Product Suppliers Adjust To Consolidation.

Large, self-distributing retailers accounted for about half of the $458 billion in retail sales by food stores and mass-merchandiser supercenters in 1998. These large firms operate their own warehouses, trucking fleets, and buying offices, enabling them to negotiate directly with grocery suppliers. Consolidation among these retailers, as they become fewer but make higher-volume purchases, has concentrated direct procurement of food and nonfood products.

As more retailers adopt supply-chain management practices for product procurement and distribution, concerns arise that competition may diminish substantially. Grocery product suppliers may face fewer but larger volume buyers of their products and commodities as consolidated food retailers reduce the number of buying offices and combine orders in order to obtain price concessions and other procurement efficiencies. Grocery suppliers have cited new marketing and trade promotion practices, such as slotting allowances (lump sum payments to a retailer as a precondition for sale) and performance requirements and fees such as charges for special advertising and promotions, as evidence that suppliers may be disadvantaged in bargaining with large retailers. Suppliers of branded products may justify such fees and allowances as necessary to compete with similar brands for retailers' valuable shelf space.

Grocery suppliers will be challenged to meet the needs of retailers that adopt supply-chain management practices. Many smaller grocery suppliers may conclude that by forming joint ventures and cooperatives of their own, they are better able to meet the procurement and marketing demands of large retailers. Other small supplier firms are seeking niche markets for a limited range of product offerings, such as specialty fruits and vegetables, or organically grown products, in order to meet the procurement needs of all sizes of retailers.

Through growth of the Internet and proliferation of online services, smaller suppliers are now able to locate buyers through a growing number of virtual marketplaces. These online marketplaces offer access to buyers that previously were difficult and costly to identify. Virtual sites such as Buyproduce.com are open to all buyers and sellers, while producer groups such as Farmconnect.com, a Minnesota-based farm cooperative, offer value-added commodities to all types of buyers. In the future, Internet-based marketplaces will provide more alternatives to grocery products suppliers that are too small or otherwise unable to meet the requirements of large retail buyers.

Phil R. Kaufman [phone] pkaufman @ers.usda.gov