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Channel Management and differentiation strategies: A case study from the market for fresh produce

Channel Management and differentiation strategies: A case study from the market for fresh produce. Valeria Sodano University of Naples Federico II Italy Martin Hingley Harper Adams University UK. Presentation Outline. Theoretical grounding: incentives for differentiation strategies

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Channel Management and differentiation strategies: A case study from the market for fresh produce

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  1. Channel Management and differentiation strategies: A case study from the market for fresh produce Valeria Sodano University of Naples Federico II Italy Martin Hingley Harper Adams University UK

  2. Presentation Outline • Theoretical grounding: incentives for differentiation strategies • Channel structure and differentiation in food channels/ fresh produce (fruit, vegetable, salad) • Fresh produce markets and distribution in the UK and Italy • Empirical: Vertical channel case study • Conclusions/ Recommendations

  3. Theoretical grounding: incentives for differentiation strategies • Achieving competitive advantage: cost leadership or differentiation? • Differentiation offers market power and avoids price competition • Industrial economic literature focuses on effects of differentiation strategies on market structure, firms’ performances and welfare effects (Beath and Katsoulacos, 1991) • Horizontal and vertical differentiation

  4. Summary of theoretical grounding • Differentiation is always a source of market imperfection and welfare loss • Horizontal differentiation: these effects linked to inefficient scales of production or to the suboptimal product variety • Vertical (or mixed) case the negative welfare effects linked to the oligopolistic structure emerging as market equilibrium • When carrying out differentiation policies, firms will be earning supernormal profits

  5. Channel structure and differentiation in food channels • Horizontal (inter-brand) • Vertical (supplier-retailer) competition: Problems of channel coordination in a multi/manufacturer multi/retailer setting (typical for food industry) paid little attention* *But note work of: Lee and Staelin, 1997; Choi, 1996; Choi and Couglan, 2006; Avenel and Caprice, 2006; Ellickson, 2004

  6. Channel structure and differentiation in food channels (cont’d) • E.g. Choi. Differentiation is used to mitigate price competition and that it tends to produce negative welfare effects • Vertical power asymmetry pushes towards non-cooperative vertical forms of coordination (and retail leadership)

  7. Channel structure and differentiation in fresh produce • Vertical differentiation, more than horizontal, tends to be associated with high degree of industry concentration and market power • Equilibria depend on a complex interplay between: 1) strategies carried out at horizontal and at vertical level; 2) power asymmetries between upstream and downstream firms; 3) governance structures along the channel

  8. Channel structure and differentiation in fresh produce (cont’d) • In fresh produce: 1). Wide range of possibilities to increase product variety (determined by retailers) in horizontal competitive arena 2). No supplier branding, so retailers do not have to take into account strategic reactions by the upstream counterparties; so more able to entirely appropriate the competitive advantage stemming from the differentiation 3). Retailers can appropriate the larger share of the channel profit; lead suppliers to comply with retailers’ differentiating strategies without a real vertical contractual integration (?)

  9. Fresh produce markets and distribution in the UK • Chain retailers dominate the market for fresh produce- 85% of sales. (4 chains accounting for 75% of all grocery sales) • Price most often determines purchase decisions & retail pressure forcing price and margins down • Retailers (directly and via their intermediaries) set both product and price agenda for rest of the supply chain

  10. Fresh produce markets and distribution in the UK (cont’d) • Interest in fresh produce source and origin from consumers • Retailer segmented own brands with (for e.g.) ‘value’, ‘standard’ and ‘finest’ • Branding and product differentiation to grow and add value to the market. E.g. environmental/ regional/ country association:-

  11. Fresh produce markets and distribution in the UK (cont’d) • Retailers directed vertical ‘partnership’supply via ‘Super-Middlemen’ (Hingley, 2005) • Category Management (CM) • CM: Reinforcing power and control rather than collaboration in vertical channels? (Dapiran and Hogarth-Scott, 2003)

  12. Fresh produce markets and distribution in Italy • Loss of Italian leadership in the European market • Weakness of production (small firms) and poor supply chain structures compared with traditional and new competitors • Solution? • Horizontal producer integration • Quality improvement • Better exploitation of Italian comparative advantages • Better relationships with big retailers

  13. Fresh produce markets and distribution in Italy (cont’d) • Leading retailers have launched own-branded lines of high quality fresh produce e.g.“Terre d’Italia” • 55% of the Italian grocery market is covered by 5 groups. Still 38% of fresh produce is via non-supermarket sector:-

  14. Fresh Produce Retail: Naples style…

  15. Empirical: Vertical channel case study • Primary producer (Italy) engaged in vertical ‘partner’ supply to a principal CM intermediary (UK) for UK retailers • The principal areas for exploration: -The impact of vertical competition on coordination -Competitive advantage through value-adding in vertical chains

  16. Empirical: Vertical channel case study (cont’d) • FP Grower. Southern-Italy based family grower. Turnover of 10 million euro • ‘Partner’ customer is FP Marketing. 60% of product to intermediaries; 35% direct to retailers; 5% to wholesale markets. 80% of FP Grower’s customers overseas • FP Marketing. Central marketing organisation for own and associated growers produce based in the UK. Turnover of over 100 million euro • CM supplier to UK retailers • Consolidated and value-added (packaged) fresh produce under retailers’ own-label (90% of their business) • Emphasis for this study on tomato production:-

  17. Case findings: Contracts • Vertical channel arrangement offers FP Grower something that they do not have from other customer sources: a contractual agreement: ….we have full exclusivity with them (FP Grower)… in (for supply to) the UK. FP Marketing (DD)

  18. Case findings: CM system • FP Marketing benefits from more business, but must take on an enhanced role and associated responsibilities: …we have to provide services; we have to provide more resources. That is our added value to the customer, we supply all that technical (input), the agronomists, the ideas, the trials, the NPD, all of this development. There is not a charge for that. FP Marketing (DD)

  19. Case findings: CM system (cont’d) • Control remains in the hands of retailer customers, whose name and identity value-adding services are conducted in: …..supermarkets are very cute (clever), they outsource some of their work to us… We do their work for them, whether it in inventory, in marketing, in procurement… FP Marketing (DD)

  20. Case findings: CM system (cont’d) • But CM based supply does, in return provide security and results in: .....more ownership of the business. FP Marketing (DD)

  21. Case findings: Product differentiation • Access to Southern-Italy allows differentiation by region/ variety/ climate: e.g. vine ripened tomatoes • FP Marketing add-value in order to avoid the ‘commodity-trap’ of being in an unbranded business: we work to try and put identity to products……and try to add value to it, …..our ideal aspiration is to be in ‘special’ and ‘finest’ (retail lines)… because you can get a higher value for it. FP Marketing (DD) It is a way of promoting the grower, the variety, the techniques they are using and most importantly, the flavour. The flavours and varieties they are producing are market leaders. FP Marketing (CD)

  22. Case findings: Vertical channel branding • Sub-branding by country and regional identity: I think (that) they (UK retailers)see (sourcing from) Italy as a way of adding value. …..It is all a way of trying to sub-brand down to the grower. FP Marketing (DD) We have now got customers (i.e. UK retailers) who are even putting grower’s names on the packs. FP Marketing (CD)

  23. Case findings: Differentiation through quality • Variations in different countries standards undermines FP Grower’s position: ….foreign competitors (growers in other countries) take advantage from different labour regulations and different pesticide/use regulations, without a real policy of price and quality transparency being carried out by retailers. Product from (named countries) with low food safety standards is arriving… and sold in Italian supermarkets without clear information on its origin. FP Grower

  24. Case findings: Differentiation through quality (cont’d) • In vertical arrangements retail chains will specify quality assurance using accredited sources e.g. EUREPGAP • UK retailers’ development of their own standards allows further differentiation, but reinforces vertical control

  25. Conclusions • Competitive structure of fresh produce gives strong incentives to differentiation strategies • Degree and kind of differentiation depends on interplay of: -competitive pressure at vertical and horizontal level -forms of vertical governance structures - power asymmetries between upstream and downstream firms Differentiation is likely to be associated with high degree of concentration and market power

  26. Conclusions (cont’d) • Consistent with theory: • Differentiation strategy in fresh produce benefit retailers due to the absence of brand policies • Product differentiation can add value to the channel value. Differentiation strategy is carried out under power asymmetry where retailers control the resources required to make the differentiation policy succeed • Vertical governance is such as to give sufficient incentives to upstream channel partners to both invest and comply with the retailer differentiation policy and offset relationship disadvantages due to buying power

  27. Conclusions (cont’d) • When retailers engage in product differentiation channel relationships shift from collaborative to competitive types with the power imbalance becoming the disciplinary means by which vertical coordination is achieved and maintained • The relationship marketing idea that channel partners look for equitable collaborative relations, is contradicted by the view: “it may be wise for suppliers to accept some inequity as the cost of doing business” (Corsten and Kumar, 2005) and Hingley (2005); especially when retailers carry out successfully competitive strategies with positive spill-over effects on upstream firms • How much is power imbalance allowed for without being threat of negative welfare/ anticompetitive effects?

  28. Recommendations • Interview retailers in Italy and UK to complete full supply chain

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