From the pages of Jim Prevor's Perishable Pundit

Some decisions in life are very difficult and some are really easy. Selecting a keynote speaker for The Amsterdam Produce Show and Conference was a really easy call. In a year when Lidl began its American invasion and Amazon bought Whole Foods, retail is the nexus of concern in the industry – and Cornell’s Ed McLaughlin is recognized as the world’s single most prominent expert on the evolution of retail as it connects to the food industry.

Though his roots are American, his involvement in Europe is substantial. He has been a visiting professor of retailing at IESEG in France since 2009 and an Adjunct Professor of retailing at Nijenrode University, the Netherlands School of Business, since 1989. He has worked deeply with Albert Heijn since 1989 and founded the Ahold Retail Academy, which he has directed since 1998. Indeed, his chair at Cornell is named after Robert G. Tobin, who was the Chief Executive Officer and President of Ahold USA.

There is simply no one on earth who so seamlessly combines an understanding of global retailing, the produce industry and who thinks so profoundly about the future.

We asked Pundit Investigator and Special Projects Editor Mira Slott, to get a sneak preview of Professor McLaughlin’s presentation:

Ed McLaughlin
Robert G. Tobin Professor of Marketing
Director, Food Industry Management Program
Former Dean, Charles H. Dyson School of Applied Economics and Management
Cornell SC Johnson College of Business
Cornell College of Ag. and Life Sciences
Cornell University, Ithaca, New York

Q: A powerful aspect of the Amsterdam Produce Show intertwines global academic excellence and cutting-edge industry research through unique collaborations with renowned universities around the world. Cornell University and its Food Industry Management Program have been at the forefront in that regard, with you taking a leading role. You’ve proven yourself to possess an innate mastery of lifting vast academic expertise into actionable real world solutions [Preview Of Foundational Excellence Program: Cornell’s Ed McLaughlin Leads Blockbuster Academic Cast To Elevate Knowledge Base Of New Produce Industry Professionals]

These talents should serve you well during your keynote presentation in Amsterdam, since the topic you’re tackling is no small feat: Disruptions in the Food Retail Landscape: Implications for Fresh Produce

A: Today, the food retail sector is now arguably experiencing more radical change and disruption to its structure and conduct than at any time in its history. I see three main recent disruptions:

First, the rise of discounters around the world but particularly in the U.S.; Second, the Amazon-Whole Foods deal impact; and Third, Wal-Mart’s dominance and strategic reaction to One and Two.

I predict all three will reverberate through the food industry for years to come with game changing implications for both produce suppliers and retailers.

Q: That’s a bold prediction. Could you walk us through your analysis, and also, contextualize the phenomenon for Amsterdam Produce Show attendees.? Do the impacts translate differently in Europe versus the U.S., etc.?

A: I can certainly sketch out what I have in mind for my presentation. I would like to hold back on the details for two reasons: First, I don’t want to give away everything, but more candidly, I’ll still be finishing my thinking and research right up to the Show, since this is a moving topic.

Q: Fair enough, disruptive news is unfolding at a fast pace. We’ll create some anticipation, and leave room for attendees to pepper you with up-to-the-minute follow-up questions.

A: That’s great. I’m up for the challenge!

Q: How did you key in on these three disruptors specifically? Aren’t there other disruptors in play?

A: I may bring in a fourth one to the discussion. Another important disruption is technology, and particularly in the produce industry, grower-oriented product and genetically-modified changes that will affect the produce system, and the branding. It could be challenging to give this topic its due within the timeframe of this one presentation.

Q: We may need to extend the conference another day for you to cover all that ground. Why don’t you start by elaborating on what you consider the retail-oriented game changers: the infiltration of discounters, the Amazon-Whole Foods merger, and what Wal-Mart intends to do about it.

A: I’ll summarize the highlights in each of those disruptions, and the implications I see for the produce industry. Number 1, let’s talk about discounters. In the U.S., Aldi and Save-A-Lot, and a few other equivalent-type stores have existed for a long time. We used to call them hard discounters. Aldi started in the U.S. 40 years ago. A foreign company thought they could survive by selling 600 SKUs, no brands, no bagging, no bathrooms, no phones, and no Coca Cola. It was a preposterous concept, and 1,500 stores later it’s booming.

Q: But isn’t that growth also predicated on its evolution into fresh food categories, including produce?

A: For the past 15 to 20 years, Aldi has carried fresh foods, and fresh produce particularly, although it didn’t start out that way at all. There’s a major acceleration going on now in the growth of discounters, with people keenly aware of Lidl’s entry into the U.S. this summer. Lidl, also a German-based company with 10,000 stores, is a very proven concept. In Europe, Lidl has more extensive produce offerings than Aldi, so it represents a substantial threat to Aldi in the U.S. It’s opened about 40 to 45 stores already in the U.S. and announced that number will be as high as 100 by the end of this year.

This is not a surprise to anyone. Lidl made its intentions very clear about three years ago that it was coming to the U.S., so all these incumbent retailers, including Aldi, have had time to prepare.

Q: And have they done so?

A: Aldi in preparation has announced it will now increase from 1,500 stores in the U.S. to about 2,500 stores by the year 2022. Aldi has already begun an aggressive capital expenditure program, taking fairly radical steps for a U.S. store. Instead of remodeling while the stores remains open, Aldi is undertaking the dramatic step rarely taken by a retailer — to allow the stores to go totally dark, closing the stores completely until the modeling renovations are completed.

Q: Is that advisable?

A: This is a very risky step for Aldi, because during the time of its closing, consumers must go to a competitor to get their food. Aldi risks they’ll prefer the competitor and not return to Aldi. Apparently, Aldi agreed to take the risk because they can renovate quicker rather than having to work around shoppers. If Aldi completes the 900 more stores than they have now, it will be the third largest food retailer in the U.S. in terms of store numbers, so this is a very significant development.

There are two prongs, or somewhat three prongs, in this disruption development: Number one is Aldi; Number two is Lidl; and the third, which is often overlooked, is the rapid growth of dollar stores.

If you think of just the two largest publicly held dollar stores, it’s Dollar General and Dollar Tree. Between just those two companies, they have about 28,000 stores, Dollar General by itself has announced for 2017, 1,000 new stores. One third of those stores will have substantial fresh produce departments. You remember when dollar stores used to be cans and cheap paper goods.

Q: Are dollar stores really much of a threat for produce department-rich food chains? For years, dollar stores have carried relatively few produce items, just the basics, due to supply chain procurement and in-store logistics issues with fresh fruits and vegetables.

A: They didn’t used to have refrigeration, and now they do, with money back guarantees if shoppers are not satisfied, and produce ads on the front page with as aggressive pricing as you can get.

One of the most rapidly expanding sectors is dollar stores, Aldi and Lidl. This poses an enormous challenge to traditional supermarkets because of the very low prices and increasingly improved quality,

Yet this also represents an opportunity for produce suppliers in a channel that’s just beginning to develop, where they can sell products that might not have the highest quality or cosmetic appearance for conventional supermarkets but still good quality attractive for an aggressive price discount format.

Q: Are the discounters realigning or customizing product selection to adapt to different market demands?

A: Two things that are fairly obvious. They are all expanding their fresh presentations. You look at Aldi 20 years ago, and it only had things like potatoes and onions in polybags, but now it offers an increasingly greater number of items, including more upscale items, such as Driscoll’s strawberries, fresh herbs, and branded bananas at aggressive prices. Not only more SKUs, but higher quality products that are competitive with conventional supermarkets.

Q: Did Wal-Mart miscalculate the full-on discounter incursion? For years, Wal-Mart plunged forward with its every-day-low-price, low cost formula, while other retailers strategized around it to survive, often upscaling produce assortments and services to differentiate as the anti-Wal-Mart…

A: Wal Mart is the largest retailer in the world, the largest company in the world, which doesn’t surprise anyone. Wal-Mart has been in food since 1989, but is still struggling a little bit with fresh food and fresh produce.

Q: Why?

A: They’re a company with a history in dry goods, apparel, electronics, and product that comes in cardboard boxes. And despite the fact they’ve now been in the food business for 25 years, I think it’s fair to say most industry analysts would not regard their produce quality equal to that of conventional supermarkets, but their produce department performance overall is equal to that of conventional supermarket companies.

Wal-Mart’s sales growth has been declining rapidly from what used to be double-digit sales growth on an annual basis. And if you go back a few years, double-digit same-store sales growth as well. Those days are long over. Wal-Mart’s stock price has been fairly stagnant, and Wal-Mart is also very nervous because its global low-price reputation is now being challenged in a very aggressive new way by these discounters.

Q: At Produce Business, we’ve long tracked how prices on the same produce items, and average shopping basket totals, compare at competing retailers within different markets of the U.S. For many years, it was not a contest. Wal-Mart dominated markets as the low-price leader, with significantly lower prices on nearly all comparable SKUs. That changed even before Aldi entered markets.

A: Wal-Mart is returning to its former positioning of always the low, sometimes the lowest price. They used to be more expensive than Aldi in most markets. They’ve invested billions of dollars to lower prices and now they are actually at par in many of the markets. So, Wal-Mart is being very aggressive in pricing, and this is a challenge for all suppliers, not just produce suppliers.

Wal-Mart goes to its suppliers now and says, "Look, we have this competitive pressure, we have to lower our retail prices even more, and you suppliers have to help us do that." Wal-Mart has announced that it expects suppliers to help it to be at least 15 percent lower than its competitors’ prices, some 80 percent of the time. This requires substantial price concessions. Suppliers need to figure out how to do that or not retain Wal-Mart as a customer. For many suppliers in the US, Wal-Mart represents 15 percent to 20 percent and in some cases 30 percent of their business.

Q: Industry executives have long pontificated the risks and benefits of putting all their eggs in the Wal Mart basket versus diversifying their businesses… A 15 percent reduction for produce suppliers sounds challenging in what is already a low-margin, cut-throat business. Still, does that pricing reduction strategy apply across the board, or is it focused on particular products and brands?

A: It’s primarily targeted at major grocery brand suppliers. I don’t have evidence that it’s being applied to fresh produce companies, but frankly I think it’s likely. I’m doing more research on that, and for Amsterdam, I’ll have more information to share.

Q: After its Whole Foods purchase, Amazon created a major media blitz touting significant price cuts of Whole Foods items, but under closer examination those price reductions were selectively employed.

A: What you’re referring to is the tactic of slashing prices on 12 items, while the other items are still high margin. It was somewhat of a PR stunt with Amazon/Whole Foods announcing price reductions, but also a brilliant strategy because it seems to be working.

Another thing to think about with Wal-Mart is observing what’s happening in ecommerce, and Jet.com and Wal-Mart.com coming together to challenge Amazon’s ecommerce dominance.

It’s safe to say, Amazon caught the industry, Wal-Mart included, off guard with the Whole Foods merger.

Wal-Mart is not used to being in second place, and having to play catch up. And I don’t think Wal-Mart is going to tolerate that. It just established its 1,000^th location where consumers can order and pick up at the store. It is commonly called a “click and collect” strategy. They’re moving into this area very aggressively.

Amazon’s $13.7 billion acquisition of Whole Foods is an historic disruption. It’s a seemingly contradictory strategy in a sense. Whole Foods is all about high quality, high cost and high price, and Amazon is an innovation machine focused on technology, consumer analytics and price to the bottom strategy.

There are very few categories of product that Amazon doesn’t have a very comprehensive listing. However, the food industry is the largest sector in the U.S. economy at almost a trillion dollars, but has not been penetrated by Amazon. So, they made this offer, after introducing all sorts of food products online 10 years ago, and then after introducing Amazon Fresh only available in selected markets in 2007 with somewhat of a disappointing performance.

Q: Disappointing in what way?

A: They expected a rollout to 50 different U.S. markets, and it’s still only a fraction of that. A decade ago Amazon Fresh started in Seattle and just in the last four years moved into Los Angeles, San Francisco, New York and a few other cities. Amazon said that by the end of 2016 it was going to be in 40 or 50 major U.S. metropolitan areas, but is only in about a dozen markets today. I don’t mean to say that performance in those markets is disappointing, but that Amazon set a very ambitious rollout goal, which it has not come close to meeting.

In the meantime, Whole Foods’, which arguably has the best reputation for fresh foods and fresh prepared foods in the U.S. or in the world, had a fairly disappointing corporate and financial performance over the last couple of years. Since 2013, Whole Foods’ stock has fallen almost in half.

Q: Why is that? Is it because of competition or has Whole Foods reached market saturation?

A: The demographics of their new stores are not close to the high-quality demographics of their earlier stores. When they first opened, they opened in high income areas with highly educated consumers who were willing to appreciate them and could pay for this “whole paycheck” concept. With each succeeding generation of stores, they already saturated those high income, highly educated areas, so they started opening in secondary areas that didn’t have the strong demographics they needed. Their sales per store were much lower. In the meantime, competitors started to encroach on their geography.

Whole Foods stores overlap with a lot of their competitors, much more so than they did four or five years ago. To some extent, Amazon put out a lifeboat to Whole Foods, and I think it will introduce a bunch of things that will help them emerge as a much greater competitor.

Q: How much of a threat does this merger really pose?

A: Make no mistake about it, this Amazon/Whole Foods deal sends shivers up the spines of virtually every retailer in the United States.

The day the deal was announced, Kroger, which is the largest supermarket chain in the U.S., had its stock decrease by 9.2 percent. Then on the day of the closing, August 25, Kroger stock dropped $2 per share in one hour, and the six largest brick-and-mortar retailers in the U.S. lost $12 billion in value in that same hour.

That’s because these other retailers and the investors in these retail companies understood this represents a very significant share of the market, effecting high-end retailers because Whole Foods will now have the technology assist from Amazon, but also low end, because Amazon will have more Whole Foods private label food products to sell on line.

Q: What implications does this have for produce suppliers?

A: Let me talk about that for a while. First of all, I think they have to understand conventional retailers are going to be under more pressure than ever before to have a differentiated strategy from the high-end specialty stores to the low-end discounters (and I think you can include Wal-Mart in that discount category). Retailers need a brand story from their suppliers even more importantly than they needed before.

I’ll give you a few examples. Retailers understand their consumers are concerned about sustainability more than ever before. They want suppliers with stories about clean water production, sustainable soil practices, reduction of chemicals, and responsible labor practices. More and more retailers are interested in organic and local products, where you can create a very effective narrative with a supplier/retailer partnership that maybe the discounters and ecommerce competitors can’t easily duplicate.

This is also an opportunity for suppliers to develop more innovative products. It could be new value-added, even genetically modified products for the high end, but there’s also an opening to penetrate this new discount channel with all sorts of products that are maybe high quality but not branded as well, or misshapen… This produce department expansion is consistent with trends towards healthful eating

I think suppliers have to help retailers with an ecommerce strategy. It’s no longer enough to just have a brick and mortar store. Every retailer needs to tap into the digital marketplace. That’s important for all of us, but it’s especially important for millennials.

Q: Selling fresh produce online has gone through quite an evolution and many iterations…What are your predictions for its market penetration?

A: I think the channel will have a significant impact in the future, and the reasons for that are three-fold: Number one, of course it’s easier to ship a dry grocery product across the country from Seattle than fresh produce from my favorite local farmer’s market. However, one of the big benefits of Amazon getting involved in the fresh food business is applying their technology to fresh produce distribution. Many analysts are encouraged that Amazon already has Amazon Fresh in a dozen major markets. But now with the acquisition of Whole Foods, they’ve got 461 Whole Foods stores that can act as distribution depots in local markets. I think we can expect distribution to become more efficient and at the same more local in the future.

Secondly, it’s indisputably clear millennials are the consumer segment most often using digital means for food shopping. Ecommerce of food now is something like 5 or 6 percent of the total U.S. retail food sales, but accounting for 10 to 15 percent of food sales for millennials. So, as millennials grow and build families, and are conversant in technologies that older consumers are not, I expect the combination of better technology and more consumer demand to drive electronic fresh fruits and vegetables.

Finally, the third prong, more and more retailers are developing ecommerce strategies because they realize they have to. The precept, build it and they will come, or that supply creates its own demand, the more retailers offer ecommerce solutions the more ubiquitous, and sales will continue to grow. Unlike ecommerce companies with no retail history, brick-and-mortar chains like Stop & Shop, Giant and Kroger can benefit from their decades of consumer brand loyalty, providing instant credibility.

Q: Consumers have myriad choices of where to buy produce, and the breadth and depth of those choices grow exponentially. Is there a risk in retailers trying to compete on all fronts, to be all things to all people and dilute their core strengths and what they’re best at doing?

A: I think it’s fair to say the very high end and very low end retailers have a strategy targeted more narrowly on a customer segment than conventional retailers. Aldi, Lidl, and dollar stores are focusing on lower income consumers that aren’t willing or able to pay upscale market venue prices.

On the other hand, conventional supermarkets, like Safeway, Kroger, and Publix in the U.S., are trying to be all things to all shoppers. These are outstanding companies that all offer high-end/high-price items, and also products meeting certain specifications that are priced to the market, and they probably have some products that are lower priced to attract the lower income segment and to compete with the discount store located across the street. These retailers understand these discount stores are increasingly important competition.

However, you might have 60 to 100 fresh produce products in an Aldi store, where in Kroger there’s 800 to 1000 products. The volumes are not only greater in a conventional supermarket, but also span the spectrum of products that are being carried to attract different customer segments.

Q: Does your analysis look at impacts of these disruptions outside the context of the U.S. market? Do you see similar dynamics in the Netherlands and other countries in Europe and beyond? What are the most relevant points for attendees at the Show?

A: All three of these disruptions are global trends. In a few weeks, I direct the Cornell retail program in Japan, and I’m talking about some of these trends. Japanese retailers are fascinated by what’s happening with Amazon/Whole Foods. They were here this summer for an entire day, about 30 retailers, and it’s all they wanted to talk about.

Every retailer in the world is watching, especially Wal-Mart. The discounters are coming to the U.S. from Europe, and the discounters are expanding rapidly in Europe too. They are coming to the U.S. later, but impact Europe almost in the same way.

Q: Going forward, what are the key strategies retailers need to employ for survival?

A: First, the easiest move is that retailers need to sharpen prices to align with the consumer segment they are addressing.

Q: What do you mean by sharpen?

A: I’m connoting price alignment as opposed to reduction. Second, they have to develop compelling strategies to retain their customers. They have this double-barreled gun looking right at them, one is discounters, and the other is ecommerce combining with high-end Whole Foods, and if conventional supermarkets don’t respond swiftly, they will get caught in the crossfire.

To develop a compelling narrative, they have to focus on the fresh department.

Q: And you note that conventional supermarkets have an edge in that respect…

A: That’s true but discounters represent a threat partly because they are increasing the size of the fresh department and the quality of fresh. Conventional supermarkets have the history, they’ve got the market and supply channels developed and can afford to carry a much greater variety then the discount stores will ever be able to carry.

Retailers need to redouble their efforts to align with the right supply chain partners. This is independent of the size of the supplier. It sounds self-evident, but it’s the supplier that understands the needs of the retailer. The market is about marketers, and the best marketers spend a lot of time understanding how to solve the problems of their customers, listen carefully and think creatively to help the retail customer execute its strategies relative to its competitors. I would say the produce department is pivotal to that differentiation.

**

We’ve been fortunate to work with Ed on various projects in excess of 30 years. Yet we learn more with each conversation. When we launched The New York Produce Show and Conference, which Ed has also been involved, and as we adapted it in the form of The London Produce Show and Conference and, now, The Amsterdam Produce Show and Conference, we had a vision of curating the very best thought and practice leaders in the industry and bringing them together so that individual executives, their companies and the industry as a whole could advance via the exchange of ideas, development of knowledge and a quest to identify commercial opportunities.

Come and visit The Amsterdam Produce Show and Conference. You can be certain that listening to Ed and engaging with these ideas at the event will point the way to new success for you, your company and the industry.

For more information check out the show website here.

If you would like to exhibit or sponsor, let us know here.

You can register for the event here.

Book a room at our headquarters hotel here

We look forward to seeing you in Amsterdam!

If you have a question or need additional information please feel free to send us an e-mail.

We thank Ed McLaughlin for his willingness to engage with the show and help elevate the industry.

We look forward to seeing you in Amsterdam!