SUPPLY CHAIN BASICS: 

The Dynamics of 

 Change in the U.S. 

 Food Marketing 

 Environment

U.S. Department of Agriculture

Agricultural Marketing Service

Marketing Services Program

July 2008

Agriculture Handbook 728-3

U.S. Department of Agriculture

Agricultural Marketing Service

Marketing Services Program

28-3

The Dynamics of 

Change in the U.S. 

Food Marketing 

Environment

Debra Tropp, Branch Chief

Edward Ragland, Economist

James Barham, Economist

U.S Department of Agriculture

Agricultural Marketing Service

Marketing Services Program

July 2008

Agriculture Handbook 728-3

i

SUPPLY CHAIN BASICS: 

Contents

New Ways in Food Marketing 1

Retail Differentiation 3

 Trends in Retail Differentiation............................................... 5

 Succeeding in the “Brave New World” of Food Marketing..... 12

 New Market Opportunities..................................................... 17

Retail Concentration 24

 The Squeeze on Grocers....................................................... 25

 Global Data Synchronization................................................. 27

 Direct Store Delivery.............................................................. 33

 Preferred Vendor and Vendor Certifi cation Programs........... 37

Conclusion 39

iii

Tables

TABLE 1. Sales of food at home by type of outlet, in percent................................................................................................................................ 3

TABLE 2. Changes in food store patronage among U.S. households, 1999-2004................................................................................................ 5

TABLE 3. Projected market share, grocery and consumables, 2011..................................................................................................................... 6

TABLE 4. Benefi ts of data synchronization............................................................................................................................................................ 31

Illustrations

FIGURE 1. Trends in U.S. consumer expenditures for food, 1966-2006.............................................................................................................. 7

FIGURE 2. Expenditures for food consumed away from home, by age group..................................................................................................... 7

FIGURE 3. States with the most farmers markets................................................................................................................................................ 8

FIGURE 4. Annual retail sales growth, grocery stores versus supercenters and warehouse club stores, 1995-2005......................................... 10

FIGURE 5. Expected compound annual sales growth rate: 2005-2010 (grocery and consumables).................................................................... 11

FIGURE 6. Average size of new supermarket stores in the United States............................................................................................................ 13

FIGURE 7. Annual growth in U.S. organic food sales, 1997-2006........................................................................................................................ 14

FIGURE 8. Organic ethnic purchase index.......................................................................................................................................................... 15

FIGURE 9. Percentage increase in Hispanic buying power, by State, 1999-2004................................................................................................ 16

FIGURE 10. Percentage increase in Aisian buying power, by State, 1999-2004.................................................................................................. 17

FIGURE 11. Percentage increase in African-American buying power, by State, 1999-2004................................................................................ 17

FIGURE 12. Average number of produce SKUs offered by retail outlets............................................................................................................... 17

FIGURE 13. Promotional materials from FamilyFarmed.org................................................................................................................................. 19

FIGURE 14. Market share of top supermarkets, 1992-2004................................................................................................................................ 24

FIGURE 15. E-Collaboration Pyramid................................................................................................................................................................... 32

v

New Ways in Food 

Marketing

The growing retail desire for exclusive and specialized 

food products offers new marketing opportunities for 

small and medium-sized food suppliers that understand 

the new world of food merchandising and are capable 

of delivering food products that satisfy commercial 

requirements for quality, innovation, and value. This 

document provides an overview of the changing retail 

landscape and identifi es some of the characteristics 

associated with successful food retailing. It is designed 

to help smaller scale food producers and processors 

develop profi table business strategies and identify 

customers likely to appreciate their unique products.

Smaller niche-market food producers have good 

reason to be optimistic in today’s marketplace. 

Increased demand for specialty food products—and 

consumers’ willingness to visit different retailers to get 

them—is creating new marketing opportunities for food 

producers and processors that can offer innovative 

merchandise designed to meet the specifi c needs 

and preferences of particular consumer segments. 

Several of today’s most highly profi table retail 

supermarket chains—typically, privately held fi rms 

that operate relatively small numbers of stores—have 

succeeded because of their ability to closely match 

their food product offerings to the specifi c needs 

of their customer base. Such fi rms offer promising 

marketing opportunities to small- and medium-sized 

food suppliers who can meet their basic product 

requirements. 

Furthermore, the nature of business transactions 

across the U.S. food supply chain is rapidly being 

transformed. A natural competitive tension between 

food buyers and sellers that characterized business 

relationships appears to be evolving toward a new 

paradigm of cooperation, encouraging retail businesses 

to reconsider their traditional roles and adjust their 

practices to accommodate this changing business 

climate. Brian Silbermann, president of the Produce 

Marketing Association, notes that only a few years ago:

 Traditional full-service supermarkets dominated 

the U.S. food retail landscape.

 Shippers sold to many buyers in wholesale 

and retail markets, and no single large buyers 

dominated the market.

 Retail buyers were transaction- and priceoriented, and not open to cooperative 

partnerships with suppliers.1

In today’s marketing environment, however, many 

retail and foodservice channels compete for the 

consumer food dollar, and increasingly affl uent and 

discriminating shoppers—no longer content to rely on 

their neighborhood supermarkets for the bulk of their 

grocery items—seek out products that appeal to their 

health, environmental, and social interests, and that 

suit their time-pressed lifestyle. As a result:

 The importance of national brands has receded 

as food retailers promote their fi rm’s reputation 

through private label programs and other unique 

offerings.

 Retail food buyers seek to establish longer term 

relationships with fewer suppliers to ensure 

steadier pricing, supply availability, and better 

quality control.

 The cultural divide between the procurement and 

marketing sides of food retail fi rms is disappearing 

as long-term supply relationships take precedence 

over short-term price negotiations.

The rapid shift toward supply chain integration is 

also being encouraged by the growing sophistication 

and declining cost of technology, especially wireless 

1. Derived from presentation delivered at Produce Marketing Association 

 convention, March 2008.

1
technology, which enables food suppliers and retail 

buyers to exchange increasingly elaborate data on a 

cost-effective basis, and to more precisely match the 

availability of supplies and movement of inventory 

with demand requirements at all stages of distribution 

and marketing. (For more information, see Global Data 

Synchronization on page 27.)

What do these supply chain developments mean for 

the smaller scale producer, processor, or agricultural 

cooperative that wishes to sell food products to retail 

grocers? As the number of retail accounts declines 

through consolidation (see Retail Concentration 

on page 24) and retailers become more selective 

about their business partners, food suppliers must 

increasingly focus on producing and delivering 

merchandise that:

 Appeals to growing consumer desire for quality, 

variety, and innovation.

 Addresses the emerging needs of Asian, Hispanic, 

and African-American consumers.

 Helps retailers tell their customers the origin 

of food and the production methods used to 

raise it.

 Enables retailers to differentiate themselves 

from their competition, as with locally branded 

products and exclusive private label items.

Moreover, to be considered as vendors, food producers 

and processors must:

 Comply with the stringent requirements of a 

preferred vendor program or production 

contract in their product preparation, packaging, 

and quality.

 Be able to participate in real-time electronic 

data exchange with retail customers using 

compatible software.

 Use appropriate technologies, such as barcodes 

and radio frequency identifi cation (RFID), to 

maintain quality control, enhance transaction 

effi ciency, and reduce recording errors.

This publication addresses two major trends changing 

retail food marketing—a move toward differentiation as 

a marketing strategy and a simultaneous shift towards 

vertical integration between food suppliers and buyers. 

It examines the ramifi cations of these developments for 

the smaller scale food supplier and identifi es strategies 

for remaining competitive in this environment.

2
Retail Differentiation

Traditional neighborhood supermarkets are losing their 

dominance of the grocery trade among consumers, 

especially for nonperishable items. The erosion of 

consumer loyalty to national brands has led buyers 

to patronize supercenters and discount outlets such 

as dollar stores, while competition from alternative 

retail outlets, such as natural food markets, ethnic 

food markets, and direct marketing venues, has further 

nipped away at the share of the perishables market 

long dominated by the supermarket sector. The onestop shopping formula that worked so successfully 

for supermarkets in the past is giving way to an 

increasingly fragmented and diverse retail market, in 

which consumers are willing to seek out and patronize 

different outlets to satisfy their needs for value, quality, 

and variety. As noted by Deloitte Touche Tohmatsu’s 

research department in March 2003:

The differences in product and shopping preferences 

between young and old, rich and poor, married and 

single, Caucasian and ethnic, urban and exurban, 

are becoming greater. These consumers are looking 

for products and services authentic and unique to 

their communities. One-size-fi ts-all retailing just will 

no longer work for a growing segment of 

the population.2

Geographic proximity no longer guarantees a stable 

customer base for food retailers. Today’s consumers 

are willing to shop at several stores to satisfy their 

grocery needs. According to a 2005 study by the 

Food Marketing Institute (FMI), the average household 

grocery shopper visited more than one store each week 

to shop for groceries.3

 Fewer than half (46 percent) 

relied almost exclusively on a full-service supermarket 

for their groceries. Almost one in fi ve (19 percent) 

regularly purchased grocery items at supercenters 

and 12 percent regularly shopped for grocery items at 

discount stores.

Data tracked by USDA’s Economic Research Service 

(ERS), based on ACNielsen Fresh Foods Homescan 

data, reveal similar trends. By 2006, only a slight 

majority of U.S. food expenditures took place at 

conventional supermarkets, compared with nearly 

two-thirds of food expenditures in 1986 (table 1). 

The greatest change in U.S. food shopper behavior 

is the extent to which food shoppers now rely on 

nonsupermarket stores as a source of grocery supplies. 

Compared with a minuscule 0.4% share of U.S. food 

sales for at-home consumption in 1986, the share of 

food sales for at-home consumption that took place 

at supercenters and wholesale club stores accounted 

for nearly 18 percent of all such sales in 2006. In the 

words of supermarket industry consultant Phil Lempert, 

the increasing willingness of the average U.S. shopper 

to patronize different food stores demonstrates that 

many supermarkets are “missing an opportunity to 

capture more consumer dollars by delivering and 

communicating . . . greater selection and value to 

their shoppers.”4

TABLE 1. Sales of food at home by type of outlet, in percent

Outlet Type 1986 1996 2006

Conventional supermarkets 65.3 58.2 57.7

Other grocery 14.3 15.8 3.4

Specialty food stores 5.8 2.6 2.7

Supercenters and 

wholesale club stores 0.4 4.3 17.9

Mass merchandise stores 1.5 2.1 1.7

Convenience stores 3.3 3.0 2.9

Home deliveries/mail order 1.2 2.8 3.8

Farmers/processors/

wholesalers 2.0 1.9 0.8

Other stores 6.2 10.1 9.2

SOURCE: USDA/ERS

2. “Break it up: deconsolidation and decentralization will dictate retailing’s future,” 

 Progressive Grocer, February 15, 2003, p. 50.

3. “American Grocery Shoppers Seek Quality, Value, and Convenience from 

 Multiple Retail Formats, According to FMI’s Trends 2005.” FMI.

4. “Poll Reveals Consumers Are Increasingly Exploring Warehouse Clubs, 

 Supercenters and Other Alternative Grocery Formats, But Supermarkets 

 Remain Preferred Source of Food Purchases,” FMI and SupermarketGuru.com, 

 August 13, 2002. 

3
Consequently, while conventional supermarkets 

remain the primary outlet for many high-value and 

perishable food products, they no longer supply the 

majority of nonprescription drugs, paper, household 

cleaning, or pet products to consumers. Supercenters 

now occupy an equal share of the market in many 

of these product categories. Warehouse club stores 

have also become an increasingly important outlet 

for grocery products, and are currently the third most 

important outlet for meat or poultry, breakfast cereal, 

and frozen foods.5

 

THE CHANGING FACE OF 

FOOD SHOPPING

Conventional supermarkets are store formats 

offering a full line of groceries, meat, and produce at 

average prices. They are up to 30,000 square feet in 

size and have at least $2 million in annual sales. 

Mass merchandisers (Target, Wal-Mart) are stores 

that primarily sell household items, electronic 

goods, and clothing, but also offer packaged food 

products.

Supercenters (SuperTarget, Wal-Mart Supercenter) 

are large food, drug, and mass merchandise 

combination stores operating under one roof. They 

average more than 170,000 square feet, offer a 

variety of food and nonfood merchandise, and 

typically devote as much as 40 percent of their 

space to grocery items. 

Warehouse stores (Food 4 Less, Super Saver) are 

retail/wholesale hybrids with a limited variety 

of products presented in a warehouse-type 

environment. Most items are sold at deep discounts 

in large packages or bulk volumes.

Wholesale clubs (Costco, Sam’s Club) are warehouse 

stores that sell only to members. Memberships 

require an annual fee.

Super warehouse stores (Cub Foods, Shoppers Food 

& Pharmacy) are high-volume hybrids of a large 

traditional supermarket and a warehouse store; they 

typically offer a full range of service departments, 

quality perishables, and reduced prices. 

Specialty food stores offer a more limited selection 

than conventional supermarkets, often specializing 

in organic/natural food, ethnic food, or gourmet 

food. 

Convenience stores (7-Eleven, Quick Stop) are small 

variety stores with a limited selection of popular 

items. They usually sell items at higher prices than 

other stores, but offer the advantage of convenience 

because they are located either in residential 

neighborhoods or at gas stations.

Dollar stores (Dollar General, Dollar Tree, Family 

Dollar) have small store formats and offer food and 

consumable items at aggressive prices, typically in 

units or multiples of one dollar. 

Fresh format stores (Whole Foods) emphasize 

perishables and offer center-store assortments—dry 

grocery, dairy, and frozen foods displayed in the 

inner aisles of the store—that differ from those of 

traditional retailers, especially in the area of ethnic, 

natural, and organic foods.

Limited-assortment stores (Aldi, Sav-A-Lot, Trader 

Joe’s) are discount-priced grocery stores that offer 

a limited assortment of center-store and perishable 

items. 

Other grocery stores generally refers to small 

neighborhood stores.

5. Ibid.

4
Trends in Retail Differentiation

How are mainstream food retailers responding to these 

changing consumer preferences and shopping patterns? 

They are differentiating themselves in two ways: by 

offering competitively priced private label products 

that meet their quality specifi cations and promote their 

fi rm’s image, and by featuring products that target 

specifi c consumer market segments and appeal to 

consumers’ desire for health, nutrition, variety, and 

convenience. 

Today’s food retailers are also able to take advantage 

of the growing capacity of technology, which enables 

precise monitoring of customer preferences and supply 

replenishment needs and permits delivery of services 

and products tailored to household consumers. (For 

more about the growing impact of technology on 

retail practices, see Global Data Synchronization on 

page 27.) 

Percent of Households Using Channel

Channel 1999 2000 2001 2002 2003 2004

Grocery store 100 100 100 100 100 99

Mass merchandise store 95 94 93 91 91 89

Drug store 87 86 86 86 85 84

Supercenter store 52 54 53 55 54 54

Dollar store 52 55 59 62 66 67

Warehouse store 50 49 50 52 51 51

Convenience store/Gas station 50 48 45 46 45 44

Trips Per Year

Channel 1999 2000 2001 2002 2003 2004

Grocery store 83 78 75 73 72 69

Mass merchandise store 26 25 23 22 21 20

Drug store 15 15 15 15 15 15

Supercenter store 15 17 18 21 25 27

Dollar store 10 10 11 12 13 13

Warehouse store 9 10 10 10 11 11

Convenience store/Gas station 13 14 15 14 15 15

TABLE 2. Changes in food store patronage among U.S. households, 1999-2004

SOURCE. “U.S. Consumers Continue Trend of Shopping Less Often in Traditional Grocery Stores,” ACNielsen, January 18, 2005.

 Decline of the Traditional Full-Service 

 Supermarket

Conventional supermarkets and grocery stores have 

experienced steady declines in consumer demand 

every year since 1995, when ACNielsen began 

its annual survey of household shopping patterns. 

Between 1995 and 2004, the number of trips made by 

the average household each year to a supermarket or 

grocery store fell 25 percent, from 92 to 69 trips, and a 

small percentage of household consumers had stopped 

patronizing traditional supermarkets or grocery stores 

entirely by 2004 (table 2). 

Much of the decline in supermarket and grocery store 

patronage can be attributed to a rise in consumer 

shopping at discount stores such as supercenters 

and dollar stores. The average number of visits to 

5
supercenters for groceries rose from 15 a year in 1999 

to 27 a year in 2004. At the same time, dollar stores 

increased their penetration; more than two-thirds of 

surveyed households (67 percent) visited a dollar store 

in 2004 compared with a bare majority of households 

(52 percent) in 1999. Younger consumers especially 

are buying groceries at supercenters and discount 

outlets. Twenty-nine percent of survey respondents age 

15–24 used a supercenter or discount outlet as their 

primary food store in 2004.6

Retail Channel Format Number of Stores Annual Sales 

($millions) 

Dollar Share 

(in percent)

Traditional Grocery Stores 40,831 $446,024 43.5

Conventional supermarkets 27,115 382,226 37.3

Fresh format stores 981 9,815 1.0

Limited-assortment stores 3,844 25,833 2.5

Super warehouse stores 485 16,380 1.6

Other (small grocery stores) 8,405 11,770 1.1

Convenience Stores 148,131 $166,094 16.2

Convenience stores with gas stations 119,662 143,742 14.0

Convenience stores without gas stations 28,469 22,352 2.2

Non-Traditional Grocery Stores 58,074 $413,923 40.3

Wholesale club stores 1,441 84,173 8.2

Supercenters 3,264 207,958 20.3

Dollar stores 27,696 20,607 2.0

Drug stores 22,097 48,968 4.8

Mass merchandise stores 3,407 47,661 4.6

Military commissaries 170 4,555 0.4

Total All Formats 247,036 $1,026,041 100.0

TABLE 3. Projected market share, grocery and consumables, 2011

SOURCE. “The Future of Food Retailing,” June 2007, Willard Bishop Consulting, Ltd.

6. “Food Retailers Offering More Takeout, Self-Scanning, Fuel Pumps, Drive-Thru 

 Pharmacies, and Other Services fo Convenience-Driven Consumers,” FMI, May 2, 

 2004.

 No Slowdown in Sight for Expansion of 

 Alternative Retail Channels

With consumers turning away from traditional 

supermarkets and grocery stores as primary food 

sources, the importance of the retail grocery channel 

has declined—and the decline shows no sign of 

abating. By 2011, non-traditional food retailers are 

expected to account for 40 percent of the Nation’s 

sales of groceries and consumables, almost equal 

to the 43.5 percent share expected from traditional 

supermarkets and groceries (table 3).

6
 Away-From-Home Food Consumption Increases 

 at Expense of At-Home Food Preparation

The gradual rise in away-from-home food consumption 

is further eroding the importance of traditional 

groceries in the United States, leaving supermarkets 

and nontraditional food retailers competing for a 

dwindling pool of consumer food dollars. In 2006, 

consumers spent approximately $1.1 trillion on food 

consumed in the United States. Foodservice facilities 

supplied about $529 billion, or 48.9 percent, of this 

total for on-premise or immediate consumption, the 

third highest level in U.S. history (fi gure 1). 

The tendency to spend money on food outside the 

home is largely inversely related to age, with the 

youngest consumers in the United States more likely 

to spend their food dollars on food consumed outside 

the home than any other age cohort. Consumers under 

25 spend more than 50 percent of their food dollars 

outside the home, compared with 34 percent among 

consumers age 75 or greater (fi gure 2).

 Direct-to-Consumer Marketing Outlets 

 Gaining Traction

The popularity of direct-to-consumer marketing 

outlets, such as farmers markets, roadside stands, 

and community-supported agriculture, is another 

challenge to supermarket profi tability. According to 

the 2002 Census of Agriculture, the value of directto-consumer food sales in the United States grew 37 

percent between 1997 and 2002—from $592 million 

to $812 million—refl ecting the enormous growth in 

the number and accessibility of direct-to-consumer 

marketing outlets, especially in urban and suburban 

neighborhoods. This increase has been bolstered 

by the growth in the number of farmers markets in 

FIGURE 1. Trends in U.S. consumer expenditures for food, 

1966-2006

SOURCE. Food CPI, Prices and Expenditures: Food and 

Alcoholic Beverages: Total Expenditures, ERS.

FIGURE 2. Expenditures for food consumed away from home, by 

age group

SOURCE. Consumer Expenditures in 2005, Bureau of Labor 

Statistics, U.S. Department of Labor, April 2007.

51.2%

47.8%

44.0% 45.5% 43.8%

39.5%

34.4%

0%

10%

20%

30%

40%

50%

60%

Under 25 years

25-34 years35-44 years

45-54 years`

55-64 years65-74 years

75 years and older

7

0

20

40

60

80

100

196619711976198119861991199620012006

Food Expenditures ($billions)

At-home Away-from-home
the United States—from around 1,750 in 1994 to 

approximately 4,475 by late 2007.7

 By the end of 

2005, farmers markets in the United States were 

estimated to generate more than $1 billion in sales 

per year.8

 Furthermore, the number of communitysupported agriculture (CSA) operations, in which 

customers purchase advance shares of a farm’s 

production in return for regular deliveries during the 

growing season, has expanded from an estimated 60 

operations in 1990 to approximately 1,150 operations 

in early 2007.9

 

The farmers market movement in the United States 

was initially concentrated along the West Coast and 

within parts of the Northeast. However, during the last 

few years the number of farmers markets throughout 

the country has increased signifi cantly, especially in 

Midwestern States with a tradition of small farms, and 

where farms are close to population centers (fi gure 3). 

Direct-to-consumer marketing channels appear to 

be especially important to buyers of organic food 

products. According to the Organic Trade Association, 

about 7 percent of U.S. organic food sales in 2005 

occurred through direct sales at farmers markets and 

SOURCE. USDA Agricultural Marketing Service, September 2007

FIGURE 3. States with the most farmers markets

0 100 200 300 400 500 600

Kentucky

Ohio

Massachusetts

Michigan

Wisconsin

Pennsylvania

Illinois

Iowa

New York

California

7. AMS. Data current as of September 2007.

8. USDA Releases New Farmers Market Statistics, AMS, Washington, DC, December 5, 

 2006.

9. Robyn Van En Center for CSA resources, Wilson College. 

 <www.wilson.edu/csacenter>. 

8
other nonretail direct market outlets (including sales to 

foodservice customers).10 In contrast, only 3.9 percent 

of all U.S. food sales in 2005 were made through any 

form of direct sale or home/mail order delivery.11

The exponential growth in access to direct marketing 

outlets, such as farmers markets and CSAs, throughout 

the country appears to have stimulated signifi cant 

growth in the value of locally grown food sold to 

consumers. The market research fi rm Packaged Facts 

estimated in 2007 that consumer demand for locally 

grown food could rise from around $4 billion in 2002 

to $5 billion a year by the end of 2007 and to as much 

as $7 billion a year by 2012, refl ecting both increased 

consumer patronage of farmers markets and CSAs 

and an expanded effort by retail and foodservice fi rms 

to procure more locally grown food that appeals to 

consumers.12 Indeed, the popularity of farmers markets 

has grown so rapidly in the United States that a recent 

national survey reports that 2 percent of U.S. food 

shoppers now say farmers markets are their primary 

food shopping venue.13 In light of these developments 

in the marketplace, mainstream news media are giving 

increasingly prominent attention to the growth of the 

local food movement.

10. U.S. Organic Industry Overview, excerpted from the Organic Trade Association’s 

 2006 Manufacturer Survey. 

 <www.ota.com/pics/documents/short%20overview%20MMS.pdf>.

11. Food and Alcoholic Beverages: Total Expenditures, Food CPI, Prices and 

 Expenditures Briefi ng Room, ERS 

 <www.ers.usda.gov/briefi ng/cpifoodandexpenditures/Data/>.

12. Locally Grown Foods Niche Cooks Up at $5 Billion as America Chows Down on 

 Fresh!, <www.packagedfacts.com/anout/release.asp?id=918>. 

13. National Grocers Association/SupermarketGuru.com consumer panel survey, Fall 

 2003, reported in “When shoppers stray,” Progressive Grocer, April 1, 2004, p.10.

 Permits them to:

 Obtain seasonal foods and other farm products at peak condition.

 Have access to varieties of farm products grown or raised for fl avor, rather than tolerance of 

long-distance shipping.

 Receive fresher products with a longer shelf life. 

 Know more about the origin of food and the methods used to produce it.

 Develop a personal relationship with local vendors, and receive more individualized or more 

responsive customer service.

 Potentially contribute to a reduction in fossil fuel usage by substituting locally grown food for 

food shipped over long distances.

 Provide additional income to family-run farms and the local economy.

 Help preserve local and regional culinary traditions.

WHY CONSUMERS LOVE BUYING DIRECTLY FROM FARMERS

9
Furthermore, when defl ated by the food price 

index, it appears that recent sales growth in the U.S. 

supermarket sector has struggled to keep up with 

the rate of U.S. population growth, which currently 

averages just under 0.9 percent per year.14 Although 

U.S. supermarket sales rose 4.6 percent in 2006 over 

2005 levels, the industry’s highest growth rate in 6 

years, the Food Institute reported that “real” growth 

was actually 1.82 percent once infl ation was taken into 

account.15, 16 These fi gures suggest that even under 

unusually favorable circumstances, the growth of the 

supermarket industry is barely keeping pace with the 

growth in U.S. population. 

Nor does this 2006 sales growth fi gure refl ect the 

impact of hefty food price infl ation during 2007, 

accentuated by energy price hikes and competing 

demands for agricultural commodities. By August 

2007, the Consumer Price Index (CPI) for food had 

already risen 4.3 percent above the comparable level 

in 2006, and the ERS predicted that, by the end of 

2007, the food CPI will have risen 3.5 to 4.5 percent 

over the previous year’s level.17 Moreover, the steepest 

rise in food prices is expected to take place among 

food items consumed at home, marking a signifi cant 

departure from recent trends. Food-at-home prices are 

forecast to increase 3.5 to 4.5 percent between 2006 

and 2007, well above the rise of 1.7 percent in foodat-home prices between 2005 and 2006.18 In view 

of these developments, it’s not surprising that many 

food retailers are expected to face sluggish growth 

over the next few years, with traditional supermarkets 

continuing to lag well behind food retailers with highly 

specialized formats, such as fresh format stores, limited 

assortment stores, and supercenters (fi gure 5).

FIGURE 4. Annual retail sales growth, grocery stores versus 

supercenters and warehouse club stores, 1995-2005

SOURCE. “Estimated Annual Retail and Food Service Sales by Kind 

of Business, 1992 Through 2005,” Annual Benchmark Report for Retail 

Trade and Food Services: January 1992 Through February 2006, U.S. 

Census Bureau, March 2006.

 

 Dwindling Store Loyalty Translates Into Lower 

 Supermarket Profi ts

As might be expected, the steady decline in 

supermarket and grocery store patronage—infl uenced 

by the growing popularity of alternative retail channels 

and away-from-home food consumption—has 

contributed to sluggish sales growth in the traditional 

grocery sector. According to U.S. Census Bureau 

statistics, overall sales growth at conventional 

supermarkets and grocery stores averaged 2.4 percent 

a year between 1995 and 2005, compared with 16.6 

percent a year at supercenters and warehouse club 

stores during the same period (fi gure 4). 

14. Based on 2007 U.S. population growth forecasts published in The World 

 Factbook, Central Intelligence Agency. <https://www.cia.gov/library/

 publications/the-world-factbook/print/us.html>.

15. “Independent and Large Chain Retailers Lead Strong Sales Growth; Energy 

 and Credit Card Costs Top Industry Issue Agenda, According to ‘Food Retailing 

 Industry Speaks 2006’, FMI , May 7, 2006. 

16. “Grocers’ real sales growth at 6-year high in ‘06”, Food Institute Report, 

 January 29, 2007.

17. “Food CPI, Prices, and Expenditures: Analysis and Forecasts of the CPI 

 for Food,” ERS. <http://www.ers.usda.gov/Briefi ng/CPIFoodAndExpenditures/

 consumerpriceindex.htm>.

18. Ibid.

0

5

10

15

20

25

19951996199719981999200020012002200320042005

Growth in Percent

Grocery stores

Supercenters and warehouse

club stores

10
FIGURE 5. Expected compound annual sales growth rate: 2005-2010 (grocery and consumables)

SOURCE. “Sales Growth for Grocery Retailers Not Expected to Keep Pace with Infl ation,” Food Institute, <www.foodinstitute.com/

pressreleases.cfm>. Projections based on Willard Bishop and ERS forecasts.

11

-2.1%

0.6%

0.9%

1.1%

1.6%

1.8%

2.6%

2.7%

2.9%

3.4%

4.8%

9.9%

13.3%

15.8%

15.9%

-5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

Fresh format stores

Limited assortment

stores

Supercenters

Dollar stores

Wholesale club stores

Convenience stores with

gas stations

Super warehouse stores

Drug stores

Mass merchandisers

Military commissaries

Convenience stores

without gas stations

Superstore

Other [small] grocery

Food/drug combination

store

Conventional

supermarket
 Bigger Is Not Always Better. 

Supermarket chains with a relatively small number 

of stores can compete successfully with larger chains 

by using innovative merchandising techniques and 

building reputations for quality and service. For 

example:

 In 2004, Raley’s and Wegmans Food Market 

ranked among the largest 25 U.S. food retailers in 

annual sales. This ranking is especially impressive 

when you consider that Raley’s operated only 

137 stores and Wegmans Food Market 67 stores 

at the time of the report, compared with an 

average of 853 stores among other supermarket 

fi rms listed in the top 25.

 

 By 2004, Whole Foods Market, a national retailer 

of natural and organic foods, had climbed into 

the top 20 list of largest U.S. food retailers, with 

annual sales of $3.9 billion, even though the fi rm 

operated only 166 retail stores at the time. Chief 

Executive Offi cer John Mackey reported that 

2004 had been the fi rm’s best year to date, with a 

14.9-percent increase in same-store sales growth 

contributing to an overall 23-percent increase in 

sales over 2003 levels. 

 In 2006, Wegmans Food Market, Publix, and 

Raley’s—all privately held companies—were 

rated by Consumer Reports magazine the best 

conventional supermarket chains in the United 

States.24 

Succeeding in the “Brave New 

World” of Food Marketing

Although the near-term prospects for the U.S. 

supermarket industry seem somewhat bleak overall, 

some individual retailers have fared extremely well—a 

phenomenon easily obscured by looking at average 

sales alone. In 2004, the top 25 percent of performers 

in the supermarket industry increased sales by more 

than 7 percent and the top 50 percent of performers 

posted sales gains of nearly 5 percent. In contrast, 

the average sales gain for the bottom 25 percent of 

supermarket fi rms was only 0.5 percent.19

Many supermarket chains that seem to be staying 

“ahead of the curve” are those that successfully 

differentiate themselves from their competitors 

by offering products and services that appeal to 

specifi c segments of consumers, especially if they 

adopt a cautious approach to store expansion 

and fi nancial leverage. These retail businesses are 

astutely responding to a general movement within 

the United States toward social fragmentation and 

deconsolidation. According to one industry analyst, in 

“virtually every [. . .] aspect of society, polarization is 

occurring, made manifest in various ways:

 The widely divergent voting blocs in the Nation

 A divergence of lifestyles between married and 

single people

 Geographical choices—leaving suburbs for cities 

on one hand, and suburbs for exurbs on the other

 A growing distinction between affl uent and 

impoverished

 An increasing separation of young from old

 An increasing separation of ethnic groups from 

each other, and from the mainstream

 An increasing fragmentation of informationdelivery means.”20

19. “FMI Speaks—Executive Summary: Measuring a Complex Year,” FMI, May 2005.

20. “Excerpted from speech delivered by Carl Steidtmann, Chief Economist and Director 

 of Consumer Business Research with Deloitte Touche Tohmatsu at the FMI 

 Midwinter Executive Conference, January 2005, reprinted in “Trends Indicated 

 Growing Opportunity for Niche Retailers,” Supermarket News, January 31, 2005. 

21. “Wal-Mart dominates,” Rod Smith, Feedstuffs, July 11, 2005, p. 7.

22. Ibid.

23. Supermarket News, April 5, 2005.

24. “Win at the grocery game: How to shop smarter, cheaper and faster, Consumer 

 Reports, October 2006. <www.consumerreports.org/cro/money/shopping/where-to-

 buy/supermarkets-10-06/overview/1006_supermarkets_ov1.htm>. 

12
Another indicator that “bigger is not always better” 

is that supermarket fi rms with relatively small annual 

sales volumes are doing better fi nancially than many 

of their larger peers. In FY 2003, for example, food 

retailers with annual sales under $100 million posted 

6-year highs in net profi ts (1.45 percent) and return on 

equity (20.38 percent), compared with an average net 

profi t for the industry of 0.88 percent, and a return on 

equity of 9.4 percent.25

 Importance of Target Marketing

Recent fi gures on new supermarket store construction 

reveal the growing importance of target marketing 

among supermarket fi rms. Stores catering specifi cally 

to consumers of ethnic, natural, and high-end 

“gourmet” foods account for a growing percentage of 

food retail outlets. According to the FMI, 14.5 percent 

of surveyed food retail fi rms opened at least one nichefocused store in 2005. Of these, 44 percent had ethnic 

formats, predominantly oriented toward the Hispanic 

consumer market. Retailers were also building natural 

and organic stores for consumers concerned about 

health and wellness and gourmet outlets for highincome shoppers.26

As stocking a broad range of products gives way to 

increased emphasis on target marketing, the average 

size of new supermarkets in the United States also has 

declined substantially in recent years (fi gure 6). The 

average size of new supermarkets fell from 47,500 

square feet in 2002 to 34,000 square feet in 2003, the 

fi rst time in 10 years that it had fallen below 40,000 

square feet.

Given expectations for fl at growth in the traditional 

grocery sector during the next few years, it comes 

as little surprise that food retailers are attempting to 

capture market share in the few sectors with prospects 

for expansion: organic foods, gourmet foods, and 

various ethnic foods. A brief glance at prospects in 

each sector reveals why consumers of organic/natural, 

gourmet, and ethnic foods attract such disproportionate 

attention from U.S. food retailers.

 Growth of Organic Food Markets

Despite several consecutive years of aggressive sales 

growth in recent years (fi gure 7), the organic food 

market is expected to continue expanding rapidly, 

rising an average of 16 percent per year between 2005 

and 2010, compared with a projected annual growth 

25. “Smaller Food Retailers More Profi table Than Larger Chains Last Year,” from 

 on-line edition of Progressive Grocer, March 17, 2005.

26. “FMI Facts About Store Development 2006: New Supermarkets Deliver a 

 Diverse Mix of Fresh Foods,” Food Export, March 2, 2007. <http://www.

 allbusiness.com/agriculture-forestry-fi shing/4437834-1.html>.

FIGURE 6. Average size of new supermarket stores in the 

United States

SOURCE. FMI

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Square feet

1998 1999 2000 2001 2002 2003

13
of 2–3 percent in the conventional food sector.27 With 

organic food sales currently representing less than 3 

percent of the U.S. food market, consumer demand 

for organic foods appears far from saturated.28 A slight 

slowdown in growth rates for well-established product 

categories such as fresh produce (about 39 percent of 

the organic food market) is likely to be overshadowed 

by a growth surge in such less-well-established 

product categories as meat, poultry, dairy, and sauces/

condiments.29

The Hartman Group, a market research fi rm that 

investigates trends in the natural product marketplace, 

reported that two-thirds of U.S. consumers purchased 

organic food and beverages on an occasional basis in 

2004 and that 30 percent purchased them on a regular 

(daily or weekly) basis.30 Additionally, organic food 

purchases were motivated primarily by health and 

nutritional concerns, most specifi cally an interest in 

avoiding pesticides, chemicals, antibiotics, and growth 

hormones. However, the motivation behind organic 

food and beverage purchases becomes more complex 

27. Progressive Grocer, March 1, 2005, reporting projections by the market research fi rm 

 Packaged Facts.

28. “Organic Sales Continue to Grow at a Steady Pace,” Organic Trade Association, 

 May 7, 2006.

29. “U.S. Organic Industry Overview,” Organic Trade Association 2006 Manufacturer 

 Survey. <http://www.ota.com/pics/documents/short%20overview%20MMS.pdf>.

14

FIGURE 7. Annual growth in U.S. organic food sales, 1997–2006

SOURCE. “U.S. Organic Industry Overview,” Organic Trade Association 2006 Manufacturer Survey. <http://www.ota.com/pics/documents/short%20

overview%20MMS.pdf>

3.59

4.29 5.04

6.10

7.36

8.64

10.38

11.90

13.83

16.90

0

5

10

15

20

$Billions

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
as the level of organic patronage increases. Among the 

most dedicated “core” organic consumers (accounting 

for 21 percent of organic food and beverage shoppers), 

most prefer to support brands that “are not owned 

by conglomerates” and that have “an authentic story 

behind their creation.”31 The interest of core organic 

consumers in learning where their food comes from 

and in supporting small businesses creates unique 

opportunities for those food producers and processors 

that can satisfy this interest.

In addition, the organic food market can expect to 

receive a boost from demographic trends as increased 

buying power among Hispanic-Americans, AsianAmericans, and African-Americans should further 

help promote consumer demand.32 Recent analysis 

of organic food patronage by the Hartman Group 

indicates that Caucasian consumers in the United 

States as a whole are less likely than other racial/ethnic 

groups to purchase organic foods on a regular basis.

 Growth of Gourmet Markets

According to the market research fi rm Packaged Facts, 

the U.S. market for high-end “gourmet” foods and 

beverages is currently worth $41.2 billion and can be 

expected to reach $62 billion by 2009.33 Nearly 20 

percent of surveyed food shoppers report they try to eat 

gourmet food “whenever they can.”34 Several factors 

contribute to the growing demand for gourmet foods, 

30. Ibid., pp. 5–6.

31. Ibid., p. 7.

32. Organic Food & Beverage Trends 2004: Lifestyle, Language and Category Adoption,” 

 The Hartman Group, Summer 2004, pp. 26–27.

33. “Nearly 20% of Americans Can be Considered ‘Gourmet’ Consumers, New Report 

 Finds,” PR Newswire, August 18, 2005.

34. Ibid.

120

113

101

101

Caucasian 99

African American

Hispanic American

Native American

Asian/Pacifi c American

FIGURE 8. Organic ethnic purchase index

SOURCE. Organic Food & Beverage Trends 2004: Lifestyle, Language and Category Adoption,” The Hartman Group, Summer 

2004, pp. 26–27.

15
including a greater commitment to the category on 

the part of mainstream food marketers, the expanding 

availability of gourmet food products (especially those 

in convenient, ready-to-eat formats), and a growing 

synergy between the natural and gourmet foods 

industries. From Packaged Facts:

More gourmet products are using natural and 

organic ingredients (and appealing to consumers’ 

social consciences by offering products that are 

good for the environment and for the workers who 

produce them), and more natural foods retailers are 

carrying upscale, gourmet food and beverage items 

that meet their quality standards.35

 Changing Ethnic Demographics 

Another development triggering profound changes in 

grocery merchandising is the expanding contribution 

of Hispanic, Asian, and African-American consumers 

to the market, refl ecting geographic shifts, population 

growth, and increasing affl uence among these 

segments of the consumer population. As the United 

States becomes more ethnically diverse, the relative 

importance of Hispanic, Asian, and African-American 

purchasing power has grown enormously, changing 

the nature of consumer demand in many localities. 

Within the 5-year period 1999–2004, the buying 

power, or total amount of personal income available 

for spending on goods and services by Hispanic, Asian, 

and African-American residents increased by several 

hundred percent in many States36 (fi gures 9-11):

FIGURE 9. Percentage increase in Hispanic buying power, by State, 

1999-2004 (ten fastest growing States)

35. Ibid.

36. Source, fi gures 7–9: “Fastest-growing consumer markets in 1999-2004,” Progressive 

 Grocer, February 15, 2005, citing the Selig Center for Economic Growth, Terry 

 College of Business, University of Georgia.

709.5

452.9

540.6 558.5

455.7

664.3

472.6

949.1 924.6

515.0

0

100

200

300

400

500

600

700

800

900

1000

AL AR GA KY MN NC NE NV SC TN

16
FIGURE 10. Percentage increase in Asian buying power, by State, 

1999-2004 (ten fastest growing States)

FIGURE 11. Percentage increase in African-American buying power, 

by State, 1999-2004 (ten fastest growing States)

New Market Opportunities 

In many ways, today’s retail marketplace offers great 

opportunities for a smaller food producer able to 

supply steady volumes of high-quality, consumerready products to retail markets. To stay competitive 

in today’s highly concentrated grocery sector, food 

retailers are offering an expanded array of highly 

differentiated and customized products to meet the 

needs of their increasingly diverse and discriminating 

customer base. The average number of stock keeping 

units (SKUs) in produce departments, for example, 

more than doubled between 1980 and 2006 

(fi gure 12).37

37. FreshTrack 2001, Cornell University (Includes only fi rms with annual sales more than 

 $1.5 billion).

334.5 325.1

462.6

380.5 348.3 323.7

531.5

395.3

453.1

320.8

0

100

200

300

400

500

600

700

800

900

1000

AZ CO DE GA MN NC NE NV TN TX

196.1 325.1

298.7

169.6 166.8

263.8 301.5

233.3 205.7

0

100

200

300

400

500

600

700

800

900

1000

AZ DE GA ID MN NV SD UT WA

17

FIGURE 12. Average number of produce SKUs offered by retail outlets

SOURCE. FreshTrack 2001, Cornell University

160

200 240

375 343

481

636

0

200

400

600

800

Produce SKUs

1960 1970 1980 1990 1994 1999 2006

est.
Freshness is increasingly important to consumers. 

Growing exposure to farmers markets has led them 

to expect merchandise of comparable freshness 

on supermarket shelves, giving local suppliers a 

competitive advantage. 

A fi rm’s size could also determine the types of goods 

it prefers to buy from smaller suppliers. Research by 

USDA’s Agricultural Marketing Service (AMS) shows 

independent grocers and regional supermarket chains 

often prefer to feature branded products from local 

suppliers as a way to promote their connections 

to their communities. Offering distinctive local 

merchandise allows them to differentiate themselves 

from larger competitors.38 On the other hand, to the 

extent that national and large regional supermarket 

chains are motivated to buy products from smaller 

scale suppliers at all, they usually do so from a desire 

to purchase products with specifi c or exclusive quality 

attributes, regardless of geographic origin—including 

items that can be sold under private labels. For smaller 

producers, private label programs can generate steady 

business with large customers and eliminate some of 

the expense of promoting, advertising, and packaging 

branded merchandise.

Two regional supermarket chains that have been 

leaders in showcasing local food are headquartered 

in Virginia: Ukrop's Super Markets, a 30-store chain 

based in Richmond with outlets in central Virginia, 

and Food City, a privately held, family-owned 

supermarket chain based in Abington with nearly 

100 stores in southwestern Virginia, northeastern 

Tennessee, and southeastern Kentucky. In 2000, 

both fi rms began purchasing local produce from 

a southwestern Virginia alliance of organic family 

farmers that market under the Appalachian Harvest 

label. About 60 growers in southwestern Virginia 

and eastern Tennessee now participate in the 

Appalachian Harvest marketing program. 

Other retail customers of the Appalachian Harvest 

marketing collective include Ingles Supermarkets, 

a supermarket chain based in Asheville, N.C., 

and Whole Foods Market stores in the District of 

Columbia, Pennsylvania, and northern Virginia. 

Not only have these retailers eagerly embraced the 

opportunity to purchase local produce, but one 

fi rm (Ukrop’s) was so interested in establishing a 

steady supply of locally grown organic produce that 

it helped the Appalachian Harvest network recruit 

former tobacco farmers to grow organic produce.39 

Ukrop’s also extended its in-store promotion of 

local food to include value-added food products 

manufactured with locally grown ingredients. In 

2002, Ukrop’s was the fi rst grocery to offer in its 

produce department herb salad dressings from 

Shenandoah Growers along with national brands.40 

This Harrisonburg, VA, fi rm is known for its organic 

culinary herbs. The dressing was displayed in 

a stand-alone section next to a display of fresh 

herbs, underscoring the “freshness” of the locally 

manufactured product, with each bottle of dressing 

displaying the “Virginia’s Finest” State logo. 

PROMOTING LOCAL ORIGIN: CASE 

STUDY #1: APPALACHIAN HARVEST

38. Enhancing Commercial Food Service Sales by Small Meat Processing Firms, AMS, 

 March 2004. 

39. “Tobacco Farmers Seek Diversifi cation after Buyout,” Associated Press, February 19, 

 2005.

40. “Ukrop’s Teams Herbs, Dressings in Produce,” Supermarket News, June 3, 2002.

18
In the Chicago area, sixteen retail grocery fi rms, 

comprising a mixture of independently owned 

grocery stores, specialty food retailers, and regional 

supermarket chains, recently agreed to begin 

carrying FamilyFarmed.org food. This label indicates 

the food is grown in Midwestern States by family 

owned and operated farms that either are certifi ed 

organic or employ similar sustainable agricultural 

practices. A nonprofi t organization known as 

Sustain coordinates and recruits participants 

for FamilyFarmed.org. Participation allows 

members to:

 Post their farm’s story and photo on the 

FamilyFarmed.org Web site <http://

familyfarmed.org>.

 Participate in an annual exposition where they 

can market their food directly to household 

consumers and commercial buyers.

 Use FamilyFarmed.org labels in their product 

merchandising and advertising. The label 

effectively communicates their farms as small, 

locally operated, family businesses that use 

sustainable production methods. Members can 

purchase stickers featuring the FamilyFarmed.

org label from Sustain at prices ranging from 

$25–$50 per 1,000, depending on volume. 

Sustain also offers its members customized design 

services for boxes, bags, and other product 

packaging on a fee-for-service basis. The designs 

showcase a farm’s personal story on consumerready packaging units. Figure 13 shows a customdesigned 5-pound bag for organic potatoes by Igl 

Farms of Antigo, WI. The FamilyFarmed.org label 

appears in the lower left-hand corner of the front of 

the bag. The back of the bag (not shown) features 

a photograph of the Igl family, a quote from the 

growers about the mission of their farm, a potato 

recipe, a Wisconsin State logo, a USDA organic 

seal, information about the farm’s organic certifying 

agent, and basic nutritional information.

Retail buyers not only 

recognize the appeal 

of locally grown food 

to their increasingly 

discriminating 

clientele, they also 

realize that the 

growing popularity 

of farmers markets 

raises expectations of 

freshness in supermarkets. This gives a substantial 

competitive advantage to local producers that 

can deliver high-quality seasonal 

produce. Richard 

Draeger, vice 

president of 

Draeger’s 

Supermarkets, 

a three-store 

supermarket 

chain based 

in Menlo Park, 

CA, recently observed to a 

Supermarket News reporter that “regular customers 

expect nothing less than ripe, ready-to-eat produce” 

because they’ve shopped at farmers markets.41

FIGURE 13. Promotional Materials from FamilyFarmed.org

PROMOTING LOCAL ORIGIN: CASE STUDY #2: FAMILYFARMED.ORG

41. “Produce Profi tability Depends on Freshness,” Lynne Miller, Supermarket News, April 

 18, 2005, p. 50. 

19
Big River Foods is the newest program of the Minnesota Food Association, a 

nonprofi t organization based near Stillwater, MN, whose mission is to build 

a more sustainable food system. Big River Foods is closely linked with the 

Minnesota Food Association’s New Immigrant Agriculture Project (NIAP), 

established in 1999 to help immigrant and other limited-resource farmers 

learn sustainable agriculture methods and farm business management. 

Since its inception, more than 250 immigrants (primarily Southeast Asian 

Hmong and Latinos) have benefi ted from these training sessions. Big River 

Foods (BRF) became a natural outgrowth of NAIP as a means of meeting the 

growing marketing needs of a number of the more commercially oriented immigrant farmers, many of whom 

were looking for marketing outlets beyond farmers markets. BRF is set up as a “training distribution company” 

that combines brokering functions and transportation logistics with on-farm production and post-harvest 

handling training. 

BRF is well positioned to tap into the growing demand by supermarkets and other retail outlets to provide 

their customers with locally grown and sustainably produced fresh fruits and vegetables. In only its fi rst year 

of operations, BRF has successfully brokered deals and distributed to one regional and two local supermarket 

chains operating in Minneapolis/St. Paul and the surrounding area. BRF sells several tomato varieties (grape, 

slicer, heirloom) to Lunds and Byerly’s (a high-end supermarket with 21 locations); Kowalski’s Market (a 

supermarket chain with eight locations and a focus on organic and natural foods); and Cub Foods (a regional 

supermarket chain with 84 locations in the Midwest). It also sells heirloom and grape tomatoes to the Wedge in 

Minneapolis, one of the largest food co-ops in the country, and green peppers to the restaurant chain Chipotle.

BRF is tapping into only a fraction of this retail demand, currently working with fi ve family farm operations, 

most of which are growing on less than 2 acres of land. BRF entered the distribution business knowing that 

demand for locally grown food would be higher than its production capabilities. Nonetheless, it has had a 

successful start by sticking to some core marketing principles:

 Produce for the market rather than trying to market what you produce. BRF reached out to numerous retail 

buyers to fi nd out what products were in highest demand. By matching its own production capacity to 

retail buyer needs, BRF saw a lucrative market for selling tomatoes and green peppers. 

 Develop a brand identity that refl ects the core values of the company and appeals to what consumers want 

in a product. The BRF logo states simply that its products are “Fresh. Local. Honest.” 

"IG2IVER

&ARMS

&RESH,OCAL(ONEST

MEETING RETAIL DEMAND FOR LOCALLY GROWN FOOD: 

A CASE STUDY OF BIG RIVER FOODS

20
 Live by the standards espoused in your brand. For BRF, this means ensuring its farmers are certifi ed to use 

good agricultural practices (GAPs), carry liability insurance, and grow their produce using ecologically 

sound practices. 

 Ensure credibility with retail buyers by knowing everything about the products you are selling. BRF 

decided to limit sales to tomatoes and green peppers. The BRF team knew every aspect of production 

and post-harvest physiology and handling for these two products. When speaking with retail buyers, 

BRF could confi dently answer questions concerning production capacity, handling, storage, and delivery 

mechanisms. 

 Start small and within your present capacity. With limited cleaning facilities and cold-storage capacity, 

tomatoes and green peppers were well-suited for BRF. Cleaning, grading, and packaging could be done 

on-farm, and both products could be stored in cold storage units of similar temperature. The farmers were 

also comfortable growing these two products at a level that met the quality standards expected from the 

retail buyers. 

 Communication, communication, communication. Cultivating a strong relationship with a retail buyer 

requires constant communication. This starts by fi nding out how the buyer prefers to communicate, 

whether this is by fax, phone, or email. It then means regularly communicating with the retail buyer, from 

assuring the buyer that product quality and handling standards are met to updating the buyer on orders 

and delivery dates. 

Further information on Big River Foods can be found at the Minnesota Food Association’s Web site, http://

www.mnfoodassociation.org

21
 Private Label Products

Private label or store brand programs represent 

another potential market opportunity for smaller food 

producers and processors. Such programs appeal to 

retail buyers who seek food products with specifi c—

and sometimes exclusive—quality attributes. Although 

in the past private label products had a reputation for 

inferiority, a 2005 report by Citigroup/Smith Barney 

reported that sales of private label products in the 

United States increased 48 percent between 1997 

and 2003, compared with a 22-percent increase for 

branded items and 25 percent for other packaged 

goods.42 The retail industry has enthusiastically 

adopted private label programs in recent years, with 

the result that, by 2007, one of every fi ve items sold 

in supermarkets, drug stores, and mass merchandise 

stores was a private label product, accounting for more 

than $65 billion in sales per year.43 

According to the market research fi rm Mintel, in recent 

years sales of private label food have outpaced other 

food products. Sales of the 20 best-selling categories 

of private label food—items such as cheese, frozen 

vegetables, and cookies—rose 23 percent between 

1999 and 2004, while overall sales of the same 

product categories rose only 14 percent.44 Consumers 

have generally embraced private label food products—

seven out of ten consumers recently told the market 

research fi rm Packaged Facts that private label foods 

are as good or better than national brands.45 

Private label products are becoming increasingly 

attractive to supermarket buyers for several reasons. 

Consumers are shopping at an ever-broader array 

of food stores, and are able to buy national brand 

products at a growing number of fi rms. Therefore, 

traditional full-service supermarkets can no longer 

attract customers by featuring a wide selection of 

national brands and depending on brand loyalty 

to drive sales. To remain successful, they need to 

differentiate themselves from other retail outlets. 

Private label products fi t into this strategy by enabling 

supermarkets to offer exclusive food items that aren’t 

available to their competitors and also directly promote 

their company’s reputation.

Private label products also offer fi nancial and quality 

control advantages to both retailers and consumers. 

In the past, private label and store brand programs 

enabled retailers to pass along savings to their shoppers 

by eliminating some expenses and frills associated with 

branded products from major food manufacturers, such 

as manufacturers’ advertising costs or their elaborate 

packaging. In today’s highly competitive retail 

environment, where big-box and mass-merchandise 

stores continue to chip away at supermarkets’ share 

of the food market, the lower prices of private label 

products attract supermarket buyers.

In an era distinguished by consumer attention to 

food quality, private label products enable retailers 

to exert greater control over food production and 

processing methods, and to use this control as a 

marketing advantage. As one managing consultant put 

it, “companies [these days] view risk to their brands 

as their single biggest business hazard.”46 Business 

alliances that permit retailers to inform consumers 

about the origin of their food and assure its quality, 

and to act quickly in the event of a recall, bestow 

substantial marketing advantages as well as the 

opportunity to educate customers about the distinctive 

qualities of their store brand products. Smaller 

scale food producers and processors are in a position, 

both geographically and operationally, to develop 

exclusive relationships with retailers that value—and 

are willing to pay for—products with assured quality 

characteristics that can quickly be traced back to 

their source.

42. Supermarket News, April 5, 2005.

43. Private Label Manufacturers Association <http://plma.com/storeBrands/sbt07.html>.

44. Baltimore Sun, May 4, 2005. 

45. Excerpts from “Private Label Food and Beverage in the U.S.,” Packaged Facts, 

 Rockville, MD, February 2007. <http://www.packagedfacts.com/Private-Label-

 Food-1282369/.

46. Greg Pellegrino, Global Managing Director with the consulting fi rm Deloitte Touche 

 Tohmatsu, quoted in “Prospering in the Secure Economy,” Meat and Poultry 

 magazine, October 2004. 

22
In a February 2005 interview with Supermarket 

News, Jack Gridley, the director of meat and 

seafood purchasing for Dorothy Lane Market, said 

his fi rm buys beef only from one source: Coleman 

Natural Beef. All beef entering his company’s 

private label program originates from Coleman in 

order to ensure traceability of the food products 

from “farm to plate.” Market offi cials estimate they 

can identify the farm source for 93 percent of their 

meat transactions, so if there is a recall, they can 

respond immediately. 

While Dorothy Lane Market’s private label program 

may include unusually stringent quality, animal 

husbandry, and social welfare standards, a growing 

number of retailers have begun to incorporate some 

type of certifi cation or natural food labeling into 

their private label programs, as such programs have 

proven to be winning marketing strategies for some 

early market entrants. Whole Foods Market, the 

prominent retailer of natural foods, led the charge 

in developing organic and natural store brand 

programs back in 1997 and 1998 by launching its 

365 Organic and Whole Kids lines of products.48 

By early 2005, these store brands represented about 

15 percent of the company’s revenue.49 Several 

conventional supermarket chains have followed 

Whole Foods Market’s lead by launching their 

own store-brand organic programs over the past 

few years, including Kroger Company (Naturally 

Preferred), Shaw’s Supermarkets (Wild Harvest), 

Giant Food/Stop and Shop (Nature’s Promise), 

Safeway (O Organics), and Wegmans Food Markets 

(Wegmans Organic). 

47. “Organic, Natural Meat Sales Exploding,” Bobbie Katz, Supermarket News, February 

 2005.

48. Timing of private label programs obtained from Whole Foods Market.

49. “Whole Foods has Another Robust Quarter,” Austin American-Statesman, February 

 28, 2005. 

A recent interview in 

Supermarket News explored 

a successful private label 

marketing campaign for 

meat that relies upon a direct 

relationship between a retail grocer and small-scale 

suppliers of natural meats.47 As part of its private 

label program, Dorothy Lane Market, a threestore specialty grocer based in Dayton, OH, offers 

consumers a choice of several free-range poultry, 

natural beef, and natural/no-nitrate pork products. 

The specifi cations incorporate attributes related to 

environmental sustainability and humane practices. 

For example, Dorothy Lane Market’s private label 

free-range turkeys are guaranteed to be:

 Raised “free-range” (meaning, according to the 

market’s defi nition, the birds are free to range 

outside, to scratch the ground, and forage on 

plants).

 Raised without antibiotics.

 Raised without hormones or growth 

stimulants.

 Vegetarian-fed—with no animal by-products in 

the feed.

 Locally grown and raised on a small family 

farm (Bowman & Landes in New 

Carlisle, OH).

CASE STUDY OF A PRIVATE LABEL: 

DOROTHY LANE

23
Retail Concentration

The number of supermarket chains operating in 

the United States has dwindled in recent years as 

many of the country’s largest supermarket fi rms 

have increased their scale of operation and sought 

to improve profi tability by acquiring assets from less 

successful competitors. Today the U.S. grocery sector 

is increasingly controlled by fewer and fewer grocery 

fi rms (fi gure 14). Whereas in 1998 the top 20 grocery 

fi rms in the United States accounted for slightly more 

than half of total sales, by 2004 they accounted for 

more than two-thirds. During the same period, the 

top four grocery fi rms increased their market share 

from 30 percent to almost 40 percent of total grocery 

sales volume.

FIGURE 14. Market share of top supermarkets, 1992-2004

SOURCE. USDA/ERS

50. “Competitive Edge,” Willard Bishop Consulting, Ltd., July 14, 2005, and “The Future 

 of Food Retailing,” Willard Bishop Consulting, Ltd., July 2006. 

0

20

40

60

80

100

1992 1995 1998 2001 2004

Percent Market Share

Top 4 Top 8 Top 20

24

Two trends appear to be responsible for the intensifi ed 

concentration of the grocery sector over the past 

couple of decades—the growing range of marketing 

outlets that sell food, which has undermined the 

longstanding role of supermarkets as a primary source 

of food, and the declining importance of at-home food 

preparation, which has boosted sales of ready-to-eat 

foods (often from foodservice outlets) at the expense of 

other food purchases.

 Channel Blurring

The growing infl uence of discount mass merchandise 

stores in the retail sector has transformed the way 

people shop for food. In 1990, supercenters—

combination retail stores that blend an economy 

supermarket with a discount department store—sold 

just under 2 percent of all food sold in the United 

States. By 2005, their share of the U.S. food market had 

grown to nearly 14 percent.50 Their ability to purchase 

food products in large volume and use their buying 

power to offer unusually low prices to consumers 

appears to have earned them a lasting niche in the 

retail grocery marketplace. 
The Squeeze on Grocers

According to recent analysis by ERS, the market for 

groceries is essentially saturated. Despite steady 

increases in the U.S. population, the growth potential 

of retail grocers in the United States remains 

limited by the declining share of consumer income 

spent on food.51 

Further exacerbating the fi nancial pressure on 

supermarkets has been the steady increase in the 

share of food dollars on food eaten away from home. 

Between 1966 and 2006, the share of food dollars 

spent on food consumed outside the home climbed 

from 31 percent to nearly 49 percent.52 For more 

information about food eaten at home versus away 

from home see fi gure 1 on page 7.

In this increasingly competitive marketing 

environment, supermarkets are looking for ways to 

improve their profi t margins. Supermarkets at all scales 

of operation are working with their vendors to integrate 

supply chain management systems and ensure endto-end quality control. These systems use information 

technology to streamline the distribution process, and 

include special arrangements with vendors to increase 

supply chain effi ciency. 

Integrated data systems have already led to savings 

among the early adopters. With the costs of technology 

continuing to fall, supermarkets will continue to adopt 

increasingly complex technology to support their 

distribution operations, especially as the potential for 

long-term cost savings becomes widely recognized. 

For more detailed information about technology in 

the food supply chain, see our companion publication, 

Supply Chain Basics: Technology: How Much—

How Soon, available at http://www.ams.usda.gov/

MarketingServicesPublications. 

 How Does Retailing Effi ciency Affect Food 

 Suppliers and Processors?

The use of information technologies, from barcodes 

to RFID and data synchronization, has increased the 

amount and effi ciency of the information supermarkets 

share with their suppliers—and that they expect in 

return. Results from a 2000 food industry survey show 

that more than 80 percent of surveyed retailers demand 

more services from their suppliers than they did in 

1993.53 The top three services reported by retailers 

were the provision of private label products, category 

management services, and electronic data interchange 

capability.54 Consequently, to be taken seriously 

as suppliers in today’s retail marketplace, food 

producers and manufacturers must develop the 

technological capability to exchange product 

information electronically.

Beyond anticipating consumer demand and 

streamlining logistics with information technology, 

retailers are exercising leverage to negotiate purchases 

of food products customized to their procurement 

and marketing needs. To ensure that suppliers meet 

their standards, some retail fi rms are initiating Vendor 

Certifi cation Programs (VCP) that require certifi ed 

vendors to guarantee specifi c safety, handling, 

traceability, packaging, and quality control practices.

To ensure that inventory levels are fi nely coordinated 

with demand, supermarkets have made arrangements 

with some vendors to ship directly to stores instead 

of to a centralized distribution warehouse. (This 

movement is discussed in detail in the section “Direct 

Store Delivery.”) The move to customized product 

offerings for each grocery store opens new marketing 

opportunities for small- and medium-sized food 

producers and processors that might not produce 

51. Competition Alters the U.S. Food Marketing Landscape, Steve W. Martinez, ERS, 

 November 2003.

52. Food, CPI, Prices and Expenditures: Foodservice as a Share of Food Expenditures 

 <http://www.ers.usda.gov/Briefi ng/CPIFoodAndExpenditures/Data/table12.htm>.

53. “Understanding Retailer Purchasing Trade Practices in the Produce Industry,” Willard 

 Bishop Consulting Web site, June 2000. 

54. National Food and Agricultural Policy Project Policy Briefi ng Paper, March 2001.

25
the trend toward close coordination between retailers 

and suppliers can be expected to accelerate until it 

becomes the new standard for partnerships between 

supermarkets and their suppliers in fi rms of all sizes.

Improved Customer Response

Firms today aspire to become demand-driven supply 

networks, with the agility and effi ciency to succeed in a 

rapidly changing global economy. This business model 

is driven by capturing information about consumer 

demand, not by forecasts or plans. Suppliers with realtime data collected at point of sale can quickly modify 

their products, quantities, and package sizes based on 

customer preferences. For more detailed information 

about electronic exchange of information along the 

supply chain, see our companion publication, Supply 

Chain Basics: Technology: How Much—How Soon. 

 Traits of Top Grocery Firms

Top grocery fi rms share a commitment to 

communication and integration with their suppliers 

through adoption of information technology, which 

can lead to cost reductions for business operations 

as well as increased sales. Streamlined data and 

information exchange with their suppliers help 

retail fi rms customize their product assortments to 

consumer needs on a store-by-store basis. On the other 

hand, producers benefi t directly from informationsharing arrangements with retailers by developing a 

more precise understanding of consumer needs and 

preferences quickly. As the cost of technology declines 

and its capability expands, the trend toward close 

coordination between retailers and suppliers can be 

expected to accelerate and become the new standard 

for business partnerships between retailers and 

vendors, regardless of fi rm size. Consequently, small 

and mid-size food producers interested in supplying 

the retail grocery market will need to employ such 

technologies as barcodes or RFID tags that enable 

them to share product data throughout the production, 

handling, and distribution processes. 

enough to supply the large number of retail stores 

served by a distribution center, but that do have the 

capacity to supply products to a selected number of 

individual store outlets.

 Advantages of Supply Chain Coordination

The retail food industry is forming tightly aligned 

supply chains to gain two key objectives—effi ciency 

and improved customer response.

Effi ciency

Supply chain effi ciencies are gained by effectively 

sharing information between and within fi rms. When 

information is shared among a fi rm’s departments 

rather than each department operating in isolation, the 

fi rm becomes more effi cient. A lack of communication 

among departments slows a fi rm’s response time, 

possibly marketing products consumers don’t want. 

Departmental integration focuses all departments on 

the same goal and makes the fi rm more responsive to 

customer demand. Effi cient internal communications 

are essential to effective external communication 

with suppliers. 

Data sharing between retailers and their suppliers is 

not new, but it has become more effi cient and richer 

in detail. The advent of inexpensive computer 

equipment and software allows increased collection 

and tracking of many kinds of product data all along 

the supply chain.

The streamlining of data exchange with suppliers 

helps supermarkets match their product inventory 

to consumer needs on a store-by-store basis. At the 

same time, suppliers benefi t from the informationsharing arrangements by learning consumer needs and 

preferences faster and with greater accuracy. As the 

cost of technology declines and its capability expands, 

26
Global Data Synchronization

In the modern world of global sales, it has become 

imperative for businesses in different countries to 

coordinate their supply chain data. This coordination 

is called Global Data Synchronization (GDS). The 

goal of GDS is to create a universal product code that 

can be understood by sellers and buyers everywhere. 

With such a code, stores and their suppliers can 

communicate clearly, unambiguously, and—most 

important—accurately about the goods they are buying 

and selling.

 How Does Data Synchronization Work?

Data is exchanged between retailer and supplier 

through data pools, which provide transparent 

gateways through which suppliers and retailers 

exchange close-to-real-time information about 

products, packaging, and logistics. Before data are 

made available for access, they are checked for 

accuracy and confi gured into standard formats. The 

data pool defi nes each data element to ensure that 

buyer and seller are “speaking” the same language. 

This standardized data format provides accuracy and 

allows buyer and seller to know exactly where to 

locate information. 

GDS began with a program called Effi cient Consumer 

Response (ECR). ECR programs, introduced in the 

1990s, were designed to allow a seamless fl ow of 

product from producer to consumer, minimizing 

inventory holding costs while reducing the number 

of out-of-stock items and maintaining high levels of 

customer satisfaction. ECR ties grocery manufacturers, 

wholesalers, and retailers together with information 

systems. The four basic strategies of ECR are:

 Effi cient store assortment.

 Effi cient replenishment (Just-in-time inventory 

minimizes the amount of inventory held by 

distribution centers and store back rooms).

 Effi cient promotion.

 Effi cient product introduction.

Prior to ECR, supermarkets and food manufacturers had 

focused primarily on reductions in logistical expenses. 

GDS is an extension of ECR. Like ECR, it is designed 

to reduce excess inventory but, because it reduces 

the incidence of data errors and allows data to be 

shared more effi ciently, it saves time and money 

throughout the supply chain process. The advent of 

computerization, the Internet, and the declining cost 

of high-powered computer equipment and software 

have made this type of constant communication and 

intensive inventory management increasingly possible 

and affordable. 

The Global Data Synchronization Network

In 2003, FMI and the Grocery Manufacturers 

Association (GMA) sponsored six case studies 

measuring the impact of data synchronization on 

grocery fi rms and food manufacturers between 

November 2002 and January 2003. Three 

manufacturers and three retailers were selected, 

ranging from relatively small regional fi rms to large 

conglomerates: Bi-Lo (a discount retail grocery 

subsidiary of Ahold USA) Kraft Foods, Nestle, Purina 

Pet Care, Proctor and Gamble, Shaw’s Supermarkets, 

and Wegmans Food Markets. Each of the fi rms in the 

case study had implemented data synchronization. The 

resulting report is titled Data Synchronization Proof of 

Concept: Case Studies from Leading Manufacturers.

55 

55. GMA-FMI Trading Partner Alliance: Action Plan <http://www.1sync.org/

 documents/GDSN/GMA-FMI%20Data%20Sync%20Action%20Plan.pdf>. 

27
The fi ndings of the study were promising and resulted 

in the launching of the Global Data Synchronization 

Network (GDSN), an electronic system that 

exchanges data between suppliers and retailers 

using a standardized format. GDSN is the electronic 

network that makes GDS practical, allowing suppliers 

and retailers to communicate product information 

accurately, quickly, and effi ciently. Early adopters of 

GDSN have experienced signifi cant time and cost 

savings and want their suppliers to participate in 

data synchronization. 

GDSN is a network of data pools with a global registry for sharing information about products and companies. 

It was conceived, and is supported by, the European Article Number (EAN) Association, the Uniform Code 

Council (UCC), and leading companies and industry groups worldwide. It enables trading partners in the supply 

chain to exchange data that is accurate, up-to-date, and compliant with universally supported EAN and UCC 

system standards57. GDSN is based on a centralized global registry that connects to data pools around the 

world, enabling standardized data to be synchronized on a near real-time basis.

GDSN was developed in response to the high costs associated with inaccurate data. To ensure GDSN meets 

the business needs of the user community, EAN and UCC established an oversight committee of 17 senior 

executives from manufacturing, retailing, and EAN member organizations to govern GDSN, promote its global 

adoption, and address strategic issues related to its rollout.58 More information about GDSN can be found in 

our companion publication, Supply Chain Basics: Technology: How Much—How Soon.

OVERVIEW OF GDSN

56. Synchronization: The Next Generation of Business Partnering, Accenture, 2006. 

 <http://www.accenture.com/Global/Services/By_Industry/Consumer_Goods_and_

 Services/R_and_I/SynchronizationPartnering.htm>.

57. Global Data Synchronization Network FAQs, Drummond Group. 

 <http://www.drummondgroup.com/html-v2/gdsn-faq.html>.

58. Ibid.

As the technology spreads to other supermarkets, more 

food buyers will require their vendors to participate in 

GDSN. Since mid-2003, food industry participation in 

GDSN has risen from 100 companies to nearly 10,000, 

and the number of registered food items grew from 

60,000 to more than 580,000 in 2005.56 GDSN is 

increasingly a requirement for food suppliers.

28
 Reduced need to adjust and reconciliate 

invoice and coupon discrepancies, which lowers 

labor costs.

 Reduced time from item entry to retail shelf.

(Speed to market and customer service).

 Reduced time spent addressing item data issues.

 What are the Advantages of GDS to Suppliers?

 Reduced inbound and outbound freight costs.

 Improved productivity within distribution 

networks.

 Improved productivity within order and item 

administration.

 Reduced time from item entry to retail shelf.

 Reduced time addressing item data issues.

 Makes your company more appealing to retailers 

who have or will soon adopt GDS.

Initially, it was thought the benefi ts of GDS would 

come from improved standards, accuracy, and 

synchronization. However, improvements have 

surpassed these basic areas and include such 

improvements in vital processes as demand forecasting, 

procurement, replenishment, and logistics. Researchers 

believe this is just the tip of the iceberg, and still more 

improvements in RFID, Electronic Product Code (EPC), 

and price synchronization can be expected as GDS 

becomes the standard for the retail grocery sector. 

 What are the Advantages of GDS to Retailers?

 Reduced inbound and outbound freight costs.

GDS improves the accuracy of product weights 

and measures information resulting in truckloads 

more completely fi lled but not exceeding weight 

limits. The improved effi ciency results in lower 

transportation costs.

 Improved productivity within distribution 

networks. Labor costs are reduced due to fewer 

work hours needed to correct and align product 

information between retailers and suppliers.

 Improved DSD receiving capabilities. More 

accurate data means that more items scan 

correctly at the back door and fewer labor hours 

are required to correct errors.

 Improved productivity within order and item 

administration. Correct item information 

streamlines administrative activities, resulting 

in improved response time of continual 

replenishment programs, less time for order 

inspection, and reduction in labor hours required 

to process new items.

29
 How does GDS Better Utilize Current Technology?

Prior to GDS, suppliers and retailers created, stored, 

and used electronic data exclusively for their internal 

operations. Retailers’ and suppliers’ product data had 

no standard format, data fi elds varied from fi rm to fi rm, 

and the information collected was not generally shared 

among companies. 

Data synchronization organizes into a standard format 

product data that has been captured electronically by 

scanning barcodes, uniform product codes (UPC), or 

RFID tags. The stored information can be accessed on 

the network by both supplier and retailer. Because 

product information is synchronized, both have the 

same information in a standardized format, making it 

easy to fi nd and understand product information. For 

example, when a supplier changes any catalogued 

characteristic of a product on GDSN, the new product 

characteristic is shared with the retailer almost 

immediately, eliminating errors due to incorrect 

information. Retailers know exactly what they are 

getting and they get the products they ordered. The 

synchronized data makes the supply chain transparent 

to buyers and sellers, reducing confusion and 

costly errors.

When a retailer receives a shipment utilizing GDSN, 

these are the benefi ts when

an electronic invoice is scanned:

 The retailer saves the time it takes to record the 

shipment manually;

 Errors are avoided that could occur by manually 

recording the contents of the shipment; 

 The shipment can be compared electronically 

with the original order.

When the retailer acknowledges receipt to GDSN, 

the supplier sees the receipt and the date and time 

received. 

 Unexpected Benefi ts of Data Synchronization

In the spring of 2006, sponsored by GMA, FMI, 

Wegmans Food Markets, and 1SYNC, a GDSN data 

pool, a follow-up to the 2003 study investigated 

the benefi ts of GDSN. The resulting report, 

Synchronization—The Next Generation of Business 

Partnering,

59 not only confi rmed the fi ndings of 

the 2003 initial study but surpassed some original 

projections. It found that:

 Using accurate data to drive business processes 

develops value for all industry players. 

 Data synchronization is not only technology—it is 

people and processes working together to form a 

highly integrated and collaborative value chain.

 Manufacturers and retailers that lead the way are 

realizing signifi cant benefi ts.

Not only have manufacturers improved productivity, 

but they have also reduced the time it takes for a new 

item to reach the retail shelf. Due to greater effi ciencies 

in the distribution network, one surveyed manufacturer 

was able to condense a spreadsheet-based process 

used to align product information with its distributors 

from 5 days to 48 hours.60 Some signifi cant 

productivity improvements include reduction in the 

59. Synchronization: The Next Generation of Business Partnering, Accenture, 2006. 

 <http://www.accenture.com/Global/Services/By_Industry/Consumer_Goods_and_

 Services/R_and_I/SynchronizationPartnering.htm> 

60. Ibid.

30
time needed to add new products; change existing 

product characteristics such as size, case count, and 

palletization requirements; reduced instances of 

coupon rejections at store check-out; and reduced time 

for a new item to reach the shelf. 

One participant in the GMA/FMI synchronization 

study introduced 720 new products into its portfolio 

with signifi cantly less labor than projected, saving 

3,480 hours of employee time annually—an estimated 

savings of $288,000.61 This sizable addition to its 

portfolio represented a 50-percent increase in its 

product line. Prior to the implementation of GDSN, 

the process of assembling and circulating all relevant 

data associated with these products to internal units 

and trading partners would have required hiring an 

additional two full-time employees to enter the data, 

print or develop documentation, and send it out.62

Performance Metrics (Process Area)

Source of Benefi tsa

% Improvement over Current State

Retailerb Manufacturerc

Reduced Inbound and Outbound Freight Costs 

(Transportation) 6.5% 1–8%d

Improved Productivity Within Distribution Network 

(Distribution) 1% 64%e

Improved DSD Receiving Capabilities 

(Store Operations) 9% Not Applicable

Improved Productivity Within Order and Item Administration

(Order Administration) 50% 2–67%

Reduced Out-Of Period Adjustments and Reconciliation of Invoice and Coupon Discrepancies

(Accounting Administration) 8% Not Applicable

Reduced Time from Item Entry to Shelf

(Speed to Market) 23% 67%

Reduced Time from Item Entry to Shelf 

(Customer Service) 40% Not Applicable

Reduced Time Spent Addressing Item Data Issues

(Sales) Not Available 25-55%

SOURCE. Synchronization—The Next Generation of Business Partnering, Accenture, 2006. 

a. Where actuals were not available, estimates were provided

b. Percentages were calculated using weighted averages, based on dollar values

c. Represents spot benefi ts for particular manufacturers; percentages do not refl ect savings across all participants

d. Eight percent based on mill transit savings for a single product line at a particular manufacturer. Total mill transit savings by this 

manufacturer is pending completion of a full product portfolio audit and is expected to be lower.

e. Improvement is in a particular area at manufacturer; does not represent improvement across entire distribution network.

TABLE 4. Benefi ts of data synchronization

61. Ibid.

62. Ibid. 

31
Initially, most benefi ts were expected to be derived 

from improved accuracy, synchronization, and 

standards for product registration and changes. 

However, those savings were just the beginning. 

Benefi ts also are achieved through enabling employees 

to concentrate on such “mission critical” tasks as 

demand forecasting, procurement, replenishment, and 

logistics, rather than validating item information and 

doing other administrative paperwork. Ultimately, even 

greater benefi ts may emerge as industry participants 

continue to work together on collaborative processes 

such as RFID, EPC, and price synchronization.63 

Figure 15 illustrates improvements in the supply chain 

brought about by data synchronization. The 2006 

Accenture report noted that initial improvements 

such as data accuracy and common global registry 

standards are the catalyst for improvements and 

savings in logistics, distribution, demand forecasting, 

replenishment, and procurement. These second-tier 

improvements, in turn, pave the way for enhancing 

the ability to track and control products through the 

supply chain, adoption and enhancement of RFID 

technology, and the development and use of price 

synchronization.64 

Even in the initial stages of adoption, GDSN is already 

providing signifi cant benefi ts to the food industry. For 

example, prior to the implementation of GDSN, one 

of the food manufacturers featured in the study had 

been fi ned $300,000 to $500,000 a year by retailers 

for inaccurate product information. After the adoption 

of GDSN, the fi nes assessed on the same manufacturer 

for inaccurate information were close to zero. Another 

food manufacturer improved the time needed to move 

new items from 4 to 8 weeks to only 2 weeks. Yet 

another study participant saved $2.2 million in annual 

transportation costs by correcting a weight error on a 

single item.65

SOURCE. Synchronization—The Next Generation of Business Partnering, Accenture, 2006. 

FIGURE 15. E-Collaboration Pyramid

63. Ibid.

64. Synchronization: The Next Generation of Business Partnering, Accenture, 2006.

65. Ibid. 

32
WEGMANS FOOD MARKET 

EXPERIENCE WITH DATA 

SYNCHRONIZATION

As of the summer of 2006, 95 percent of Wegmans 

Food Markets’ vendors were participating in its 

data synchronization program, 92 percent had 

actually traded at least one item through their 

synchronization network, and 66 percent were 

completely synchronized. The value of benefi ts to 

Wegmans Food Markets from more accurate data is 

estimated at $3.5 million in annual transportation 

costs. In addition, new items arrive on retail shelves 

about 7 days quicker, labor and inventory carrying 

costs are reduced by about $1 million annually, 

and coupon scanning rejections are cut by about 

40 percent.66 This translates to cost reductions of 

$500,000 for every additional $1 billion in sales, as 

well as increased simplicity throughout the supply 

chain process.

Overall, food manufacturers participating in 

Wegmans Food Markets’ data synchronization 

program are projected to reap $1 million in savings 

for every billion in sales. This increase in earnings 

represents estimated savings from reducing bloated 

inventory levels and stocking problems due to 

inaccurate data.67

Direct Store Delivery

While supermarkets generally prefer “just-in-time” 

inventory practices for budgetary and logistical 

reasons, maintaining low inventory levels throughout 

the distribution system has the potential to increase 

out-of-stock levels at individual retail stores, which 

can be a fi nancially risky undertaking. Consumers’ 

disappointment when they don’t fi nd the items 

they want on retail shelves is estimated to cost 

manufacturers $28 million and retailers $32 million for 

every billion dollars of sales.68 According to a recent 

Franklin Covey study of the U.S. retail industry, called 

Mapping Management Practices that Drive Great 

Performance, the typical out-of-stock level for retailers 

is about 8.5 percent. 

There are many causes for out-of-stock items: 

inaccurate forecast of consumer demand, shipment 

by the supplier of the wrong package size or fl avor, 

unfi t products due to product damage during 

shipping, expired product shelf life, or the seller’s 

inability to track inventory accurately in its stores or 

distribution centers. Given the frequency of out-ofstock problems, and the huge fi nancial burden that 

large out-of-stock levels can create for supermarkets, 

suppliers able to help supermarkets avoid out-ofstock items are likely to attract retail food buyers. 

Consequently, some enterprising supermarket chains 

are beginning to explore using Direct Store Delivery

(DSD), an arrangement in which suppliers deliver 

directly to stores instead of to a distributor. DSD 

helps supermarkets overcome out-of-stock problems 

while keeping minimum inventory at their distribution 

centers. 

The move to greater acceptance of DSD among retail 

chains may provide expanded market access to smaller 

scale local food producers and processors with the 

capacity to supply food items appealing to specifi c 

segments of a fi rm’s customer base, but may not have 

the capacity to supply products to every store supplied 

by the chain’s centralized distribution center. Recent 

market research by AMS suggests food items that 

perform extremely well in certain markets may not be 

as profi table for a broader sales territory.69 Firms that 

66. Ibid.

67. “In Sync: Wegmans and P&G Collaborate on Product Data, Grocer and CPG Giant 

 Prevent Discrepancies,” ERI Journal, July 2006.

68. Presentation by Jim Flannery, Proctor and Gamble, for the SN Interactive Forum on 

 Maximizing Store Performance via Trading Partners Collaboration, June 28, 2006.

69. Enhancing Commercial Food Service Sales by Small Meat Processing Firms, AMS, 

 March 2004.

33
are open to receiving food items via DSD and tracking 

product performance on a store-by-store basis may be 

more accommodating of smaller scale local producers 

than fi rms more heavily dependent on centralized 

procurement mechanisms. Indeed, a straw poll taken 

during a recent webcast sponsored by Supermarket 

News discovered that food retailers found it easier to 

collaborate with suppliers at the store level with DSD 

than with warehouse deliveries. Sixty percent believed 

DSD provided easier collaboration, 20 percent found 

warehouse deliveries better, and 18 percent found 

no difference.70 

Producers and processors of locally grown and raised 

food may fi nd it easier at fi rst to approach retail fi rms 

that showcase foods from the nearby region. For 

example, Whole Foods Market, as part of its marketing 

philosophy, is strongly committed to purchasing 

locally grown produce. Not only do the fi rm’s regional 

buyers purchase locally grown products, but the fi rm 

also allows individual stores to purchase selected 

merchandise directly from local producers via DSD, 

tailoring product offerings in its store to the preferences 

of its particular market area. In 2006, regional buyers 

from Whole Foods Market were explicitly directed to 

focus more attention on sourcing local products for 

their stores, and subsequently obtained merchandise 

from more than 2,400 independent farms.71 Purchases 

from individual and family farmers (including 

marketing alliances of family farms pooling production 

under a common brand name) accounted for 78 

percent of Whole Foods Market’s total fresh produce 

purchases in 2006.72 

In addition to purchasing products from local growers, 

Whole Foods Market established a $10 million 

promotional program for local agriculture, which 

offers low-interest, long-term loans to small agricultural 

entrepreneurs.73 The loan program targets local 

producers of grass-fed beef, goat milk dairies, pasturebased eggs, and farmers with animal-compassionate 

policies. A portion of the loans will be available to 

vegetable farmers as well. Each year, Whole Foods 

Market makes an additional $10 million available 

for these loans. As the loans are repaid, the funds are 

recycled for additional loans to small producers.

During a March 2007 seminar, Jeff Biddle, Whole 

Foods Market’s produce coordinator for the Pacifi c 

region, and David Schaner, a farmer/roadside stand 

manager who sells fresh produce to a single Whole 

Foods Market store near his farm in Placentia, CA, 

shared tips on how small farmers and food suppliers 

can successfully enter 

the retail market.74 

Schaner is among more 

than a dozen Southern 

California farmers tapped 

by Whole Foods Market 

to supply produce. Since 

entering into a direct marketing relationship with 

a single Whole Foods Market store in Tustin, CA, 

in 2005, Schaner has boosted his annual revenue 

about 20 percent. Moreover, the in-store publicity 

received from point-of-sale material attracted new 

customers to his roadside stand.75

Biddle and Schaner point out that the most 

important fi rst step for producers is to recognize that 

the typical retail buyer is an inherently conservative 

decision-maker, and can’t afford to take chances. 

When one is moving large quantities of product, 

each additional penny or nickel per pound adds 

A CASE STUDY OF MARKET ACCESS 

OPTIONS FOR SMALL FARMERS: 

WHOLE FOODS MARKET, 

ORANGE COUNTY, CA

70. Maximizing Store performance via Trading Partners Collaboration, Supermarket 

 News webcast, June 2006. 

71. Open letter to Michel Pollan from John Mackey, CEO and co-founder of 

 Whole Foods Inc. 

72. Ibid.

73. Ibid.

74. Remarks excerpted from presentation delivered at Southwest Marketing Network 

 Conference, Flagstaff, AZ, March 2007.

75. “Relocated Tustin Whole Foods debuts,” Orange County Register, August 29, 2007 

34
up to a lot of potential loss. In addition, the daily 

life of a retail produce buyer is full of anxiety (e.g., 

weather problems, delays in transportation) and 

it’s always a struggle to fi gure how best to manage 

inventory—whether to buy more to avoid running 

out, or to “short” the stores to save money. No 

matter what the decision, someone will complain 

when planned targets for profi t margin or shrinkage 

reduction are not met. On the other hand, there is 

constant pressure to try new products.

So how can a producer expect to stand out and 

get his or her foot in the door? Biddle and Schaner 

recommend the following steps:

 Approach store-level department managers 

as an initial step in gaining market access, as 

this tends to be more effective than contacting 

buyers at a centralized distribution center 

(who are constantly barraged by prospective 

vendors.) Even at fi rms that generally 

embrace DSD, such as Whole Foods Market, 

Biddle notes some store managers are more 

open than others to DSD. Nevertheless, he 

encourages producers to keep “knocking 

on doors” even if they do not succeed with 

the fi rst store contacted. Once a producer 

establishes a track record with a buyer for 

quality and reliability, buyers are usually 

willing to do what it takes to maintain a 

successful business relationship.

 Send food! Samples of food accompanied 

by a subsequent phone call are probably 

the most effective way to grab a buyer’s 

attention, and e-mail solicitations are usually 

ignored. (Schaner developed his current retail 

business opportunity through a Whole Foods 

Market representative who had patronized his 

roadside stand and enjoyed his product.)

 Have information at your fi ngertips about 

• Pricing of your product

• Pack size and packing material

• How the product is cooled

• Product quality standards

• Special handling needs, if any

• Delivery capabilities

• HACCP certifi cation

• Liability insurance coverage (often 

mandatory)

 Make a point of mentioning organic 

certifi cation or any humane or 

environmentally sensitive agricultural 

practices you follow. Biddle remarked that 

one produce supplier he worked with near 

San Diego boosted his sales by publicizing 

that he deliberately used production methods 

and barriers that would not harm the rabbits 

that visited his fi elds!

 Offer product demonstrations at stores and 

interact with customers.

 Be willing to open your farm to tours by retail 

buyers; buyers often become supporters after 

visiting a farm.

 Don’t be embarrassed about charging what 

you need to make a living. You shouldn’t 

lower the cost of your product just to make 

a fi rst sale or enter the retail marketplace, 

because raising your price after giving an 

initial lowball fi gure can alienate a customer.

 Indicate your willingness to provide the 

retailer special services, such as deliveries, 

in-store product demonstrations, price lookup stickers on bulk produce, and value-added 

processing services.

35
Growers may fi nd DSD deliveries a marketing 

advantage when shipping to a small number of 

store locations. Growers with insuffi cient volume 

to supply a chain store distribution center may 

fi nd that they can fi ll the needs of two to three 

stores through direct delivery. As growers scale 

up the number of stores they service with DSD 

deliveries they may fi nd that DSD is no longer 

as feasible. 

This is the situation in which Red Tomato, a 

Massachusetts-based nonprofi t organization, 

found itself when it arranged direct deliveries of 

locally grown produce to 40 retail stores three 

times a week in the Boston and Philadelphia 

areas. Among the services Red Tomato provides 

to its partner growers are product consolidation, 

repackaging, and transportation to destination 

markets. At fi rst Red Tomato viewed DSD as an 

excellent way for farmers to improve producer 

access to retail markets and get their foot in the 

door. However, as the demand for locally grown 

products increased and retailers wanted to expand 

delivery beyond the pilot stores, it became too 

expensive to continue.

In order to continue DSD, Red Tomato addressed 

the distribution needs of its growers by partnering 

with transportation service providers, and with 

retail fi rms making deliveries to local stores, 

independent truckers, and farmers who had space 

after their rural deliveries. Red Tomato found that 

piggybacking on existing transportation networks 

helped both parties. Shipping products through 

their business partners reduced Red Tomato’s 

shipping costs and also improved the operational 

effi ciency and revenues of the shipper by fi lling 

trailers that previously were partially loaded or 

that otherwise would return empty.

To determine if DSD is appropriate for your fi rm, 

consider your scale of operation—including labor 

requirements, transportation costs, and time 

requirements. 

DSD AND THE RED TOMATO DISTRIBUTION MODEL: 

STRATEGIES FOR MANAGING GROWTH

36
Preferred Vendor and Vendor 

Certifi cation Programs

As food safety assurances become more infl uential on 

purchasing decisions, supermarkets are seeking out 

food suppliers with track records of proper postharvest 

techniques, good quality control throughout the 

distribution process, and recordkeeping procedures 

that enable supermarkets to track food products to 

the source effi ciently. To accomplish this and reduce 

the risk of inadequate service from suppliers, many 

retailers created preferred vendor programs, which 

restrict vendor selection to suppliers that meet 

prescribed quality, quantity, packaging, and delivery 

requirements. Suppliers who participate in preferred 

vendor programs must adhere to strict requirements in 

order to maintain preferred vendor status. 

Some retail fi rms prefer to work only with vendors 

that have enrolled in a formal Vendor Certifi cation 

Program (VCP). A VCP allows retail buyers to verify 

their food suppliers comply with acceptable food 

handling, product quality, and food safety standards.76 

Usually carried out by a third-party auditor, a good 

VCP starts in the fi eld with a review of the harvest, 

handling, packing, and shipment practices followed by 

a grower for a particular food product, and tracks the 

handling and distribution process of the food product 

until it reaches its fi nal destination. Some growers 

develop their own certifi cation programs to monitor 

performance, which also becomes a marketing tool 

for prospective customers. These programs are usually 

verifi ed by third-party inspectors. 

The basis of many certifi cation programs is a Hazard 

Analysis and Critical Control Point (HACCP) plan. 

HACCP is widely accepted as a means to prevent 

contamination at vulnerable points in the handling and 

distribution process where the possibility is greatest for 

accidental or intentional contamination. 

Growers’ documentation of their production schedules, 

handling practices, and adherence to food safety 

protocols is an essential component of meeting retail 

procurement requirements for traceback capabilities 

and preparing for possible recalls. These may include 

product production dates, use-by codes, daily or hourly 

production run codes, quantity-produced data, and 

metal detector verifi cation reports. Carton information 

should also include the processor name, hour of 

production, expiration date, and plant ID number to 

help retail buyers trace products to their places 

of origin.

76. “Vendor Certifi cation Programs: Improving Food Safety Through Performance 

 Tracking,” Food Safety Magazine, July 2006

37
The Appalachian Sustainable Development 

(ASD) Appalachian Harvest brand of organic 

fruit and vegetables is supplied by 60 farmers in 

southwestern Virginia and northeastern Tennessee, 

many of whom had converted tobacco acreage 

to organic fruit and vegetable production. While 

this network does not claim to have a VCP, it pays 

close attention to the quality of products and the 

requirements of grocery retailer clients. Anthony 

Flaccavento, Executive Director of ASD, says, “If 

you mostly deliver what grocers want most of the 

time, they will work with you.” 

ASD sales are growing rapidly, with 2007 sales 

expected to reach $700,000, and 2008 sales 

projected at $1 million. Flaccavento noted that the 

relationship between ASD and its grocery retail 

clients had become easier over time. He attributes 

the improved relationship to ASD’s proven ability 

to meet grocers’ specifi c production, packaging, 

and shipping requirements successfully time and 

time again. Flaccavento projects consumer demand 

in 2007 for his network’s production to be more 

than twice the volume of available supply and 

estimates that 25–50 growers need to be added to 

the network to meet current consumer demand. 

More information about ASD can be found at 

http://www.appsusdev.org/.

A CASE STUDY OF VENDOR/BUYER RELATIONSHIPS: THE APPALACHIAN 

SUSTAINABLE DEVELOPMENT NETWORK

38
Conclusion

With retail establishments of all sizes, from national 

chains to independents, seeking to carve out a piece of 

the natural and organic food pie, food manufacturers 

who can deliver products that meet their standards 

at reasonable prices will fi nd a ready market. How 

can this benefi t smaller scale food producers and 

processors? They may fi nd it cost effective to produce 

packaged food items for a private label program, and 

let the retailer bear the fi nancial burden of promoting 

and advertising the merchandise. Moreover, as private 

label programs for organic and natural foods become 

more widespread, some retailers, following the lead of 

such independent operators as Dorothy Lane Market, 

may try to distinguish themselves from competitors by 

involving smaller scale, local businesses in their private 

label programs. The local businesses then could share 

“personal stories” with consumers through promotional 

materials and appeal to consumer desires for local 

origin and authenticity.

The waning importance of national brands and 

neighborhood full-service supermarkets in the food 

marketplace and the rise of increasingly fragmented 

and diverse consumer shopping patterns offer 

exciting new opportunities for the smaller scale niche 

producer and manufacturer of food products. The 

rapid rise in Hispanic, Asian, and African-American 

consumer purchasing power, coupled with widespread 

consumer interest in gourmet and specialty food items, 

potentially benefi ts the smaller scale food producer 

and processor that can supply products that appeal to 

consumer desires for variety, innovation, authenticity, 

and freshness. 

At the same time, health, nutrition, and environmental 

issues are becoming increasingly important 

to consumers who seek to purchase goods in 

accordance with their social values. Food producers 

and processors who can provide assurances of 

environmental stewardship and food safety can be 

expected to prosper. Retailers of all sizes seek suppliers 

that can deliver reliable volumes of high-quality, nicely 

presented food products that satisfy the concerns of 

environmentally and health-conscious customers. 

If demands for volume, supply availability, and 

consumer-ready packaging can be met, local smaller 

scale food producers and processors can play an 

integral role in today’s rapidly diversifying food supply 

chain. Whether their participation involves producing 

branded food products for specialty retailers that 

use local origin as a consumer “hook,” or supplying 

customized/exclusive food products to a retailer’s 

private label program, smaller scale food producers 

and processors have many options for fi lling an 

important niche in the retail food marketplace.

The U.S. grocery sector is a mature market and, as 

such, its growth rate is limited to the growth in U.S. 

population. Consequently, one of the new frontiers in 

the grocery sector for increased sales and profi ts 

and reduced expenses is in the arena of data 

collection, accuracy, and exchange. Improvements to 

information transmission throughout the supply chain 

are expected to lower warehousing, distribution, and 

marketing costs.

39
Gains in sales are facilitated by more effi cient 

collaborative relationships between suppliers and 

supermarkets from the adoption of data collection 

and data synchronization technologies. Leading 

supermarkets and suppliers electronically capture and 

analyze near real-time data throughout the supply 

chain, giving supermarkets the ability to quickly modify 

product offerings, quantities, package sizes, and other 

product attributes that consumers prefer. Collaboration 

between supermarkets and suppliers assists 

supermarkets’ efforts to consistently merchandise 

a high-quality product mix that accurately refl ects 

consumer desires at the store level. Food producers 

and manufacturers with profi ciency in electronic 

data collection, sharing, and synchronization, and 

that collaborate with buyers, have a marketing edge 

in the grocery sector of the new millennium. Over 

time, as the collaboration between supermarkets and 

suppliers increases and the cost of technology declines, 

compatible forms of electronic data transmission will 

become even more critical.

Accurate evaluation of customer demand and precise 

tracking of inventories ensure that supermarkets 

have the right product on the shelf. Simultaneously, 

supermarkets will limit inventory stored in back rooms 

and distribution centers to precise levels suffi cient only 

to prevent running out of stock, and will collaborate 

with vendors. Market leaders in the grocery sector are 

already committed to the Information Age, and require 

vendors to collect and record information about food 

products from the time crops were planted or animals 

raised through fi nal delivery. 

Product knowledge alone, however, is not suffi cient in 

today’s market. Suppliers must also be sensitive to the 

market demand for their product and know how the 

supermarket or consumer intends to use the product. 

Suppliers that develop this capability will be able to 

respond more quickly to shifting consumer preferences 

and retain a marketing advantage in the rapidly 

changing grocery sector. 

40
Trade and company names are used in this 

publication solely to provide specifi c information. 

Mention of a trade or company name does not 

constitute a warranty or an endorsement by the 

U.S. Department of Agriculture to the exclusion of 

other products or organizations not mentioned.
The U.S. Department of Agriculture (USDA) prohibits discrimination 

in all its programs and activities on the basis of race, color, national 

origin, age, disability, and where applicable, sex, marital status, familial 

status, parental status, religion, sexual orientation, genetic information, 

political beliefs, reprisal, or because all or part of an individual’s income 

is derived from any public assistance program (not all prohibited bases 

apply to all programs). Persons with disabilities who require alternative 

means for communication of program information (Braille, large print, 

audiotape, etc.) should contact USDA’s TARGET Center at (202) 

720-2600 (voice and TDD). To fi le a complaint of discrimination, write to 

USDA, Director, Offi ce of Civil Rights, 1400 Independence Avenue, S.W., 

Washington, D.C. 20250-9410, or call (800) 795-3272 (voice) or (202) 

720-6382 (TDD). USDA is an equal opportunity provider and employer.

 

42