March 1, 2018
Consumers’ seemingly inexorable march to the internet to buy goods previously purchased on-site and in the flesh — including food — is nothing short of revolutionary.
Consider the growth of e-commerce giants. Net sales were up 123% for Amazon at $135.9 billion for 2012-16, according to Don Close, RaboResearch Food & Agribusiness senior protein analyst. That was before Amazon purchased Whole Foods. For 2013-17, net sales were 359% higher for Alibaba at $158.3 billion. Over the same period, total Walmart sales, including online, increased 2.4% to $481.3 billion.
In as few as five to seven years, 70% of U.S. consumers will shop for groceries online, according to the Digitally Engaged Food Shopper study from the Food Marketing Institute and Nielsen.
Close estimates, conservatively, 20% of all food sales for in-home consumption will be purchased online by 2025. For perspective, he says total domestic food sales last year were about $1.5 trillion. A little less than half of that is for in-home consumption.
“The switch to online shopping is the biggest transition to occur in grocery shopping since the introduction of the supermarket in the late 1930s,” Close says. “Changes in where consumers buy groceries, when they buy and what they buy will inevitably force changes all the way through the supply chain. Nowhere will these changes be more dramatic than in perishables.”
That’s the topic of a new report from the RaboResearch Food and & Agribusiness group, written by Close, which explores what the beef industry will need to do to make beef an integral part of consumption in the online world.
Millennials prefer you to choose
If you’re of a certain generation, the rapid adoption of buying food online, especially perishables, can be tough to comprehend.
Most baby boomers would never dream of buying a steak or roast without seeing it. Letting someone you’ve never met do the picking is just as unthinkable. Millennials, who are overtaking baby boomers, are just the opposite, Close says. They figure others are more qualified than they are to make such selections.
Millennials are also of the generation and time of life when they’re willing and able to pay for added convenience. In fact, Close says the age-old saying “Location, location, location” that defined successful retail businesses in the past has been replaced with “Convenience, convenience, convenience.”
That’s what’s driving the growth of meal kits. If you’re unfamiliar, typically consumers choose from a variety of recipes, with prices based on ingredients and the number of servings. You receive the necessary ingredients — including fresh meat and produce — along with step-by-step preparation instructions.
There are currently more than 170 meal kit companies, according to Close.
“The driving forces behind the successful growth of the meal kit category are convenience, transparency and the inescapable fact that consumers in all groups want to know more about where their food comes from,” Close explains.
For beef consumption, Close sees meal kits as the proverbial two-edged sword. On the one hand, meal prices are determined by the center of the plate. As such, it’s harder for beef to be price-competitive.
On the other hand, Close believes the visibility meal kits present to beef could entice more frequent consumption by no-use and low-use beef consumers. As well, he sees the potential for supporting carcass value through increased use of new and underused cuts.
Along with convenience, expansive choice is driving consumers to shop online.
“A conventional supermarket of 30,000 to 50,000 square feet will carry 250,000 to 300,000 SKUs,” Close explains. SKU is the acronym for stock keeping unit, but think of each SKU as a distinctive item.
Mind boggling as that array of goods might seem, he adds that retailers can choose from more than 3 million SKUs. Online stores can offer a wider selection because they’re not bound by physical shelf space.
Ironically, if and when online volume for a perishable passes the tipping point, Close can see the day when online customers will receive the supplier’s top cut, while in-store shoppers searching for the freshest and best could get seconds or thirds.
Fewer brick-and-mortar stores
As soon as Amazon purchased Whole Foods, plenty of headlines proclaimed the ultimate death knell for physical grocery stores. Although Close believes online sales will shutter some brick-and-mortar stores, he thinks many will continue — but with a different business model.
“I think we’re headed toward a hybrid, where you buy and pay online and then you either have your order delivered, or you go to a pickup location,” Close says. He explains some conventional stores offering such services use their employees or a contracted service to walk the aisles and fill orders. To avoid congestion in their retail stores, others do the same, but in warehouse space used as a fulfillment center.
So, some grocery stores may cease retail operations and become warehouses and distribution centers for online sales.
As for the retail meat case, Close explains that the typical conventional grocery carries three categories of beef items: the bottom third of Choice for the mainstream; some Select for value shoppers; and, depending on the neighborhood, some upper-end branded products.
“With those three categories of beef products, we keep rolling the inventory. That’s how our current system works,” Close says.
Back to the future
The internet takes that basic pie of three beef categories and obliterates it.
“You’re not constrained by geography or space in the meat case; you’re only constrained by how many items you can carry on a website,” Close says.
“The pie is so big that you can identify the pool of customers that wants an ultra-high-quality beef product. We can identify a larger pool of customers that wants the bottom-to-mid-Choice, natural and non-hormone-treated, and so on,” he says. “With such wide access to potential customers and an almost endless variety of products, we can fulfill the product requests for every customer niche.”
That might sound familiar. It resembles what many envisioned two decades ago, when alliances and value-based marketing went mainstream. The broad notion was that industry sectors could create more value for consumers by working closer together, give consumers more specifically what they wanted and be paid for the effort.
Certainly, that’s current reality — up to a point. Certified Angus Beef carved out an entirely new value category. Branded beef is becoming the rule rather than the exception; the majority of fed cattle are traded in the beef, away from the spot cash market. There are vertically cooperative systems that identify and share the rewards of added value more precisely.
More niche markets?
But taking the next step toward further customizing beef for narrower consumer segments and assigning value more specifically has proven more difficult on any sort of scale. Maybe cyber-shopping provides the missing piece — or one of them.
Imagine a rancher or group of ranchers wanting to offer their own branded beef product. Some already do, of course, and more have tried. By themselves, offering such a product is usually unthinkable, given the logistics inherent in churning out a value-added branded product.
Those vagaries include having enough volume to make the product available without interruption; the economy of scale to be price-competitive; and the ability to market the entire carcass for added value, not just the middle meats.
Now, think your way through an internet-broadened pool of customers for more categories of beef, with narrower specifications. Perhaps there are enough suppliers wanting to provide a branded program with beef of a common, narrower specification. It’s still not easy, but perhaps more practical.
Ponder along the same path. Maybe someone links together enough of these supplier networks to consider building a specialty packing plant — not to compete with the giants, but solely to service specific niches.
Close believes such an idea is far from outlandish.
“Every time we run a specialty pool of cattle through the packing plant, we have to stop and start the kill floor,” Close explains. “They have to account for all of these additional SKUs, and have more cooler space and boxed beef storage to keep the specialty items separated.”
However, the absence of such evolution would do nothing to dilute the overall industry opportunity that comes with ever more value segregation.
“If we segregate cattle among all of these specific niches, the price spread will widen, because there are more categories cattle can fit in terms of the quality and the kind,” Close explains.
“Then, we add other management and feeding attributes, so the premium and discount schedule will also be much deeper. We’re going to look at pricing opportunities across the scale, but also pricing opportunities based on the number of bells and whistles.”
Thus, this niche specialization will spread value horizontally, but also vertically, Close says, as consumers select beef with an increasing number of verifiable attributes.
“I think we’re right on the threshold of seeing a whole new industry of third-party auditors verifying and certifying that the product is what it claims to be. I see that happening relatively soon,” Close says.
“For producers, I think it will mean more specialization, more programming cattle to a specific end use, more verification. It will mean more alliances and networks,” he says
Of course, there must be enough economic incentive to entice enough producers to go to the added effort and take extra risk.
“These niche desires will result in additional demands on cattle quality and production specifications, which will lead to a wider price spread across all classes of cattle, as well as a more detailed premium and discount schedule,” Close says.
“These changes are indicative of a permanent change in the way food reaches the average American consumer — and if the beef industry is to ward off any further decline in beef consumption, it must embrace these changes and make beef an integral part of the consumption experience, regardless of where it is purchased.”
At least the industry has the opportunity to face the new frontier from a position of strength.
“We’ve got three years of herd rebuilding, growth in beef demand, growth in per capita consumption of animal proteins of all kinds, and a growing acceptance by society that some animal fat in the diet is not necessarily a bad thing. The industry currently has tremendous momentum,” Close says.
“We can use that momentum and position ourselves where we want to be for this change, or we can sit and do nothing until we’re told by someone else what we must do in order to sell our product.”
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