The Food Marketing and Distribution Sector in Canada (1999)

EXECUTIVE SUMMARY

The food marketing and distribution sector ("the food distribution sector") is the critical final link in the Canadian agri-food chain between food processors ("processors") and agricultural producers ("producers") and consumers, and represents a significant part of the Canadian economy.

Approximately 145,000 retail and foodservice establishments accounted for sales of $91 billion in 1997¹, $24 billion of value added and over one million jobs. This sector also purchases over $50 billion of processed food products and $3 billion of raw agricultural products.

The food distribution sector is divided into the food retail and foodservice sub-sectors. The food retail sub-sector represents outlets (e.g. supermarkets) where food is purchased primarily for preparation "at home" while foodservice (e.g. restaurants) represents food that is prepared mainly" away from home." The food distribution sector also includes food wholesalers ("wholesalers"), foodservice distributors ("distributors") and brokers that supply and service food retail and foodservice outlets.

Consumers - the Customers of the Distribution Sector

Consumers drive changes in the food distribution sector and the rest of the agri-food supply chain in Canada. The most important demographic and economic trends are aging of the population, increased labour force participation by women, higher levels of education, increasing ethnic diversity, declining levels of disposable income, increasing nutritional awareness and smaller household size.

Today's consumers want more quality, value and convenience, and the Canadian food distribution sector must continue to adjust to these demands.

Structure of the Sector

Food Retail - Retail food outlets sold about $50 billion of food and non-alcoholic beverages ("food") in 1997. Most (91%) food products are sold in traditional food stores including supermarkets, and grocery stores and specialty food stores such as bakeries. A small but growing portion (9%) of food sales come from "alternate formats" - drug stores, warehouse clubs (e.g. Costco), mass merchandisers such as Wal-Mart, and gas stations.

Sales in traditional supermarket outlets are split between chains² and independent stores. All major Canadian supermarket chains are involved in wholesaling and retailing operations. Chainowned warehouses supply not only the chain's outlets, but may also supply franchised stores and independent grocers.

Some independent grocers are affiliated with a wholesaler through a voluntary buying group. Voluntary groups, such as IGA, take advantage of, for example, economies of scale. Affiliated independents account for most of the sales by independent grocers.

Unaffiliated independents are true independent operators. They are primarily supplied through a variety of suppliers: cash and carry outlets of wholesalers, smaller wholesalers or, in some cases, by distributors.

About 25% of store inventory is delivered directly from the processor; the rest is supplied by wholesalers. Brokers act as processors‘ sales agents and currently represent 31% of the items moving through wholesalers' warehouses to food retail or foodservice. Most of the other items are sold through the processors' own sales forces.

This sub-sector is quite concentrated; on a corporate basis, the top four firms account for 55% of national sales. Regionally, corporate concentration levels may be higher.

Foodservice - Foodservice sales³ reached about $32 billion in 1997. Seventy-five percent of these sales are in commercial establishments. There are a number of segments within commercial foodservice, the largest of which include the licensed and unlicensed restaurants and quick/counter-service restaurants.

Non-commercial foodservice establishments sold $8 billion in 1997. They include hotels, institutions (e.g. hospitals), recreational facilities such as theatres and arenas, vending operations, and foodservice establishments in department stores.

As in the food retail sub-sector, foodservice is characterized by both independent and chain operators supplied by local, regional or national distributors (the foodservice equivalent of wholesalers). Unlike food retail, major foodservice firms do not integrate retail and wholesale operations.

Foodservice is fragmented. The top 10 firms account for only about 25% of sales but some segments are quite concentrated (e.g. the top 10 unlicensed restaurants account for 85% of total unlicensed restaurant sales).

Performance

The retail food sub-sector and foodservice compete for a share of the consumer's food dollar. In 1997, the retail food sub-sector accounted for about 65% of consumer food expenditures (including alcoholic beverages). Foodservice's share declined sharply in the early 1990s due to the recession and, in the opinion of the sub-sector, the introduction of the Goods and Services Tax. However, its share has recovered slowly since 1991. The growth of the "ready to eat," "convenient meal solutions" or "home meal replacement" market has further blurred the traditional line between the retail and foodservice sub-sectors.

Food Retail - In real terms, sales have increased by about 1.5% per year, mostly due to population growth. In this stable but mature market, retail firms can increase sales only by taking market share away from other firms or by selling more non-food products.

Because of this intense competition, efficiency improvements have occurred. However, subsectoral financial performance declined significantly between 1988 and 1996. Returns are generally lower than in the US. In contrast, after-tax profit margins and return on assets (after-tax profits as a percentage of assets) of the 10 largest food retail firms were significantly higher in 1996 than in 1988.

Food retail captured about 15% of total agri-food trading profits between 1988 and 1995. The 10 largest retail food firms recently averaged about 101% of the return on assets of the 10 largest processors, up significantly from 60% earlier in the decade.

Foodservice - Real foodservice sales dropped 15% between 1990 and 1991 and, although they are slowly recovering, they have yet to regain their pre-recession peak. Sub-sector employment has followed a similar pattern of expansion, decline and subsequent growth. Employment levels were about 13% higher in 1997 than in 1988. Foodservice's market share is somewhat underdeveloped compared to the US.

The cyclical trend in foodservice sales drives the performance of labour productivity, profit margins, return on assets and investment spending. Due to an emphasis on consumer value, real sales per hour have increased since 1988. Foodservice's return on assets averaged less than either the processing sector or the food retail sub-sector.

Food Brokers - In sales, food brokers have performed well in recent years. Their grocery volume has grown by 33%, from 22.5% of warehouse items in 1991 to 30.9% in 1997.

IMPACT ON THE REST OF THE AGRI-FOOD CHAIN

The changing structures and business practices in the food distribution sector have a major impact on suppliers (processors and producers).

Consolidation - Recent acquisitions in the food retail and foodservice sub-sectors highlight the trend to increased consolidation in the food distribution sector. Many factors have inspired these mergers, not the least of which is increased buying power.

The Canadian food brokerage industry is also consolidating in line with the move to national procurement and centralized purchasing in the food retail subsector and foodservice. Many small- to mid-size regional brokers are expected to merge or align to form national operations.

Consolidation in the food distribution sector has an important impact on the rest of the agri-food system as more of the business of suppliers is controlled by fewer buyers. This may place greater pressure on suppliers to deliver quality products at lower prices.

Private Label - One of the most influential trends to hit the agri-food system in recent years has been the growth of private or control label products. These products are owned and generally developed by retailers, but their production is outsourced to processors. Consequently, retailers are performing functions previously carried out by processors, including product development, packaging, marketing and advertising.

The impact on processors of the significant category share of many private label products is unprecedented. Retailers are assuming some of the functions of a processor, but with a very important difference: the retailer has primary access to grocery shelves. Although the success of private labels offers market opportunities for some smaller processors, it has strengthened the retailers' role within the agri-food supply chain.

A major advantage of private label products is maintaining customer loyalty. Private label market share is expected to level off at around 30%. However, there may be more opportunities for Canadian retailers to sell private label in global markets. For example, Loblaws' President's Choice is currently sold in foreign markets, including the US and Latin America.

Private label is also prevalent in foodservice but is more "trade" than "consumer" oriented. Distributors' labels compete with processors' brands in areas such as ingredients, bulk packages (e.g. coffee) and in institutional catering (e.g. airline food).

Efficient Consumer Response (ECR) - ECR allows distributors, processors and producers to cooperate and remove unnecessary costs and inefficiencies from the agri-food supply chain. The initiative includes many activities (e.g. Category Management⁴, Electronic Data Interchange [EDI]⁵ and Continuous Replenishment) designed to reduce the time and expense of inventory/ warehousing and to respond more efficiently to market demand. Foodservice's counterpart, Efficient Foodservice Response (EFR), was modelled after ECR.

Smaller processors may have to adopt business practices, such as EDI and case bar coding, that are better suited to larger firms. In some instances, brokers are providing this service. Eventually, suppliers that choose not to participate in ECR/EFR may lose business opportunities.

Despite the potential benefits, uptake has been slow. Efforts have focussed on the mandatory use of bar-codes and EDI standards with implementation targets set for May 1999.

Alternate Formats - These non-traditional players provide much needed additional retail buyers for suppliers. However, alternate formats are especially challenging because many emphasize supply chain efficiencies and see groceries as a vehicle to increase store traffic.

Trade spending/Promotional allowances - This includes an array of potentially contentious incentives provided by processors to wholesalers/retailers such as "slotting fees" or "listing allowances." Some processors, especially small-sized, view slotting fees as a barrier to getting their products to market. Many processors question the efficiency of promotional allowances. Promotional allowances are not as prevalent in foodservice.

Home Meal Replacement (HMR) - There is a growing demand for fresh or chilled, convenient, complete meals that are purchased in the grocery store and eaten at home. Examples include ready-to-bake pizza, chicken that is sold ready to heat and eat, and packages of pre-cut salads. Many grocers now offer complete meals ready to take home and eat. Suppliers must respond by suppling products that meet this need.

Consumer and Product Information - Detailed knowledge of consumer preferences is leading to customized product offerings and more efficient product delivery. Suppliers would also be interested in such micro-marketing information and may consider forging new relationships within the distribution sector to develop and share such information.

Home Shopping - Home shopping offers interesting potential as an alternate channel via electronic means such as the Internet. Home shopping could present an opportunity for processors to bypass the retailer, and fill some shopping orders directly from their warehouses or central depots.

Global Perspective

The demographic and technological changes that have caused Canadian consumers to become more value-focussed and Canadian firms to become more competitive are consistent with what is happening globally. As in Canada, food retail sub-sectors in other parts of the world (e.g. Europe) are highly concentrated. Also, while private label penetration is higher in Canada (25%) than in the US (20%), it is lower than in the UK (29%). Export opportunities for Canadian processors of private label products may exist in countries such as China and India as private label penetration increases.

CONCLUSION

The food distribution sector is playing an increasingly important role in the Canadian agri-food system by generating significant economic activity and contributing to the provision of one of the world's most affordable food supplies. The distribution sector has evolved from a passive sales venue to become an increasing influence in domestic and international food markets and in trading relationships within the agri-food supply system.

Increasingly, most processors have had to deal with retailers as branded product competitors instead of as vendors that sell their products. At the same time, suppliers are being asked to work more closely with retailers to examine and remove unnecessary costs from the supply chain. Meanwhile, fewer and fewer retailers result in fewer and fewer buyers; thus a more demanding business environment is created.

Opportunities will exist for suppliers that help the distribution sector respond to consumer needs by emphasizing value or react to the blurring of the interchannel competition between the food retail sub-sector and foodservice.

The Canadian agri-food system begins and ends with the consumer; the only constant is change. The distribution sector remains an important portent of these changes. Accordingly, suppliers must continue to acknowledge, understand and respond to these changes if they are to remain competitive.

1. This figure includes alcoholic beverages
2. Statistics Canada defines a chain as 4 or more stores. In the US a chain is defined as 10 or more.
3. Unless otherwise noted, foodservice sales include alcoholic beverages.
4. Category Management is a method of retailing which analyzes groups of closely related products with the intent to achieve an efficient mix of products and profits.
5. EDI is the electronic transmission of business information.

Date Modified: 2004-09-10		Important Notices
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