Horizons March 2018

A monthly newsletter on Australian and international trends, innovation and other insights relevant to the Australian food market

Making news

Price wars over? – The Australian grocery retail landscape is set for big changes, with news Wesfarmers will sell 80% of Coles Supermarket to the public. According to the sales pitch from Wesfarmers, Coles will also transform itself by calling time on its long-running deep-discounting strategy and opting for a more profitable loyalty proposition backed with “stories”. Wesfarmers is selling down its stake at a curious time as Coles has lost momentum in sales growth and has posted falling earnings. The chief reason for a sale is that Coles makes an insufficient return on employed capital, as it still owns a large chunk of retail stores. Wesfarmers did not raise cash from Coles’ bricks-and-mortar assets – a key part of the Woolworths high-returning model.

But is a prompt transformation in Coles feasible? Its naïve to think so – it took several years to reposition the group when it was languishing in 2008. It now faces a resurgent and well-managed Woolworths and an ever-expanding Aldi, with Amazon also limbering up. Aldi is far from finished rolling out new stores to steal share of the cheap parts of the weekly shopping list, and will continue to drive the private label agendas of all the chains. Read more.

Down-down might disappear from Coles soon, but don’t expect to see any less intensity in price discounting to build back sales growth. Discerning IPO sales from retail reality will be worth watching as this sale process marches on.

Cage industry on the ropes – Egg Farmers of Australia has introduced a regulated cap on conventional cage farming; temporarily banning any more “battery” hen cages from being installed on Australia’s 337 commercial egg farms. Instead, egg farmers can install much bigger cages containing both a perch and a nesting box for their hens only when expanding or building a new farm. Egg Farmers of Australia’s chief executive John Dunn said egg farmers needed to convey to the public that their farm practices weren’t “cruel or horrific”.

Dunn said the industry couldn’t ignore the over 100,000 public submissions on changed poultry welfare issues. And while there will be no more battery cages, Dunn said the larger cages wouldn’t offer more room. Instead they will contain 20-40 chickens, rather than 5-10 with similar space available to each bird. Dunn said phasing out all cages – as suggested by the RSPCA through its campaign – would cost the industry A$1.5bn and would eventually send farmers out of business.

The caged egg industry has a tough fight ahead to convince consumers – with limited understand of or attention to – the production issues involved for producers, that they should keep their cages.

 

The Book loses Face – In a stunning fall from grace, Facebook’s privacy issues have been spotlighted with Cambridge Analytica’s unauthorised harvesting and use of millions of profiles. Through an app, the company managed to collect 50-60m Facebook profiles which were allegedly used to nudge voters towards a Trump vote. In the immediate aftermath, Facebook rejected that these activities amounted to a data breach. However, CEO Mark Zuckerberg has since apologised for the “major breach of trust” and assured users Facebook will take steps to make sure it doesn’t happen again.

The latest scandal follows the alleged use of Facebook by Russia to influence the 2016 election using fake news. Advertisers are demanding changes and hashtags such as #BoycottFacebook and #DeleteFacebook are gaining in popularity. Only time will tell if consumers and advertisers forgive Facebook its indiscretions.

This highlights a massive trust issue for Facebook, and the fallout is already affecting the company’s share price. Facebook may be embedded in people’s lives, but the brand is seriously on the nose for advertisers.

Discerning consumers

Low carb vs low fat – A new study in the US has found that for weight loss, there’s no difference between low carb or low fat. The study assigned 609 people either a low-fat or low-carb diet for 12 months, during which they attended 22 dietary counselling sessions. Participants were screened for 15 genotypes and subjected to 12 random 24-hour dietary recalls. The study stands out due to its large sample size, long duration and because it encouraged participants to eat mainly home-cooked whole foods. All participants were free of major health conditions such as diabetes and cancer and had an average BMI of 33.
After 12 months, the low-carb group shed 6.0kg, while the low-fat group lost 5.3kg. Both groups had nearly identical caloric intake during the trial, but the low-carb group had a slightly larger protein intake. The study showed the proportion of carbs and fat matters little for weight loss when caloric and protein intake are matched. And it also found that the 15 genotypes and insulin production tested during the study weren’t predictive of weight loss.

Does this put this whole debate to bed yet? No silver bullet or fad eating plan will do the trick – it all comes down to caloric intake and a healthy diet you can maintain…is anyone really surprised?

I Quit Sugar…Quits – Founder of I Quit Sugar Sarah Wilson is closing down the company she founded to wage war on sugar.  In a note to her followers Wilson explained that her work in the “sugar-free” realm is over after five years of “I Quit Sugar” cook books, products and programs that she claims have helped 1.5million people wean themselves off sugar. Wilson claims her interest was never about money, but about educating, and she maintains the business is “fiscally vibrant”. After 12 months of trying to find a “respectful soul” to buy the business, she decided to close the operation which employs 23 people. The founder has asked “the movement”, to continue to spread the message, while Wilson turns her attention to discussions about anxiety and food waste.

As Wilson winds up “the kind and gentle experiment” it seems the business model – much like an over-restrictive diet – was unsustainable. Built around a celebrity and a demonized nutrient, I Quit Sugar ran its course. 

Cynical products don’t cut it – Craft brewers BrewDog commemorated International Women’s Day by releasing Pink IPA. A fifth of the proceeds from the Pink Punk IPA in four weeks were to be donated to ‘charities that fight inequality and support women’. Women got 20% off the Pink IPA in any BrewDog bar, while men would pay full price. In a single tweet, the brewer proclaimed the Pink IPA wasn’t “a beer for girls, but a beer for equality”, in direct opposition to the writing on the bottle’s label…which was pink….because women.

Despite the brewer claimed was an effort to expose some of the “sexist marketing to women, especially in the beer industry”, BrewDog copped a social media beating over their Pink IPA. Instead, the craft brewer’s attempt to sell its products through a poorly executed equality campaign was viewed as sexist and cynical.

This crafty brewer misfires with a lazy attempt to back equality while instead managing to look patronising and tone-deaf. Delivering a satirical message that has to be explained by a press release or tweet is unlikely to succeed.

Not organic enough – New organic certifications that emphasise soil regeneration and enhancement are being trialled in the US. Out of frustration over the USDA’s official organic certification’s lack of depth, the Regenerative Organic Certification (ROC) and the Real Organic Project will offer new seals of approval to organic farmers who meet higher standards than those set out by the USDA.
CEO of Dr. Bronner’s David Bronner is one of the organisations behind ROC. He says the organic movement originally promoted fair labour practices, a greater level of compassion for animals and a mandate to improve soil health. However, these virtues got lost along the way when federal organic regulations were set. A spokesperson for the Real Organic Project David Chapman said large companies were cashing in on premium organic product prices by doing the bare minimum, while also basking in the shinier narrative about organic farming conveyed through media coverage and public perceptions of small operations. Read more.

Moves to launch additional organic certifications highlight the challenges of certifying a range of food producers on practices that may or may not flow through to values that everyone espouses. The question is will these additional marks muddy the already vague grasp consumers have on what organic means?

Volatile world

Will ag trade be Trumped? – President Trump has fired the first salvo in what could be an escalating trade war with China. Trump’s announcement of tariffs on steel and aluminium imports has also angered trading partners from Canada to the EU. China has responded with levies on imports of some American food products, such as fresh fruits and nuts as well as steel pipes, amounting to close to US$1bn in 2017. Further tariffs are expected on another US$2bn of American pork, processed products and recycled aluminium.

While many rural voters supported Trump’s nationalist, anti-globalisation stance, US agricultural supply chains are now bracing for major disruption. “This could not be happening at a worse time for American agriculture,” American Farm Bureau Federation President Zippy Duvall said, as farm incomes are expected to be the lowest since 2006.

If Trump goes ahead with the proposed steel and aluminium tariffs, US farmers could bear the brunt of any Chinese retribution. Following on from the TPP withdrawal and NAFTA negotiation this is another self-inflicted blow.

China does what it wants – Hopes of China shedding its communist tendencies and evolving into a true western-style market economy look dimmer in the wake of China’s constitutional change allowing President XI Jinping to be president for as long as he chooses. When Xi took office, there was speculation he would steer China towards constitutional rule. Instead the president has steered politics and economics towards repression and state control, according to The Economist. Under Xi, it has become more evident that China is controlling its business as an arm of state power.

The country is the world’s biggest exporter with over 13% of trade. For foreign countries operating in China, commerce is always on Chinese terms. This “sharp power” in commerce is in parallel to the hard power of military force.  The US retreat from international institutions and norms it helped to create only heightens the threat.

Western democracies bet that China would move towards an open market, full democracy and observe international rules of trade. Xi’s installation as President for life indicates China probably won’t eventually be “just like us”. But what to do now?

Dealing with dairy volatility – At the Australian Dairy Conference in Melbourne, farmers and industry stakeholders shed some light on how they deal with volatility in the sector. Procurement officer from Domino’s John Harney said the group manages volatility by treating each store as a factory – buying in bulk to convert to finished products. Locking down prices of mozzarella for six months at a time, managing labour costs and having long-term leases on rents, the company controls what it can.

Mondelez Australia’s procurement manager John Olden said dairy was the company’s toughest market, as volatility worked against longer-term fixed-price contracts, with “fear of missing out” making it difficult for suppliers and buyers to agree. New Zealand-based futures trader Mike McIntyre echoed the challenge increasing volatility presents for supply chains, but said the mentality was changing with farmers finding solutions in fixed-price programs from processors and trading of milk futures.

It’s often imagined that volatility affects just one part of food supply chains – farmers. This discussion highlights there are impacts for everyone, and also very different opportunities for managing it.

Evolving models

Craft innovation sparks hop revolution – The rise of craft beer has helped transform a small unprofitable producer into an expanding innovative agribusiness. Rostrevor Hop Gardens has been owned for more than 100 years by the Panlook family. It was producing bland varieties for mainstream breweries but has now replanted with hops suited to craft brews that use five to ten times more hops for every bottle. This has boosted hop demand as well as returns to growers, as craft beers command significantly higher unit prices.
Hop Products Australia (HPA)’s research station at Rostrevor has bred varieties such as Vic Secret, Ella and Galaxy. The new varieties contain alpha acids to add bitterness to beers, but also contains essential oils with strong flavours, varying from spicy and floral to fruity tastes of pineapple, peach and passionfruit. HPA chief executive Tim Lord says a lot of growers come to Australia to taste the craft beers made from local hops and grow them in their own backyards. But while HPA will sell its dried hops anywhere, nobody outside Australia will be able grow HPA’s varieties.

A nice example of a downstream grower responding positively to a more discerning market segment. Keeping some innovations back to benefit local brewers is a great strategy to build uniqueness in a segment that’s all about individuality.

No brand the latest gimmick – Brandless is building a business selling unbranded items at low prices, inviting consumers to create their own narratives about the product online. Cofounder and CEO of Brandless Tina Sharkey is “unapologetically redefining what it means to be a brand” and calling things what they are. All the company’s staple products are packaged in bundles, every item costs US$3 and membership means free shipping and builds a sense of community.
Brandless uses its Instagram feed to showcase the engagement and creativity of its customers. The Brandless approach recognises the paradox of choice facing consumers and avoids the usual marketing approach to fill the space with stories that often don’t resonate. Read more

The Brandless movement looks to turn down the noise around brands and focus on the intrinsic product benefits albeit with distinctive packaging. Consumers make up their own stories to help showcase the products on social media.

Publix and Wegman’s outperform rivals – Florida-based grocery chain Publix  and Rochester-based Wegman’s are winning over customers with their approach to customers service and company culture. In the age of Amazon, these physical grocery chains are growing with Publix announcing plans to spend US$1.5bn this year to build new locations. It owns close to 32% of its stores and continues to buy more, while also remodelling existing sites and offering online shopping. It has a sterling reputation with both customers and employees. Much like it’s Rochester-based competitor Wegman’s.
In the annual Harris Poll Brand Reputation Quotient Survey which polls more than 25,000 people, Wegman’s came in second, only below Amazon, but well above Apple, Google, Starbucks and other big brands. It was also named the second-best employer in the US in 2017. A trip to Wegmans is an experience with outstanding produce displays, high quality private label products and a wide range of prepared meals.

Measured growth and a commitment to superior customer service has benefitted these two regional grocery chains whose margins have been preserved through shopper and employee loyalty.

More from less

Digging deep – A few hundred meters below the ocean surface the mesopelagic  layer is teeming with life and could be an important resource to sustain fisheries into the future. Cropping just 1% of the estimated 10 billion animals residing in this layer for feed could double the landed catch of the ocean fisheries. However, the layer also functions as a carbon pump, pulling 5bn to 12bn tonnes of carbon out of surface waters and into the depths annually. While currents can return carbon to the shallows, this cycle is important in counterbalancing man-made global warming.
Over the coming decade more research will be done to answer questions about how much mesopelagic fishing can be allowed without disrupting its important role in climate regulation. It’s a rare opportunity to manage a resource based on science and long-term thinking – with a clean slate.

Exploitation of the mesopelagic to support food production must be balanced against its role as a carbon pump to help mitigate climate change. It could be a unique opportunity to develop a resource based on deep scientific understanding and international cooperation….0r we could totally mess it up.

GMO halo – A study by University of Maryland researchers has found that the adoption of GMO crops reduced the use of insecticide sprays through area-wide suppression of pest populations, a phenomenon termed the “halo effect”. By examining the populations of two insect pests, the scientists charted a steep decline in populations, corresponding with the widespread planting of genetically modified corn. The researchers go as far as to suggest organic farmers may actually benefit from the use of GMO crops as pests that are difficult to control are eliminated.

The finding is in stark contrast to the long-running legal case concerning alleged “contamination by GM crop material” of a neighbouring organic farm. While the case was settled in favour of the GM farmer, the West Australian government is currently holding an inquiry into the need for a compensation fund for similar cases. The lawyer defending the GM farmer claims the government is “looking for a solution to a problem that doesn’t exist” and implying GMO crops are unsafe. Read more

It’s no doubt counterintuitive for the organic industry and its supporters to acknowledge, but GMO adoption may have a role in cutting pesticide use for them, as well as those producers who actually adopt. It’s in stark contrast to the GMO contamination furore and we saw in WA – which still lingers on.

Plastic-free aisle – Dutch supermarket Ekoplaza has opened the world’s first  plastic-free aisle in its Amsterdam store. All groceries are packaged in recyclable or compostable materials like glass, metal and cardboard. A first mover in plastic-free, the Dutch supermarket chain will roll-out its plastic-free aisles in 74 stores across the Netherlands in 2018. Ekoplaza is collaborating with UK-based grassroots organisation A Plastic Planet to create the plastic-free shopping experience.
A Plastic Planet’s cofounder Sian Sutherland called Ekoplaza’s new aisles an example which UK supermarkets must follow at the earliest opportunity. Sutherland’s organisation estimates 40% of all plastic created is used for packaging with half of that used for food and drink products.

Awareness of the environmental damage associated with plastics is growing quickly. Food manufacturers will need to respond to the challenge of reducing or adapting their packaging.

Disruptive technologies

Keepin’ it fresh – Scientists around the world are experimenting with high-tech food preservation methods that keep bacteria and spoilage at bay while protecting flavour, texture and nutrients.
The USDA has developed a machine that eliminate salmonella in eggs using electrodes to pulse radio frequency waves through the shells. Meanwhile, at the University of Strathclyde in Scotland, scientists pioneered a technique that bombards fluids with high-intensity blue light, producing a form of oxygen lethal to pathogens. This technology is being adapted for use on berries and other foods. Other technologies such as cold plasma blasts, bacteriophages and high-energy electrons are used to disrupt and destroy bacteria, but not aroma.

Novel and specialised ways of preserving food have the potential to minimise waste and revolutionise distribution. It’s an important application of technologies that are becoming highly specialised and sophisticated.

Flippy flops – Despite sky-high expectations, Flippy the burger-flipping robot was taken off the roster after one day’s work in fast food chain Caliburger’s Pasedena location. The outlet was flooded with customers that wanted a burger made by the robot, but it couldn’t keep up with the fast pace of the kitchen. According to the Cali Group’s chief technology officer Anthony Lomelino, the issue is timing. In a commercial kitchen, communication is key and, human kitchen staff need to work around Flippy.
While the robot takes orders, flips burgers and displays cooking times on a screen, human kitchen staff is still needed to place the patties, apply cheese, salad and dress burgers when they are cooked. It’s a system that needs to be choreographed around the robot. Flippy’s designers say there is still potential to curb high employee turnover rates in the fast-food industry and eliminate work-related injuries.

Flippy’s temporary decommissioning highlights the challenge of introducing technology to replace – labour. Ironically more though needed to be given to training the remaining staff or the technology fails!

 

Freshagenda’s Horizons March 2018 newsletter is a free publication on Australian and international trends, innovation and other insights relevant to the Australian food markets.

Our Horizons newsletter describes Freshagenda’s megatrends, describing how tech and innovation is shaping the food industry around the world. Our megatrends are; Discerning consumers, volatile world, disruptive technologies, evolving value chain models and more from less.

Horizons March 2018 digs in to Freshagenda’s megatrends

Freshagenda identified a set of major megatrends affecting the future of food that combine to provide the key inputs to industry or enterprise strategic planning built on future scenarios.

In a paper outlining these megatrends, Freshagenda explains what they mean, how they are playing out, and how they fit together.  These forces might be nice to know, and great to stimulate thinking, but how do you harness them?

As shown in the process summarised below, understanding these forces, articulating how they are affecting your industry and business outcomes in future, and drawing insights from them to stretch future thinking, are a key component that can provide impetus and context to strategy development

 

Discerning consumers – A diverse set of influences

  • Increasing developing world affluence creating new consumers
  • New channels of influence on behavior and wants
  • More complex segments and preferences affecting value, ethics, health and indulgence
  • Competing demands driving greater needs for convenience
  • Aging demographics in developed world

 

Volatile world – Food markets are more complex and unpredictable

  • Climate change affecting stability of food supply
  • Food commodity markets more prone to price volatility and closely linked as intensification continues
  • Ad-hoc protectionism of farmers and consumers
  • Trade policy becoming more technical rather than fiscal
  • Geopolitical conflicts
  • Lingering economic and financial uncertainty post GFC
  • Resilience of traditional farming threatened by volatile returns

Disruptive technologies – Technologies rapidly reshaping life

  • Digital tools and platforms are changing engagement, behaviour and lifestyles
  • Advances in GE and GM know-how and applications
  • Advances in automation for production and processing
  • New substitutes (3D printing, synthetics)

Evolving value chain models – Redefining how to add and capture value

  • Shift in capital power
  • Risks being reassessed
  • Emerging preferences for capital investors
  • Emerging retail models
  • New forms of value chain integration

 

More from less – Limited resources and capacities

  • Growing populations – more mouths to feed over time from finite natural resources
  • Greater community concern for sustainable production systems
  • Sustainability agendas balancing “3Ps” changing value chain relationships
  • Policy unevenness and short-termism