Disruptive Forces:Are U prepared?

Richard H. Kochersperger

June, 2014

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Industry Gurus

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Tell Me and I Forget

Teach Me and I Remember

Involve me and I Learn

Ben Franklin

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Previous Presentations

• 2014: Disruptive Forces: Are U Prepared?

• 2013: Value Chain Strategy in a VUCA world

• 2012: Speed: The Consumer is Changing Faster than the Food Industry can change!

• 2011: Seek to stay out in front and don’t look back!

• 2010: The World is Changing Faster than you are!

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Goals/Objectives

• Who’s Driving the Bus (food industry)?

• The REAL Economic Situation

• Food Industry Perspective• Winners and Losers• New Developments

• A review of Key Players/Concepts

• Logistics Strategy: Key Issues and Opportunities

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Disruptive Forces• Decline in the Fertility Rate

• No Growth Economy/Income Disparity

• Speed of Change

• Technology Influences/Transparency

• The Amazon Effect

• Rise of New Competition

• Government Regulations

• Globalization

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The Consumer Drives the Food Supply Chain

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Customer’s Perspective

•Anytime: 24/7/365•Any Place: Format•Anywhere: geography•My Way!

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The “Have” and “Have Not’s”

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U. S. Demographics

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U. S. Demographics

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Who Are My Consumers?Generation Age Millions of

PeopleYoung ones (Generation Alpha 0 – 10 11

Digital Natives (Generation Z) 10 - 17 21

Millennials (Generation Y) 18 - 24 91

Generation X (Busters) 25 - 35 41

Younger Boomers 35 - 50 48

Mature Boomers 50 - 65 40

Depression / WWII 67 - 80 35

G.I. - Pre 1928 Over 80 26

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Observations about the Consumer

• Consumer behavior is changing faster than our abilities to change the FCPG supply chain (OMNI-Channel) !!

• Consumer is complex!!• Demographics don’t work!!!

• 5 W’s: Who, What Where, When, Why?

• Different drivers affect decision making

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Future FCPG Industry Supply Value Chain

Command CenterControl Tower

Roles can not be defined

RetailersGoogleMicrosoftAmazon

The Consumer

DistributorsThird PartyAlliances,Partners

ManufacturingNetwork

Regional, global plantsBulk, Semi-finished,Filling Finishing,

Suppliers

Information Information

InformationInformation

Information

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Thought for the day!

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Perspective

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Reality Check

American Employment???• Available Workforce: 155 million

• Unemployed/underemployed: 23.7 million

• 102 million working age Americans do not work

• Real Rate: 17+%

• Rutgers Study: 2006-2011– 27% of the graduating students have full time jobs– 33% are unemployed

• The median family income dropped 39% since 200718

6.3

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% working in the US

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Labor Force Participation: Men

Businesses Are Being Destroyed Faster Than They Are Being Created

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Reality Check• 1 in 6 Americans; 1/10

Canadians are challenged to feed themselves

• 2 Billion people worldwide do not have enough food to eat!

• 40% of global food resources are wasted

– Not harvested– Spoils– Thrown away

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4 Biggest Economic Factors• Fertility Rates: rapidly declining

• Food Prices: Rapid increases due to drought, disease

• Healthcare: Rising premiums will continue to funnel consumer spending to healthcare rather than to food & retail consumption (48 million no insurance)

• Energy Costs: Significantly impacts consumer budgets

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US Fertility Rate

Fertility Trends

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Fertility Trends

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Food Industry Prices

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Food Prices• Bacon: 55% increase since 2010

• Ground beef: 35%

• Oranges: 35%

• Coffee: 31%

• Peanut Butter: 30%

• Margarine: 30%

• Wine: 25%

• Turkey: 24%

• Chicken: 22%

• Pork: 15% 2014

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Protein Pricing

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Independent Food Retail Sales

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Financial Performance

• UNFI 13.9%

• Sprouts 13.8%

• AWG 6.8%

• Delhaize 4.6%

• Whole Foods 4.3%

• Spartan/Nash 4.3%

• Publix 4.0%

• Inflation Rate: 3%+

• Costco 3.0%

• Ingles 2.5%

• Supervalu 2.1%

• Walmart 2.0%

• Safeway 1.8%

• Unified Grocers 1.4%

• Stater Bros 1.0%

• Loblaws 0.9%

• Ahold 0.1%

• Weis Mkts 1.3%

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Foodservice Economic Performance

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Current Issues• Number of People financially struggling

• $20 trillion spent on poverty programs• 13 million on welfare• 35 states welfare pays more than minimum wage• 49 million live in poverty: $23,550• 49 million on SNAP• 11 million disability• 47% have given up looking for a job

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Thought for the Day

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Food Retail Industry Graveyard

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Food Retail Industry Graveyard

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Food Retail Industry Graveyard: 2014

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Food Industry E R

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Food Industry E R

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Consumer Reports 2014

• 33% changed primary store

• 58% looking for lower prices

• 26%Long wait Checkout• 25% poor selection, long

lines• 20% Cleanliness• 17% employee rudeness• Not enough checkouts

• Wegmans 88• Trader Joe’s 87• Publix 85• Costco 84• Sprouts 84• Fareway 83• Marketbasket83• Raley’s 83• Stater Bros 82• Winco 81

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Food Retail Winners

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Food Retail Winners

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Rise of the Ethnic Focused Retailer

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Foodservice Losers

25% of new restaurants go out of business the first year

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Foodservice Industry Winners

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Thought for the Day

May -2.09%

April -5.15%

March +2.53%

February -0.67%

January +1.67%

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December - -0.94%

November -0.26%

October +0.58%

September -0.88%

August -0.81%

July +0.85%

June -2.01%

May +1.17%

April +1.84%Inflation Rate: 1+% At Home

2.3% Away

Foodies: Green, Natural, Organic

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Clean Food

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Real FoodReal Food is food which truly nourishes producers, consumers, communities and the earth.  It is a food system--from seed to plate--that fundamentally respects human dignity and health, animal welfare, social justice and environmental sustainability.Some people call it "local," "green," "slow," or "fair."  We use "Real Food" as a holistic term to bring together many of these diverse ideas people have about a values-based food economy

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Farmers Markets

2013: 8,000+

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Food to the Neighborhood

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Urban Agriculture

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Vertical Farms

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Thought for the Day

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US Developments

• Roundys for sale: Invest in Mariano’s• Kroger buys Harris Teeter• Fresh n Easy sold to Yucaipa investment group• Susser purchased by Sunoco• Okey-Dokey closes Florida• Spartan-Nash merger• Bozzuto’s supplies Mars/Baltimore• Winco opens in Phoenix and Dallas• Wegmans moves into Richmond• Albertsons purchases United Stores/TX

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• Aldi to open DC in Houston

• Aldi to open DC in LA

• Mi Pueblo looks at liquidation

• Savalot to open Colorado DC

• Family Dollar closes 370 stores

• Caseys to build DC in Indiana

• Giant Eagle moves into Indianapolis

• Publix enters Charlotte

US Developments

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• Peapod to open DC Jersey City, NJ• Ahold to open 100,000 sq ft greenhouse• Lidl to open 100 stores by 2018; office in VA• Grocers Supply to build Dallas DC• Fresh Grocer switches to Wakefern Coop• Belle Foods closes all stores/AWG picks up pieces• Safeway Sells off Dominicks/Chicago• Bi-Lo buys Piggly Wiggly stores/Scarolina• Tops purchased by management team

US Developments

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• Meijer moves into Milwaukee

• Gelsons purchased by TPG investment group

• Gordon Foods purchases Glazier Foods

• UNFI to build DC in Prescott Wisconsin

• UNFI purchases Tony’s Finer Foods

US Developments

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Canada Developments

• Sobeys purchases Safeway/Canada

• Sells 30 stores to Overwaitea

• Loblaws purchases Shoppers Drug Mart

• Walmart ramps up supercenters

• Target fails to get traction

• Loblaw to build DC in Cornwall

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One Thing Is ClearRetailers with a clear brand outgrow the market

Source: Kantar Retail analysis 69

Natural/Organic

Natural/Organic ValueValue

PremiumPremium ClubsClubs

‘13E-’18E CAGR =

9.2%

‘13E-’18E CAGR =

5.4%

‘13E-’18E CAGR =

7.5%

‘13E-’18E CAGR =

6.3%

#1 #2

#3#4

Amazon

• “Clearly, Amazon is teaching the world what’s possible,”

• He doesn’t know exactly which geographies where it will work, but Walmart is focused on delivery in London and possible Shanghai.

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Amazon• 96 D C’s: 7th generation design (Kiva)

• 10,000 robots to be installed

• Amazon deliveries in UK, India, China (bike)

• Fulfillment by Amazon: 65% +

• Sunday Delivery with USPS

• New Corporate Offices

• Phone rumor

• App Store: 200,000 apps/games

• AWS: software as a service

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Amazon Smile

• Amazon donates 0.5% of the price of your eligible AmazonSmile purchases to the charitable organization of your choice.

• AmazonSmile is the same Amazon you know. Same products, same prices, same service.

• Support your charitable organization by starting your shopping at smile.amazon.com.

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• Estimated 22+ million customers @ $79/year

• 20 million products

• No minimum orders

• Free Shipping-2 days

• Free Video/TV Streaming

• Free Kindle Books

• Free Music Downloads

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Amazon Fire TV

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Amazon: Pantry

Prime Pantry is a new shopping experience on Amazon.com. Prime members can shop popular household essentials and have them conveniently delivered.Adding your first Prime Pantry item to Cart starts a Prime Pantry box. As you shop, you see that each Pantry item tells you what percentage of a Pantry box it fills based on its size and weight. Pantry boxes are large and can hold up to 45 pounds or four cubic feet of household products. As you check items off your list, we continuously track and show you how full your box is.You can buy as much or as little as you want for a flat $5.99 delivery fee per Prime Pantry box. Save gas, save money, save time.04/11/23 76

Amazon

Welcome to Amazon School Lists, a new way for K-12 teachers to create and share online back-to-school supply lists with parents. With everything from pencils and rulers to calculators and binders, parents can complete back-to-school shopping in just a few clicks. They can also copy, save or print the list. When Kindergarten, elementary school, middle school, and high school teachers and parents are on the same page about supplies, kids get off to a great start.

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Amazon DashDash connects to your home Wi-Fi network and works directly with your AmazonFresh account. Say or scan items into your Dash, and then view the list on your desktop or mobile device to purchase and schedule delivery.

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Amazon Fresh

• Seattle

• S Cal

• Nor Cal

• Partnering with other

Food retailers

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Amazon May Day

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Experimenting with Drones

• 85% of orders weigh 5 lbs or less

• Waiting on FAA to determine guidelines

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Amazon Performance2010 2011 2012 2013

Sales 34.2B 48.1B 61.1B 74.4B

Inventory Turns

11 10 9 9

Accounts Payable

72 74 75 74

Cash Flow 3.5B 3.9B 4.2B 5.4B

Cap Ex 979M 1.9B 3.8B 3.4B

Shipping Revenue

3.5% 3.2% 3.7% 4.1%

Outbound <7.5%> <8.3%> <8.4%> <8.9%>

Fulfillment <8.5%> <9.5%> <10.5%> <11.5%>

Gross Margin

22.3% 22.4% 24.8% 27.2%

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• Walmart serves customers more than 250+ million times per week at more than 11,000+ retail units in 27 countries

• WalMart employs 2.2 million associates globally, including almost 1.4 million in the United States.

• Walmart is one of the largest private employers in the U.S., the largest in Mexico and one of the largest in Canada as well.

• Sales: $473 Billion

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• How to compete with Amazon

• Focus on small stores: Multiple Formats• Convenience store• Market store

• Order online pick up at the store.

• Drive in-Pick up centers

• Savings Catcher: checks competitor ads for items purchased at Walmart, and provides e-gift cards for the difference in price when a competitor’s price for eligible items is lower.

• Wild Oats partnership

• Expansion of organics

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Walmart Innovations• Experimenting with grocery home delivery

• San Jose, San Francisco, Chicago.

• Offering ‘same-day’ deliveries via internet

• Offering click and pick with in-store lockers

• Partnership with American Express Cards

• Offering Scan and go via smartphone

• Express/Convenience Store program

• E-commerce sales $13 Billion

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Net sales Net sales

~$279.4B Increase of 2% or $5B

Operating expenses

Operating expenses

18 bps of leverage4 consecutive years

Operating income

Operating income

~$22.4BIncrease of 4% or $860M

Grew profit faster than sales

Gross profit rate -1 bps

Priceinvestment

Priceinvestment

Walmart U.S. delivered a strong FY 14

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Net sales Net sales

~$50.6B Increase of 1.6% or $785M

Operating expenses

Operating expenses

14 bps of deleverage

Operating income

Operating income

~$2.0BIncrease of 5.0%

Grew profit faster than sales

Gross profit rate -1 bps

Priceinvestment

Priceinvestment

Membership income

5.9%

Sam’s Club increased membership income

Note: All data is without fuel

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Net sales Net sales

~$136.5B Increase of 1.3% or $1.8B

Operating expenses

Operating expenses

18 bps of deleverage

Operating income

Operating income

~$6.3Bdecrease of 4.7%

Gross profit rate -10 bps

Priceinvestment

Priceinvestment

Walmart International invested in price

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69 different banners through out the World

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Walmart Transportation

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• 8th largest food retailer

• 7 million customers visit 375 stores each week

• Opened 32 stores last year

• Fortune one hundred best companies: 16 years

• Gross Margin: 35.8%

• Net Income: 4.3%

• 94 stores in development

• Goal: 1200 stores

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• 418 stores: $11 billion

• 4,000 items: 80% private label

• Stores: 8-12,000 sq. ft.

• Sales per sq ft: $1750

• Top ranked supermarket by Consumer Reports

• Outsourced transportation

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• 150 stores/26 states

• 34% margin/7% ops

• Sales: $1.6 Billion

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Deep Discount Stores

• $16. B

• $9.3 B

• $7.4 B

• $5.3 B

• Price Rite: Shop Rite

• Savalot: Supervalu

• Aldi: Albrecht

• Ruler Foods: Kroger

• Bottom Dollar: Delhaize

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Dollar Stores

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• Sales $73 Billion

• Net Profit: $2.4 Billion

• 2016: $130 Billion

• 2020: Healthcare to be 20% of GDP

• 8,200 locations

• 70,000 associates

• 10,000 Americans turn 65 every day

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• Makes wrong decision about credit card technology

• Data breach which impacts millions

• Sales go down

• Makes major acquisition to invade Canada

• Rolls out 100+ stores

• Didn’t understand supply chain issues• Wrong prices• High out of stocks

• CEO gets fired!!

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Perspective

• All of these retailing concepts were not viewed as competition to food retailers 20 years ago.

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• Makes an investment into Albertsons

• Albertsons buys United Supermarkets

• Acquires the 5 Supervalu divisions• ACME• Shaws• Jewel• Albertsons/West Coast• Shoppers/Farm Fresh

• Saves Safeway/US

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• Cerberus saves the retail segment

• Supervalu goes back to its roots

• Sales: $18 Billion /Profit: 1%

• Purchases the Rainbow stores in MPS

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• Sales: $20 Billion

• Multiple Formats• HEB• Central Mkt• Mi Tienda• Joe V

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Ahold/

• 167 pick up points

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• Seattle

• Philadelphia

• Los Angeles

• NYC

• Chicago

• Austin

• Washington DC

• San Francisco

• Boston

• San Jose

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Sysco dominates

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Global BattleCompany Banner Sales,

2011 (USD bn)5-year CAGR,

2006-2011

1 Walmart 483.1 +5.6

2 Carrefour 150.4 +4.1

3 Tesco 116.3 +6.0

4 AEON 107.7 +12.8

5 Metro Group 106.3 +4.0

6 Seven & I 98.8 +9.6

7 Schwarz Group 97.5 +10.9

8 Kroger 93.7 +6.3

9 Costco 93.5 +7.4

10 Casino 86.3 +10.1

Company Banner Sales, 2017f (USD bn)

5-year CAGR, 2012-2017f

1 Walmart 637.7 +4.8

2 Amazon 199.4 +24.8

3 Carrefour 169.6 +4.8

4 AEON 158.6 +5.9

5 Tesco 156.9 +5.2

6 Costco 151.7 +7.8

7 Seven & I 140.2 +5.8

8 Schwarz Group 130.1 +6.4

9 Metro Group 118.5 +3.6

10 Auchan 113.3 +6.7

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When there Is no vision, the people perish!

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Complexity in Supply Chain

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Battle of Value Chains

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Going Forward

1. Eliminate the Black Holes

2. Embrace Technology

3. Develop an OmniChannel Strategy

4. Transportation/Traffic Opportunities

5. Collaboration in the Network

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1. Eliminate the Black Holes!!!

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Map the Value Network

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SourcesProductsRoutesCostsPricingInventory

Value Chain Mapping: Product

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Procurement is a supply chain function!

Product Visibility

• Track and trace from source to your operation

• Assume RFID will not happen?

• Ensure integrity of the product

• Identify opportunities to improve in-stock performance throughout the supply chain

• Temperature• Quality• On-time• Lowest Cost

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Food Safety Modernization Act

• Foreign Supplier Verification Program• All levels• Original source• Visit facilities• Major story: Prawns Supply Chain

• Traceability of products through the network• RFID required to make it work• Life to Death accountability

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Food Safety Action Plan

• Court recently ruled “all parties involved in a supply chain contamination problem can be held liable.”

• Jenson Farms, CO• CDC-reported total of 147 infected persons from 28

states, including 33 deaths and one miscarriage.

• Lawyers will sue all companies!!!

• Focus on the potential problem products/companies

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Reduce deliveries to the store!

• Traditional DSD products (15-25% cost of goods)

• Specialty Food Products (GM: 17%+ Net: 2%)• 11% US food sales• Growth: 14%

• Foodservice Products ( GM: 15-25%+)

• Cross Dock from supplier/distributor

• Flow Through Pallet Build

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2. Technology Opportunities

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• Embrace Technology:AutomationPaperless SystemsSupply Chain Cloud

Ariba: The world’s business commerce network

IBM ecommerce platform

DC: Automation

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Take Fingerprints off the Box!

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3-D Printing

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Internet of Things

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Internet of Things

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Video: SAP GlassGoing Paperless in the supply chain• https://www.youtube.com/watch?v=9Wv9k_ssLcI

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Technology Tools

• Brands go online direct to consumer• On-line food shopping continues to grow

significantly: 6% in Europe; 15% during holidays

• An explosion of mobile shopping/scanning apps

• Digital dialogue widens/expands• Front end checkouts are eliminated

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3. Omni Channel OpportunitiesDevelop an Omni Channel Strategy:•Pick from a DC; Direct to Consumer

•Pick from a DDC; Direct to Consumer

•Pick from a DC; Pick up at the store

•Pick from a DC; Pick up via a locker

•Pick from retail store; direct to consumer

•Pick from retail store; pick up at the store

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Peapod/Ahold: $570 million Fresh Direct: $450 millionAmazon Fresh: $100 million

Picking from the store is not an ideal solution!!!

On Line Food Sales

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FMI: 11%

• Effectively manage transportation services• Professional traffic team to control all purchase orders.• Audit team to review freight bills.• Move to intermodal where appropriate• Review energy resources: Natural Gas, Electric• Hedge your energy commitment• Black box/satellite connections with all assets• Balance the work load : Offer incentives for ‘slow days'

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4. Transportation Opportunities

5. Collaboration in the Network• Share Groups

• Educational Programs: 600 colleges/universities now offer degrees in Supply Chain Management

• Logistics Institute (Canada)• Consultants

• Blogs

• Road Trips

• Association local meetings• CSCMP, APICS, WERC, ASM

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Blogs:

• Food: valuenetworkissues.blogspot.com• Marketing: haccmarketing.blogspot.com

• Richard2496@comcast.net• 610-256-6636

• Post on www.slideshare.com

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Thought for the Day

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