Fruits,tree-nuts, and vegetables represent about half of these totals, while dairy and poultry products, and grains are also major contributors.In 1998, fresh and processed fruits, tree-nuts, and vegetables had the greatest impact of any commodity group on California’s economy, generating about half the direct and indirect sales, total income, value added and jobs related to agriculture. About one third of the $33 billion in direct sales in this category was attributable to sales of alcoholic and non-alcoholic beverages. Examples of beverages linked to fruit, tree-nut and vegetable production include wine and juice. Some of the beverages included in this category may reflect processing of grain products rather than fruit, tree-nuts and vegetables. Dairy and poultry products and grains also had significant economic contributions, accounting for between 10 percent and 20 percent of the total income, value added, and jobs related to agriculture.Because of its climatic advantages, California is able to produce a great variety of products that are not grown extensively elsewhere in the United States. The California Department of Food and Agriculture estimates that the state is the leading U.S. producer for about 65 crop and livestock commodities.
Fifty-five percent of the value of California agriculture’s $26.1 billion in 2002 farm gate sales is contributed by the fruit , vegetable , and nut industries. Indeed, California dominates the U.S. horticultural sector, accounting for approximately 37, 55 and 85 percent, respectively, of the 2002 farm gate value of the principal vegetables, fruit, and tree nuts produced in the United States . California’s leading position in the $30.8 billion U.S. horticultural industry is explained by climatic, technological, and infrastructure advantages, as well as the market- and consumer-driven orientation of its agribusiness managers. Given the importance of horticultural crops to California agriculture,dutch bucket hydroponic and to the nation, our discussion draws heavily on examples from this sector.Many of California’s fruits and vegetables are highly perishable, and production is seasonal. A major challenge in marketing is to ensure both the high quality of these products and their availability to consumers year-round. Another key challenge facing marketers is the maturity of the U.S. market. Both the U.S. population growth rate and the income elasticity of demand for food are low, meaning that the market for domestic food consumption expands only slowly over time, and firms are essentially competing for share of stomach. This competition has intensified given the high rate of new product introductions and expanded year-round availability of formerly seasonal items, often through imports. Both of these factors have led to a greater array of substitute products, frequently dampening demand for large-volume staples like oranges and apples.
California’s bounty also presents opportunities. Through the diversity of its agricultural production, firms marketing California produce have the opportunity to provide food retailers with complete lines of fruits, vegetables, and nuts. Because California produces a large share of the U.S. supply of key commodities such as almonds, lemons, olives, lettuce, prunes, strawberries, table grapes, processing tomatoes, and walnuts, California producers and marketers traditionally had unique opportunities to exercise control over the markets for those commodities. However, expanding world supply of many commodities has reduced California’s share, increasing competition and presenting new marketing challenges. This chapter documents the importance of marketing in both U.S. and California agriculture and highlights the institutions that have emerged and the strategies that have been pursued by California’s food marketing sector to compete effectively in this market environment.The U.S. food industry is the largest in the world. The final value of food sold through all retail channels was $485.2 billion in 2002 with an additional $415 billion sold through foodservice channels . Marketing functions account for the largest share of the U.S. food dollar, and the percentage of food costs due to marketing is rising over time. Food marketing thus has an important effect on the welfare of both consumers and farmers. The U.S. Department of Agriculture maintains two general measures of relative food costs. The market basket consists of the average quantities of food that mainly originate on U.S. farms and are purchased for consumption at home.
The farm share of the value of the market basket remained stable at about 40 percent from 1960- 80 but has declined rapidly since then, to 30 percent in 1990 and 21 percent in 2001. Table 1 depicts the trend in farm share for selected commodities of importance to California. Although farm value has traditionally accounted for more than 50 percent of retail value for animal products such as meat, dairy, poultry, and eggs, those shares have now fallen well below half. The farm share for fruits and vegetables tends to be much lower and does not differ much between fresh and processed fruits and vegetables.The second major measure of food marketing costs in the U.S. is the marketing bill, which is calculated as the difference between what consumers spend for domestically produced farm foods and what farmers receive. In 2001 the farm share of the food marketing bill was 19 percent. This measure of the farm share has also been declining steadily over time, falling from 41 percent in 1950 to 31 percent in 1980 and then to 24 percent in 1990. The marketing bill takes account of food expenditures both at home and in restaurants. The proportion of the U.S. food dollar spent outside the home has been rising rapidly. In 2002, such expenditures accounted for 46 percent of the food budget compared to 37 percent in 1990 and 32 percent in 1980.While the overall U.S. food market is characterized by slow growth, eating habits are becoming more diverse. Demographic and psychographic trends, such as ethnic diversity and new attitudes about food consumption as it relates to self-identity and well-being, have contributed to a much more segmented market. Food marketers must increasingly target specific consumer segments rather than employing mass marketing strategies. More retailers are looking to their suppliers to assist them in understanding and better serving different types of consumer segments. In response, many suppliers are becoming involved in new types of marketing services, including consumer research and category management. The latter is designed to help retailers improve net profitability for a category of products through efficient assortment, pricing, promotion and shelf-space management. For suppliers the aim is to focus on identifying and servicing the evolving needs of specific accounts as a preferred supplier, rather than marketing more homogeneous products with fewer support services on a spot market basis. The U.S. retail industry is dominated by chain stores. In 2002,dutch buckets system retail chains accounted for 83 percent of supermarket industry sales vs. 58 percent in 1954 . The remainder of sales is by independent stores, although the vast majority of these stores are affiliated to buying groups, either voluntary chains such as Supervalu or to a lesser extent retailer cooperatives such as Associated Wholesale Grocers. In 2002 there were 32,981 supermarkets including all format types. Firms in the U.S. food-marketing sector often view a large market share, including, if possible, the position of market leader, as a key requisite to success. Pursuit of market share has led to a dramatic consolidation in the U.S. food chain at all levels, ranging from the farm through food retailing.
Due to the difficulty of capturing sizable market share from rival firms, many U.S. food marketers have pursued share growth through mergers and acquisition of rivals. Mergers and acquisitions in the food sector occurred at a rapid pace in the 1980s, temporarily peaked in 1988 at 573 mergers, declined and then reached an all-time high of 813 in 1998, since declining to 415 in 2003 . Although the growth in merger activity has temporarily abated, cumulative activity in recent decades has likely had important implications for the structure of competition in the U.S. food sector. Consolidation occurring at the food manufacturing level has progressed rapidly for some time. About 16,000 food and tobacco processing companies operate in the U.S., but in 1997 about 75 percent of sales were by the 100 largest of these firms. The largest sales growth, fueled mostly by mergers and acquisitions, has been recorded by the top 20 of these 100 firms, which in 1997 were estimated to account for about 50 percent of value added in food manufacturing . Most of the 53 food and tobacco industries surveyed in the U.S. Census of Manufacturing have experienced increasing concentration over time. The average market share held by the four largest firms in these industries has risen from 43.9 percent in 1967 to 53.3 percent in 1992, the most recent year for which data are available. In contrast to the food manufacturing sector, over the decade 1987-97 retail concentration ratios were quite stable with the share of U.S. food sales accounted for by the top 4, 8 and 20 retailers at about 20, 30, and 40 percent, respectively. During this decade new players were emerging in the U.S. food system, including value oriented retailers such as Wal-Mart with its fast expanding super center and club store formats, specialty food retailers like Trader Joe’s, European entrants into U.S. food retailing, and other mass and drug store merchandisers entering the food business. This phenomenon is called channel blurring and continues with the recent emergence of “Dollar Stores,” on-line food shopping and the on-going competition from the food service sector for the consumer food dollar. This challenging marketplace motivated many conventional retailers to become larger in hopes of improving their competitiveness. From 1997-1999, in particular, mergers occurred between several already large retail chains, beginning to induce important and still unfolding changes in relationships between buyers and suppliers. By 2002 the estimated share of U.S. food sales accounted for by the top 4, 8 and 20 retailers had reached 31, 45, and 57 percent, respectively. This means that in 2002 suppliers faced a market where only 20 retail firms sold at least $276 billion in food. Despite the mergers, the United States has no truly national supermarket chains. In 2002 only eight chains had over 1,000 stores, and only one of these has over 2,000 outlets. Given the large geographic size of the United States, chains tend to be regional in focus. However, the recent high merger activity has contributed to much larger chains than ever before, with five surpassing $25 billion in sales in 2002, and four with stores in over half of the country. Still, many local and regional chains remain quite competitive by staying in close contact with their customers and implementing highly targeted marketing strategies. The regional, ethnic and demographic diversity of U.S. consumers leads some to predict that small to mid-size chains may have an important role to play for some time to come. Within the retail channel the super center concept has emerged as a major industry force, which further concentrates buying power in the hands of a few very large new players. Super centers are a type of mass merchandising format combining a full-line supermarket with a full-line discount department store and range up to 24,400 square meters in size , compared to 4,900 square meters for the average supermarket. Total 2002 grocery-equivalent sales of super centers were estimated at $45.5 to $50.3 billion with total super center sales reaching $116.7 billion . The largest entrant to this format is Wal-Mart, with an estimated $29.3 billion in U.S. grocery-equivalent 2002 food sales, a 75 percent share of national super center sales and 1,333 super centers as of mid-2003. Already the largest retailer in the world, operating in ten countries, Wal-Mart is opening over 200 new super centers per year in the U.S. alone, and is fast becoming the dominant global player in grocery retailing with $244.5 billion in 2002 global sales among all its store formats, including large discount stores and warehouse club stores . Wal-Mart has also entered the conventional grocery-retailing sector in the U.S. with 52 neighborhood markets in 2002, and growing. Wal-Mart’s immense buying power combined with its approach of driving non value-adding costs out of the food system appears to have raised the competitive benchmark for conventional retailers. It emphasizes supply chain management via covendor managed automatic inventory replenishment procurement systems.