel coordination in a
multi/manufacturer multi/retailer setting
(typical for food industry) paid little
attention*
*But note work of: Lee and Staelin, 1997;
Choi, 1996; Choi and Couglan, 2006;
Avenel and Caprice, 2006; Ellickson, 2004
Channel structure and
differentiation in food channels
(cont’d)
E.g. Choi. Differentiation is used to
mitigate price competition and that it tends
to produce negative welfare effects
Vertical power asymmetry pushes towards
non-cooperative vertical forms of
coordination (and retail leadership)
Channel structure and
differentiation in fresh produce
Vertical differentiation, more than horizontal,
tends to be associated with high degree of
industry concentration and market power
Equilibria depend on a complex interplay
between: 1) strategies carried out at horizontal
and at vertical level; 2) power asymmetries
between upstream and downstream firms; 3)
governance structures along the channel
Channel structure and
differentiation in fresh produce
(cont’d)
In fresh produce:
1). Wide range of possibilities to increase product variety
(determined by retailers) in horizontal competitive arena
2). No supplier branding, so retailers do not have to take
into account strategic reactions by the upstream
counterparties; so more able to entirely appropriate the
competitive advantage stemming from the differentiation
3). Retailers can appropriate the larger share of the
channel profit; lead suppliers to comply with retailers’
differentiating strategies without a real vertical
contractual integration (?)
Fresh produce markets and
distribution in the UK
Chain retailers dominate the market for
fresh produce- 85% of sales. (4 chains
accounting for 75% of all grocery sales)
Price most often determines purchase
decisions & retail pressure forcing price
and margins down
Retailers (directly and via their
intermediaries) set both product and price
agenda for rest of the supply chain
Fresh produce markets and
distribution in the UK (cont’d)
Interest in fresh produce source and origin
from consumers
Retailer segmented own brands with (for
e.g.) ‘value’, ‘standard’ and ‘finest’
Branding and product differentiation to
grow and add value to the market. E.g.
environmental/ regional/ country
association:-
Fresh produce markets and
distribution in the UK (cont’d)
Retailers directed vertical ‘partnership’
supply via ‘Super-Middlemen’ (Hingley,
2005)
Category Management (CM)
CM: Reinforcing power and control rather
than collaboration in vertical channels?
(Dapiran and Hogarth-Scott, 2003)
Fresh produce markets and
distribution in Italy
Loss of Italian leadership in the European
market
Weakness of production (small firms) and poor
supply chain structures compared with
traditional and new competitors
Solution?
–
–
–
–
Horizontal producer integration
Quality improvement
Better exploitation of Italian comparative advantages
Better relationships with big retailers
Fresh produce markets and
distribution in Italy (cont’d)
Leading retailers have launched ownbranded lines of high quality fresh produce
e.g.“Terre d’Italia”
55% of the Italian grocery market is
covered by 5 groups. Still 38% of fresh
produce is via non-supermarket sector:-
Fresh Produce Retail:
Naples style…
Empirical: Vertical channel case
study
Primary producer (Italy) engaged in
vertical ‘partner’ supply to a principal CM
intermediary (UK) for UK retailers
The principal areas for exploration:
-The impact of vertical competition on
coordination
-Competitive advantage through valueadding in vertical chains
Empirical: Vertical channel case
study (cont’d)
FP Grower. Southern-Italy based family grower. Turnover of 10
million euro
‘Partner’ customer is FP Marketing. 60% of product to
intermediaries; 35% direct to retailers; 5% to wholesale
markets. 80% of FP Grower’s customers overseas
FP Marketing. Central marketing organisation for own and
associated growers produce based in the UK. Turnover of over
100 million euro
CM supplier to UK retailers
Consolidated and value-added (packaged) fresh produce under
retailers’ own-label (90% of their business)
Emphasis for this study on tomato production:-
Case findings:
Contracts
Vertical channel arrangement offers FP
Grower something that they do not have
from other customer sources: a
contractual agreement:
….we have full exclusivity with them
(FP Grower)… in (for supply to) the UK.
FP Marketing (DD)
Case findings:
CM system
FP Marketing benefits from more business, but
must take on an enhanced role and associated
responsibilities:
…we have to provide services; we have to provide
more resources. That is our added value to the
customer, we supply all that technical (input), the
agronomists, the ideas, the trials, the NPD, all of
this development. There is not a charge for that.
FP Marketing (DD)
Case findings:
CM system (cont’d)
Control remains in the hands of retailer
customers, whose name and identity
value-adding services are conducted in:
…..supermarkets are very cute (clever),
they outsource some of their work to us…
We do their work for them, whether it in
inventory, in marketing, in procurement…
FP Marketing (DD)
Case findings:
CM system (cont’d)
But CM based supply does, in return
provide security and results in:
.....more ownership of the business. FP
Marketing (DD)
Case findings:
Product differentiation
Access to Southern-Italy allows differentiation by region/
variety/ climate: e.g. vine ripened tomatoes
FP Marketing add-value in order to avoid the
‘commodity-trap’ of being in an unbranded business:
we work to try and put identity to products……and try to
add value to it, …..our ideal aspiration is to be in ‘special’
and ‘finest’ (retail lines)… because you can get a higher
value for it. FP Marketing (DD)
It is a way of promoting the grower, the variety, the
techniques they are using and most importantly, the
flavour. The flavours and varieties they are producing are
market leaders. FP Marketing (CD)
Case findings:
Vertical channel branding
Sub-branding by country and regional identity:
I think (that) they (UK retailers) see (sourcing
from) Italy as a way of adding value. …..It is
all a way of trying to sub-brand down to the
grower. FP Marketing (DD)
We have now got customers (i.e. UK
retailers) who are even putting grower’s
names on the packs. FP Marketing (CD)
Case findings:
Differentiation through quality
Variations in different countries standards
undermines FP Grower’s position:
….foreign competitors (growers in other
countries) take advantage from different labour
regulations and different pesticide/use
regulations, without a real policy of price and
quality transparency being carried out by
retailers. Product from (named countries) with
low food safety standards is arriving… and sold
in Italian supermarkets without clear information
on its origin. FP Grower
Case findings:
Differentiation through quality
(cont’d)
In vertical arrangements retail chains will
specify quality assurance using accredited
sources e.g. EUREPGAP
UK retailers’ development of their own
standards allows further differentiation, but
reinforces vertical control
Conclusions
Competitive structure of fresh produce gives
strong incentives to differentiation strategies
Degree and kind of differentiation depends on
interplay of:
-competitive pressure at vertical and
horizontal level
-forms of vertical governance structures
- power asymmetries between upstream and
downstream firms
Differentiation is likely to be associated with high
degree of concentration and market power
Conclusions (cont’d)
Consistent with theory:
Differentiation strategy in fresh produce benefit retailers
due to the absence of brand policies
Product differentiation can add value to the channel
value. Differentiation strategy is carried out under power
asymmetry where retailers control the resources
required to make the differentiation policy succeed
Vertical governance is such as to give sufficient
incentives to upstream channel partners to both invest
and comply with the retailer differentiation policy and
offset relationship disadvantages due to buying power
Conclusions (cont’d)
When retailers engage in product differentiation channel
relationships shift from collaborative to competitive types with
the power imbalance becoming the disciplinary means by
which vertical coordination is achieved and maintained
The relationship marketing idea that channel partners look for
equitable collaborative relations, is contradicted by the view: “it
may be wise for suppliers to accept some inequity as the cost
of doing business” (Corsten and Kumar, 2005) and Hingley
(2005); especially when retailers carry out successfully
competitive strategies with positive spill-over effects on
upstream firms
How much is power imbalance allowed for without being threat
of negative welfare/ anticompetitive effects?
Recommendations
Interview retailers in Italy and UK to
complete full supply chain