Disruption alert: New supply chains for high-value products

November 11, 2016

The “Single Cow” burger showcases the trend of specialized supply chains – this time targeting consumers who are interested in hyperlocal meat, specifically beef. In these “personalized supply chains,” the value that consumers assign to a particular product is high enough to cover the extra cost of serving their special preferences. This trend threatens the supermarket business because it’s another case where competition is successfully encouraging consumers to purchase certain products separately from their regular trip to the supermarket.

A recent WSJ article explained how Amazon, Fresh Direct, and Whole Foods have positioned themselves as places where consumers can count on getting these direct-from-the-farm products.  They are very serious about putting a stake in the ground in this space. Amazon has gone so far as to apply for a trademark for “single cow” ground beef. They’re selling it for $10 per pound and giving customers the ultimate in transparency into their ground beef sourcing. Whole Foods has invested in specific farms.

What this tells us is that both producers and retailers will continue to look for niche markets in which high-value products can support the higher cost of a specialized supply chains. Some will be successful and some will not not, but the result impacts the traditional supply chain by:

• Reducing the volume moving through the traditional supply chain, thereby driving up cost for the remaining product.
• Diverting the premium value – the incremental profit – which will undermine the profitability of the traditional supply chain.

Implications

Much of the growth that food retailers are seeing today comes from specialized, high-value products in many departments (organic, grass fed, antibiotic-free and natural). As online and specialty retailers become more successful, they will divert this growth and its high-profit-margin sales away from the supermarket, ultimately undermining the profitability of that business.

The loss for food retailers is not inevitable; however, it will require they do more to ensure that consumers know the items they’re looking for are available in their stores. In this case, they should:

• Look for partnerships and sources of these products if not currently offering these types of products
• Get the marketing/promotions needed to alert more customers that they’re available. 
• Price these items so that they’re a good value compared to the more specialized retailers, whether they be online or brick and mortar. 

When a food retailer does this they will slow, if not stop, the leakage of this growth. Lunds & Byerly’s took this step by forming a partnership with two local pig farms to supply their exclusive all-natural, no antibiotics or hormones, humanely-raised, vegetarian fed Premium Pork Brand (see picture to the right).