Management and business strategist, Michael Toby, unpacks how the fresh produce industry can reduce costs and boost productivity while working with retailers
In these inflationary fueled times of high costs and stagnant productivity, there are some parts of agriculture that have undoubtedly delivered material cost reductions directly to the retailers’ operations. The meat industry would be one of the most prominent examples, and having set the productivity bar high, the question to be asked is whether the fresh produce industry has anything comparable or as innovative to offer.
Once upon a time, retailers needed to employ their own in-store butchers and invest capital in their own equipment to receive carcasses, process them into cuts and grades, to be sold at meat counters by their own staff.
Over time this expensive (both in terms of capital and labour costs) process became untenable, and it was the meat industry who helped the retailers find a productivity solution in which they could drive real reductions in their costs. The industry became the processors and delivered the meat to the retailers already packaged and prepared for sale. This has worked so well that as of early 2023, Woolworths announced it was closing 250 of its in-store butcher shops, while Coles announced the closure of 300 in 2021.
Anyone who buys their meat from the major retailers today knows that it is all pre-cut and pre-packaged, displayed in neatly ordered refrigerated cabinets, where shoppers simply select what they want and help themselves. There is no need to wrap or weigh anything, nor is there any need for someone to print a price docket. The product can be simply received, stored, displayed and purchased.
This material change has undoubtedly saved the retailers many millions of dollars in unnecessary capital and operating costs through their supply chain and increased the productivity of their in-store operations. This has helped to significantly improve their bottom line and profitability. It has surely been a win-win for both the retailers, meat industry and consumers, ensuring a more consistent quality product, with the best chance of maximizing value.
The way retailers now source their bakery products provides another case in point where they have been able to reduce costs and improve in-store productivity. Although Woolworths, for example, still employs some in-store bakers, nothing is prepared from scratch. Rather, it sources its bakery products through a mixed model using major commercial manufacturers for packaged bread, specialised commercial bakeries for specialty items, and frozen par-baked dough delivered to individual stores for in-store finishing. This last item provides the opportunity for the store to still create a sensory aroma, which is all important in attracting consumers to buy baked goods.
If one then looks at the fresh produce industry and the opportunities for retailers to reduce their costs and increase productivity in the way retailers receive, handle, process, display, market and sell such produce, the picture is not quite so clear.
The logistics of the fresh produce sector are very different to meat, where multiple different items, both lose and pre-packed, and of varying perishability must be managed at any one time. Add to this the different display set ups that are required, both chilled, ambient and non-chilled, the need to keep them neat and tidy, and the supply of bags and weigh stations. Even though most stores these days no longer employ a dedicated fresh produce manager, this all contributes to not insignificant operating expenses and labour costs being incurred in-store.
Fresh produce also comes in many different packaging formats, and the way in which these need to be received, displayed and purchased can vary greatly. It is easier and cheaper in terms of labour to tip more robust lose form produce such as citrus and potatoes boxes directly into a display bin, compared to taking the time to carefully arrange hundreds of individually packed berry punnets from trays into a refrigerated cabinet.
Growers and suppliers can certainly do various things through the supply chain and the use of packaging technology to improve the shelf life and the aesthetic appeal of their products, but this is more likely to help the retailers maximise pricing, as opposed to reducing their costs and increasing productivity.
In these seemingly permanent times of ever-increasing costs (across capital, non-labour inputs and labour) and the drive to find any cost and productivity advantage, the question is what can the produce industry offer or do to provide the retailers with the capacity to reduce their costs, even in an incremental way, let alone a material one.
Put simply, we must find a way for the answer to be “yes”. For example, is there an opportunity for greater packaging innovation to allow easier handling, storage and product display in-store? Should something also be done to review the need for best before dates on some products? This can dictate where and how they must be stored, their display, and the ultimate volume of product waste that it generates.
Added to the mix should also be a serious examination of shrink reduction. As has been widely reported, there tends to be a lot of confusion and scepticism in the produce industry when retailers point to so the called ‘cost of shrink’ as one of the reasons for missing their bottom-line targets. It is clear many retailers take shrink seriously when assessing its cost and productivity impact, as the marginal cost (and by definition the corresponding marginal benefit) of effectively addressing it can be significant when retailer aggregate margins are at best never above low single digits.
Suppliers need to think innovatively about what role they can play, this includes but is not limited to building strategies to reduce product waste and spoilage, eliminating costly variances in weights and measures, and even capitalising on the many variances which exist between the quality of service provided by an individual supplier versus its competitors.
Or is it the case that AI will provide a neat solution at some point to the perennial cost and productivity challenge, such as dramatically improving the productivity of home delivery, thereby reducing and eventually eliminating the ultimate cost and productivity restraint for retailers, ie. the need to operate a bricks and mortar store network. At this point in time, this solution still appears to be a long way off, and recent announcements by Coles indicate they are planning to invest further capital in upgrading their stores.
We are clearly operating in an environment where maximising cost reduction and continuously increasing productivity matters just as much, if not more than maximising pricing and sales to create value.
It is a question and topic that deserves some serious pondering by industry, especially those who are leaders in building innovative strategies to address complex challenges.
Business as usual for the fresh produce industry is no longer an option, but for those who lead on meeting this challenge, the benefits will surely be significant.
