Consumer Driven Innovations and
Adoptions in the Food Supply Chain
Jean Kinsey, Professor, Applied Economics Department; CoDirector, The Food Industry Center, University of Minnesota, USA
ERS, TFIC, Farm Foundation Conference
Global Markets for High-Value Food Workshop
Washington DC
February 14, 2003
Consumer Driven Innovations Start
with Consumer Purchases

Information about what consumers are
buying drives decisions back up the
supply chain



The source in retail food = bar code
The sources in food service = purchases + chef’s
best guess + a few bar codes.
The sources are also public pressure from
consumer/citizens who care deeply about other
people, animals and the environment.
Consumer Driven Innovations Start
with Consumer Purchases

It has reversed the flow of decisions in
the supply chain => a new paradigm.

Old idea: today we sell what is available in
the supply chain.

New idea: today we sell what our
consumers have indicated they will buy.
Global Exchange of Goods and
Services - New Paradigm

The New Food Economy is
 not
about money or trade
negotiations
 it
is about information,
information technology &
personal networks
Themes :

Consumer driven demand/supply loops

Consumers seek “value” – accommodated by
discount retailers


Horizontal consolidation at all points
Intricate and shifting networks of firms around
the world

Human contacts count more than ever
Themes :

Trading nations diminish relative to private
firms in procuring food.

More food, more variation locally, less variation
globally

Public policy focusing on food for health care,
food safety, and food security.
Themes:
 Consumer
driven demand/supply
loops
 Consumers seek “value” –
accommodated by consolidated
discount retailers
Science Labs
Seed/Feed
Farmers
First Line
Handler
Ingredient/
Flavor
Companies
Retail
Food
MANUFACTURER
Food
Service
WholesalerSelfdistrib.
Supply chain
Demand chain
Retail
Store
52%
Wholesaler
System
Distrib.
Food Industry
Consumer
&-
Food
Service
48%
Citizen
Information Technology Demands
COORDINATION/COMPATABILITY
Private
alliances
Retailer orders
pull product
Internet
InterfaceUCCNet?
Food Manufacturers/
Processors
POS Data
Wholesalers/Self Distributors
4 Top International Grocers
Wal-Mart
Carrefour

Royal Ahold
Kroger
---------------------------------------------------------Brought to you by:



information technology
economies of scale
expert logistics
The Food Institute, 2002
Supply Chains in China

Rapid growth in supermarket (retail)
power

Rise in modern retailers (supermarkets,
hypermarkets, convenience stores and department
stores) accounts for 60% of consumer good sales
in 4 major cities in China.

Direct Foreign Investment by Multinational firms
dominate the growth
Chang, WSJ, 11/26/02
Supply Chains in China

Chinese supermarkets: (Joint Ventures since
mid 1990s. Must have local partner until 2004)





Carrefour 31 stores
Wal*Mart 22 stores
Mako (SV Holdings – Dutch)
Metro (Germany)
Buy directly from international companies

5% of goods come from within China
7 Top International Food Processors







Nestle S.A.
Kraft Foods Inc.
ConAgra Inc.
PepsiCo Inc.
Unilever plc
ADM Co.
Cargill
Prepared Foods, 171:12, 2002
(Switzerland)
(USA)
(USA)
(USA)
(UK,Netherlands)
(USA)
(USA)
Consolidation at the beginning
of the Food Chain Too
Scripps
Cargill
Merck
Novartis
Sandoz
CIBA Seeds
Monsanto
Dow
Supply Chains in
Food from Farm to Fork:

Supply chain => supply push of products


Demand chain => demand pull with
information, coordination and agreements with
global sources


Linear systems
Circular flow of information and inventory
replacement
Product Distribution Networks – Webs of
arrangements
Theme:
Intricate
and shifting networks of
firms around the world –
electronic and human facilitators
Transport, Delivery
Grow Crops,
Raise Animals
Add Value (Process,
Package, Cook)
H
I
M
G
F
H
Aggregate, Store
Monitor Quality,
Safety
H
L
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MI
R
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Oversee Market
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& Economic
Handle Waste,
TV
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Welfare
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Finance,
Manage,
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Credit
Train Labor
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Science, Research,
Development
Adopt Technology
Transmit Information
About Demand, Analyze Data
Add Value (Process,
Package, Cook)
Transport, Delivery
Grow Crops,
Raise Animals
Aggregate, Store
G
Monitor Quality,
Safety
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Science, Research,
Adopt Technology
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Development
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Transmit Information, Analyze Data
Transport, Delivery
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Raise Animals
Add Value (Process,
Package, Cook)
Aggregate, Store
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Monitor Quality,
Safety
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Manage,
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Credit
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Science, Research,
Adopt Technology
D
Development
H
I
M
Transmit Information, Analyze Data
Add Value (Process, Package, Cook)
Transport, Delivery
Aggregate, Store
Grow Crops,
Raise Animals
G
Monitor Quality,
Safety
F
H
H
L
U
I
M
SG
M
F
F
W FS W
H
FS
FS
MI
R
W
R
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Oversee
C C C RFS
C
C
Handle Waste,
Market & TV L U G
C R FSW M I H F S
Environment
Economic
C
R
Welfare
FS
CC FS
WM
R R
MW
IH
FS FS
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W
F
W
M
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G
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Finance,
Manage,
F
H
S
Credit
Train Labor
G
U
U
G
D
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Science, Research,
Adopt Technology
D
Development
H
I
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Transmit Information, Analyze Data
Add Value
Aggregate, Store
Transport, Delivery
Grow Crops,
Raise Animals
Monitor Quality,
Safety
EX
H
F F
Large
H
I
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M
F
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M
M
HF
UL
WTO
M
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RC R
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Market & TV L U G
F
CR
FS
M I HH
Environment
Economic
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Welfare
FS
CC FS
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WM
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MW
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Manage,
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Train Labor
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Science, Research,
Adopt Technology
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Transmit Information, Analyze Data
Demand Driven Food Production
networks

Presents a fundamentally new way
to conduct business, form
organizations, and value assets
Changing Web Patterns

Makes changes harder to track






Raw product source – global, seasonal
Prices – negotiated, secret
Control points and profit margins shift from:
hard assets to market intelligence
Sellers to buyers (retailers)
Producers to analyzers
New Food Networks

A move from an economy based on a firm’s
production of goods to an economy based
on the use of knowledge about markets.

Markets replace firm’s (or nations) as a unit
of analysis
Theme:
 Trading
nations diminish relative to
private firms in procuring food
New Food Networks & Markets

Markets are local but firms that supply
them can be anywhere.

How do global suppliers learn about local
buyers preferences?


1. Shared data -- e-commerce
2. Human networks
The (Human) Networked Trade

Business and Social Networks



Facilitates information about trading
opportunities
Enforces Contracts
Builds Trust
Rauch, 2001
The (Human) Network

Importance of immigrants to trade
with home country:

As immigrants increase by 10% exports
increase 13 -47% (network effect)

As immigrants increase 10% imports increased
33-83% (taste and network effect)
Rauch, 2001
Networked Trade


Enforces Contracts – Build Trust
Japanese word: keiretsu



Know the characteristics of those who would
be helpful & loyal
Enforces rules by internal punishment
Increases direct foreign investment
Rauch, 2001
Networked Trade

Buyers and sellers match in characteristics
space – need “thicker” information to “match”
partners

Transnational networks can overcome informal
trade barriers – enhance exports

Domestic networks can create trade barriers by
collusion to restrict foreign firms – inhibit imports
Rauch 2001
Global Supply Chains: Producer Driven
And Buyer Driven
Producer driven for capital and technology
intensive industries: automobiles, aircraft,
semiconductors
Profit greatest for those with scale & technology
(manufacturers)
Rauch, 2001
Global Supply Chains: Buyer Driven
Buyer driven for labor intensive, consumer
goods industries: garments, footwear, toys,
electronics – FOOD?
Profits greatest for those with design and marketing expertise (
retailers).
Rauch, 2001
New Food Economy?

The market we know and love is being “de-democratized”
by networks – human and electronic

Both depend on specific knowledge for specific products
and markets

Efficiency models are not enough and maybe not right for
globally differentiated products and market networks
Global Supply Chains:
Buyer – Seller Driven?
Driven by the part of the supply chain/network
that is in the best position to capture the most
value from the chain.
Where is that in food and agriculture?
Increasingly at the retail end.
Globalization of Supply Chains
•Will more formal (computerized) information
networks increase or decrease the usefulness of
business and social (human) networks?
•Yes – if e-commerce networks become dominant and
parties trust the information to represent the behavior
of trading partners.
•No – if products increasingly differentiated and
“human” interpretation of preferences and markets
needed - and more immigration builds human
networks and more DFI across borders.
New Supply Networks for Food

Slowly adopting information technology to track
and manage inventory. Still trying to catch up to
Wal-Mart’s logistics.


Losers: Regional wholesalers, small
farmers, small processors
Winners: Consumers – lower prices,
variety, convenience, diversity, safety,
quality

Multinational food companies (Nestle’) use Supermarkets
to gain access to remote areas.
Public Policy Focus Turns to Food
for Health, Safety, & Security

New terms:


Paradox of Prosperity – too much food
Diseases of Prosperity – diabetes, heart
diseases, hypertension

New meaning to food security

Bio-security / Bio terrorism
Food Variety and Abundance

The new nutrition - too many calories

USA 2002:
65% of adults overweight
30.5% obese (BMI over 25)
25% children overweight or obese
Doubled in a decade
Food Abundance and Health Care

Diabetes – linked to overweight and obesity

In 2002
17% of Americans has diabetes linked to diet
60% pf children have at least one risk factor for heat
disease

10% of Health Care Costs go to treat diabetes
This is a health care crises in slow motion
Indulgence / Abundance
Globally: “Globesity”
Adults: 7% obese
Children: 53% undernourished
But in Chile, Australia, Malaysia,
Chinese cities, 17 – 20 % obese.
Countries with at least 10 Percent of the
Adult Population Obese
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
30.5
18.7
20.0
US
A
UK
tra
ilia
Ice
lan
d
Ge
rm
an
y
a
Au
s
ad
Ca
n
ain
Sp
l
rtu
ga
d
Po
lan
Po
lan
Fin
ium
Be
lg
nd
Source: OECD Health Statistics (2000)
19.4
14.6
12.9
11.5
11.4
d
10.8
10.0
Ire
la
11.2
18.7
Globalization and Public Policy

Economic integration of private companies with
national and international trade policies and
standards

Homogenization of the foods across nations,
more variety of food within a nation

Nation states have less control over policy and
items traded
Globalization and Public Policy

Retail domination giving consumers lower
prices – so far.

Demise of small farmers and undercapitalized
firms

Foods for health, food safety, food (bio)
security is international business