Supply Chain Management to Address Changing Food Markets

Vijay Sardana

Global sales of high-value products have been growing, as the consequence of WTO agreement. Consumers have started looking for better food options and begun purchasing fewer staples like rice and wheat and more high-value food items such as value added wheat and rice products, meat, dairy, pasta, and frozen vegetables. This change is witnessed due to free trade agreements, and increase in incomes in many developing countries during the past few years.

Indian food buyers and suppliers have also responded to this expanding consumer demand by importing high-value foods from around the world. Moreover, many global and Indian food manufacturers have invested in processing facilities in many countries keeping in mind emerging opportunities due to free trade agreements.

The choice to import or produce locally depends on the nature of the product, trade and domestic policy issues, and other factors affecting transaction costs. One thing is certain that global food markets have become more competitive and trade in high-value products has slowed as more high-value products are produced locally. It means with liberalization it is not necessary that food trade will increase. It may lead to more investment in the country and therefore increasing competition will offer better choice to consumers in the market. This is a great opportunity for consumers but this can also put pressure on profits for manufacturers.

In order to retain profitability, innovation will be the key driver.

Segments in Food Market:

Food trade is often categorized based on the level of processing. In broader terms it can be classified as commodities and value added differentiated products.

The other way of looking these segments is:

  • Traditional bulk commodities such as wheat, rice, and corn;
  • Horticultural products such as fresh fruits and vegetables;
  • Semi-processed products such as flour and oils; and
  • Processed food products such as pasta and prepared meats.

Horticultural, semi-processed, and processed products are considered high-value products depending upon many factors. Unlike bulk commodities, high-value products often offer convenience in the form of ready-to-cook, ready-to-serve, ready-to-eat and are generally more perishable by nature. These characteristics make high-value products subject to greater quality and safety scrutiny compared with bulk agricultural commodities.

Given these characteristics, food suppliers sometimes choose to meet consumer demand through locally processed food products rather than through imported food. This needs better understanding of supply chain and logistics issue. The wastage of value added product could seriously dent the profitability. Also, domestic and trade policies and regulations can be impediments for trade in high-value products.

Globalization is the driver

Food marketing is going global. Around the world, food processors, wholesalers, and retailers as well as foodservice firms, are looking to other countries to source the raw materials and to expand their markets. The interesting part of the trade is that Indian companies are also looking abroad and talking to foreign companies for possible tie-ups.

It is high time to have global perspective and action plan to capture local markets.

Global Reach is within reach

Recent developments have given encouragement to Indian food companies to think global. The acquisition by Indian companies in USA, UK and other markets clearly indicates that many entrepreneurs have started looking forward in aggressive manner and are willing to fight the marketing battle from front in the marketing warfare.

The most important precaution they should take is that supply chain must remain intact otherwise that may result in loosing battle.

Foreign Markets Provide Opportunities for Expansion

While many large food processing firms have gone international, most of them are not major exporters-especially of highly processed consumer food products. The world’s largest food processors continue to expand aggressively in foreign markets by increasing their investments in foreign plants or expanding licensing arrangements with foreign firms to produce and distribute their branded products. Nestle, for example, recently signed a joint venture agreement with General Mills to produce and market General Mills cereals, as well as jointly develop new brands. Philip Morris announced its acquisition of Jacobs Suchard, the largest confectionery firm in Europe, with annual sales of about $4.5 billion. Tata Group has acquired equity stakes in US Beverage Company, British Tea Company; Thaper Group acquired European Food Company to expand its operation in Europe. Lavazza from Italy has taken over Barista Coffee Company in India; Godrej has tied up with Hershey from US and many more JVs are at different stages. This is a good development in food market.

Strategic benefit in investing in supply chain in other countries

Establishing supply chain and production facilities in foreign countries avoids tariff and most non-tariff trade barriers. Even where trade barriers are minor, many firms apparently prefer producing in the foreign country rather than exporting. Those firms find it easier to deal with local governments and regulatory agencies when the product is produced in the host country. For consumer value-added products, it is also easier to keep abreast of local tastes and opportunities for new product development or reformulations when products are produced in the foreign country. The other major benefit is the low cost supply chain management because of very high cost of fuel. Lots of Food MNCs develop good linkages with authorities and the benefits are visible in the market place at the time of controversies. The role of beverage companies in this regard in India is quite visible and appreciated.

Some firms prefer to acquire established brands in foreign countries and use those facilities as a base for further expansion. Furthermore, producing a product in a foreign plant may improve access to local food distribution firms and facilitate a variety of marketing and promotional activities involved in selling a branded consumer product. In fact, many local companies with strong distribution network are looking for strategic tie-ups.

Changing Retail Pattern for Food Products

Unlike the processing sector, emerging food retailing companies are almost entirely domestic-market oriented. The interest shown by big players in India clearly indicate that domestic marketing scenario offers huge opportunity to make profit in food marketing business. The profit making options are many, starting from better products to better management.

Some of the major retailers are also willing to help their vendors in improving their supply chain. It is a good development and will be mutually beneficial. Metro Cash-n-carry, ITC are such examples.

Foreign Firms in the Domestic Food Markets

While foreign companies have increased their investment, Indian firms have also started looking at foreign food marketing operations.

As the situation emerges, foreign firms will be investing more in Indian food retailing at a much faster rate in comparison to their Indian counterparts expanding into foreign countries. Inspite of regulations restricting the stock-holding and internal growth of large retailers in India and many other countries and the fluctuating foreign currency have encouraged foreign investment in Indian food processing and retailing.

In order to make their dream a reality, the biggest challenge for them will be to manage the fragmented supply chain.

Need to have strategies to have secure supply chain to access International Food Markets

There are many strategies that firms can use to enter foreign markets. Some involve considerable more investment of time, money, and expertise than others, and greater risk as well. Most firms enter the export market by using foreign agents or brokers. As export sales increase, many firms set up separate export offices or divisions within their existing operations and companies.

Indian food companies can also think of franchise models to expand their presence in other markets. Food Companies may also choose to produce and market their branded products in foreign countries under licensing agreements with foreign firms.

While this generally requires no direct investments in foreign production facilities, but considerable skill and investments are required to identify appropriate licensees, develop production systems, supply chain and marketing procedures and establish quality control safeguards.

Joint ventures allow food companies to tap into the production, marketing, and regulatory know-how of host-country companies without the expense of acquiring wholly owned subsidiaries. Finally, food processors can acquire or build foreign manufacturing facilities and operate them as wholly owned subsidiaries. In actual practice, firms can use any one or all of these strategies at the same time.

The issue will however remain can companies manage supply chain thru remote control?

Supply Chain will change around the World

Food Supply Chain and Markets are changing around the world because of various factors, some of them are Food safety Regulations, Environmental issues, Investment regulations, Food Regulations, Animal Welfare Issues, Changing Purchasing power, Fuel prices, WTO agreements, Free Trade Agreements, Role of supermarkets, etc.

There are many factors which are reflecting the changing pattern of supply chain, consumer behaviour, purchasing power and concern of public health and other important issues.

Indian Food supply chains are set to Change

The recent developments in Indian food supply chain, price rise of commodities, changing food markets will have long term impact on the food processing and marketing activities in Indian Markets.

The new food laws and amendments in the existing rules and regulations will force companies to ensure food safety and accountability in the food system. This will improve professionalism in the industry and will encourage fair competition among good players.

The food safety debate in the media has contributed a lot to improve the food safety discussions in the country and we are likely to witness new regulations to protect consumer interests in coming days. All of these developments will enhance investments by large players in supply chain and marketing of food in the country. The debate between organized retail and small retailers will also impact supply chain in India.

 

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