Functional foods or fallacy?

The March 2009 edition of Which? asks "Which food is best for you?" in their survey of 'functional foods'. The most interesting insight is 81% of the respondents in their survey don't know whether to believe the manufacturers' health claims. This level of scepticism is surprisingly high, given

• the plethora of UK and European regulations around health claims
• the market for these products exceeds £600 million and continues to grow
• manufacturers seem to invest ever more in promoting healthy benefits as they relaunch tired brands, or build the franchises of specialist functional food ranges

The overall conclusion from Which? is ambivalent, indicating these products sometimes work, and the claims are legally justifiable. However, they point out functional food brands are expensive, and in many instances, natural alternatives are both more effective and cheaper.

Of particular interest to me are the cholesterol-busting claims of some brands. Do functional foods represent a credible alternative to statin medications, and should manufacturers be persuading consumers that consuming their products is a pathway to a healthier and longer life? Which? clearly makes the point elsewhere in the March 2009 edition, that it is much more important to limit foods high in saturated fat, with the clear implication that functional foods don't represent good consumer value.

Health claims are a perfectly valid brand proposition, however promotion of "friendly bacteria" and "healthy Omega-3" appears to smack more of marketing opportunism than being a meaningful step in improving the health of the nation.

Biting the elephant's ankle

Much has been made about the relative performance of the UK supermarket chains over Q4/2008, and in the first weeks of 2009. Of particular note have been headines telling us how Tesco customers are deserting the market leader for Asda and Morrisons -- the latter having shown the best like-for-like growth last year, compared to their rivals. Indeed Morrisons' efforts since the arrival of CEO Marc Bolland, have much to be applauded.

As a loyal but hyper-critical Tesco shopper, I thought it time to see if I too could be seduced by Morrisons' promises of low prices, innovative store ambiance -- "Market Street", friendly counter staff, etc. Thus I found myself this morning at their Queensbury branch in North West London.

In summary, my initial very positive first impressions rapidly dissipated, as I encountered an offer characterised by inferior choice and variety. Sure their prices appeared competitive, with prominent "Price Crunch" messages and communication of temporary price reductions. I left the store uderwhelmed, in spite of a much lower than usual basket price of £77 vs. £100 usually spent at Tesco. This is not a true £20 saving. The fact is their range didn't inspire me to make much of an effort to shop, and I'll have to make up the shortfall during the week.

On entering the store, the first thing you see is their produce display coordinated with other fresh food departments as "Market Street". This looks very attractive -- much more than the somewhat sterile Tesco displays. However, the assortment was very poor in comparison. The lack of choice extended across all categories -- exotic fruit and vegetables were entirely absent, as was a range of fresh herbs. Given the large Asian population in the store's catchment area, I find this frankly astonishing.

The "Market Street" theme extends into the bakery section, and this area offered a more interesting assortment than I usually find at Tesco. However, merchandising standards were poor, with insufficient space allocated to display the range at its best.

The much vaunted fresh meat, deli and fish departments failed to deliver the promise suggested in Morrisons' TV advertising. Whilst having more space and more staff than their Tesco equivalents, again the assortment appeared uninspiring. Progress down the aisles was impeded by stand alone displays of random cheeses, olives and cooked meats, which seemingly had no purpose nor integrity with the overall display -- ie. not promotional lines, nor new products. The salad bar however was excellent. The problem was that nobody appeared to be buying anything from it.

Strangely the ambient / frozen food display was broken in two by a very large homeware section. The assortment was much more comprehensive than found in a similar sized Tesco. Other non foods included a large electricals section, and a somewhat underwhelming stationery, books and DVD offer. Greetings cards were displayed in a separate kiosk with news / periodicals and tobacco. Valentine's Day cards were in a pathetic stand-alone Hallmark-branded unit -- a missed opportunity, given this event is in 2 days time.

This store doesn't know if it is a multi-category hypermarket or a destination food outlet. Neither format is effectively delivered. Too much space is given to non foods at the expense of grocery. This constrains the assortment and diminishes opportunities for influencing shopper purchasing.

Looking at my fellow shoppers, basket quantities were modest. Like me, they probably also were uninspired to buy.

Morrisons haven't fully exploited the opportunity of this store. They need to get a better understanding of customer needs and requirements, and address space imbalances. If this is a typical Morrisons, then Tesco have little to fear from them.

How can they kiss and make up?

The FT reports today on the public airing of a spat between Unilever and Delhaize in Belgium (www.ft.com/cms/s/0/6d36c0d2-f7ab-11dd-a284-000077b07658.html?nclick_check=1)

In the absence of insights into the nitty-gritty of the negotiations, it isn't possible to say definitively who's right and who's wrong. Yes -- Unilever has to address declining volume sales, and increasing price and securing additional product listings can be construed as valid tactical responses. In the spirit of win-win trading, Delhaize should also benefit from this approach, but clearly, both sides appear not to agree on this outcome. Such diverging views between trading partners isn't new, however Delhaize's delisting of Unilever's ranges represents the more aggressive posturing that we could be witnessing as the economic environment toughens.

Research I carried out a couple of years ago into retailer-manufacturer relationships indicated that these disagreements largely arose as a consequence of embedded negative perceptions of trading partner motivations and strategies. This was very much a consequence of a failure to really understand the economic, market and operational drivers impacting the manufacturer-retailer-consumer value chain. For example -- most of the CPG manufacturers interviewed had little idea about the cost to retailers of listing new / additional SKUs. Conversely, most retailers failed to understand the ramifications to their suppliers of complying with additional payments or changes to trading agreements.

On asking the UK relationship conselling service Relate to comment on the wider research findings, interestingly, they saw clear parallels between CPG commercial relationship breakdowns, and the personal relationship challenges they deal with between couples and within families. The critical issue is one of transparency of communication -- of really seeing where the other party is coming from, and of adapting behaviours to these realities.

So how does this translate to the dynamics of the CPG sector, and what does it mean for Unilever and Delhaize? Let me suggest the following issues be factored into each party's trading scenario considerations as they strive for resolution:

For Unilever -- Although Delhaize is a major player in Belgium, it is under real pressure. The discounter Colruyt is increasingly setting the shopper value agenda, and Delhaize's superior merchandising standards alone are insufficient for competing on price. At the other end of the trade, Carrefour can leverage its larger global buying power much more aggressively in competing with Delhaize. If Delhaize loses market share, Unilever will be faced with even more challenges from empowered Colruyt and Carrefour. It should therefore support Delhaize in defending its share of trade through these difficult times. A "blanket approach" should not be taken. The strategic position of each category and product segment needs to be addressed individually in terms of price, promotion and listings. In spite of all the ECR-driven supply chain optimisation initiatives undertaken over the past few years, there will still be scope for taking out cost. The resources released can offset additional contractual costs.

For Delhaize -- Unilever needs to convincingly demonstrate through market / econometric modelling the impact of price increases. They need hard factual evidence to show the effects on overall category consumption and profitability. This will require discussing the margin impact of customers switching to own brand alternatives. As for the wider range of products Unilever wants listed, this can be easily validated in a test. If category revenues and customer purchasing are negatively impacted, there is a strong justification for additional discounts / payments, or for rationalising the assortment.

As for other CPG markets and other manufacturers and retailers -- we can expect more of these disagreements as external pressures intensify. Now more than ever, manufacturers and retailers need to have a stronger grasp of the facts, be able to project alternative and evolving trading scenarios, and maintain an open, honest and wide-ranging dialogue with their trading partners.

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