Managing Director of Food & Agribusiness, Rabobank International
XVth International Congress on the Science and Cultivation of Edible Fungi
Maastricht, May 2000
This article was presented at the official opening of the 15th ISMS Congress and Mushroom Days and is reproduced with permission.
On behalf of every one at Rabobank International, it is a great pleasure for me to welcome you to this Congress. Rabobank International works consistently on building the kind of long-term relationships with its customers. This is underpinned by our commitment to the knowledge-driven focus. Focus here has two meanings: focus on customers, but also focus on sectors. I think I can safely say that no one would dispute our knowledge of food – and agribusiness value chains.
Knowledge of the whole food chain, from primary production to finished product is shared by Rabobank International with customers in a variety of ways. Every year in-depth sector studies provide insight into current trends and forecast future developments. This morning, it is my task to present you a picture of the main developments in the European fresh mushroom industry. In my opinion, the industry is operating in a very, very challenging environment. The reason for this is that I believe that the industry is lagging behind the consumer. Let me give you an small example. For decades, in the Netherlands we have been buying mushrooms in the well-known, still the same blue, small boxes. Consumers, however, are looking for new varieties and innovations, which suit their life style and satisfy the need for adventure!
In detail. I would like to start with the main five driving forces affecting the industry. I have summarised these drivers for change: First: saturation in demand. Second: consumer shifts towards value-added products. Third: increasing demand for organic products. Fourth: increasing power of supermarkets and Fifth: increasing competition.
After I have taken you through these issues, I will move on to the impact of these drivers on the supply chain. We will see that the current chain of fresh mushrooms is not well equipped to deal with these drivers. But let’s first start with the drivers. The first driver is the stabilising consumption of mushrooms in Western Europe. If we add up fresh and processed consumption per capita per year, the result in Western Europe is fairly the same. That is around 3 kilo per capita per year. But if we look further, at the two segments, then there are large differences per country. For example, in the UK, Belgium and the Netherlands consumption is mainly fresh, more than 75%. In France and Germany, however, this figure is less than 50%. Despite these differences, we clearly see that consumption of both processed and fresh mushrooms in general is levelling off. The next driver I would like to address is the shift towards new varieties. In a saturated market, we often see that people are willing to pay for value-added products, such as new varieties. The white button mushroom still is the most preferred one. However, we gradually see an increase in other mushrooms, such as the oyster mushroom and the shiitake. But ‘value-added’ means more than new varieties. There is also ‘pre-cut’. Today, households lack time or want to avoid the trouble of preparing fresh produce. This is likely to increase the demand for pre-cut fresh produce in the future. One challenge for the industry however, herewith, is to improve the duration of the shelf life of pre-cut products.
I believe that demand for value-added will grow further in the future. As I mentioned earlier, the current consumer is eager for innovations. And as an outsider, looking to the industry I wonder why we don’t see mushrooms which can be combined with a drink. Mushrooms, for example with a dip or with spices on top of it.
Let’s turn to the next driver, the increasing demand of organic products. At the moment the organic mushroom industry still is fairly small. Compared to other industries, both supply and demand are relatively small.
Supply of the Netherlands is still restricted by the poor availability of organic straw. Dutch production of organic mushrooms last year was therefore no more than 0.8% of total Dutch mushroom production.
Demand is affected negatively by the higher price, which can amount to 40%. It is widely believed that price premiums of 20-30% are acceptable, but that above this level demand will fall sharply.
However, the market for organic food in general is growing significantly. It is estimated that growth in Europe over the last 10 years was around 20% and this is expected to continue. Actually, there are three positive aspects, which contribute to this growth. These are the consumer, the supermarkets and the government. And it is generally believed that these factors will also encourage the organic mushroom market in the near future.
Let’s turn to the next driver. What is this driver? This driver has nothing to do with the consumer, but has to do with the power of supermarkets. Power of supermarkets is quite high. In Western Europe and North America, supermarkets account for the majority (75%) of fruit and vegetable sales. And this is not all. The recent consolidation process among supermarkets has resulted in, on average, a combined market share of over 50% of the top 5 supermarkets in western countries. The current consumer doesn’t want to spend much time preparing food; he or she is prepared to spend more money by going out. And this is exactly the reason why I believe that consolidation will continue. Retailers are increasingly competing with food service companies (such as McDonalds) and shops where you can buy take away meals. What further is stressing the power of supermarkets is that supermarkets are willing to invest in the produce department. There are two reasons for this: Firstly, fresh produce is a key customer attraction and one of the most important items of the supermarket. Consumer increasingly judge a supermarket by the quality and depth of its fresh produce department. Secondly, the margin of fruit and vegetables is higher than of other products.
Now I would like to take you to the fifth and last driver. The fact that supermarkets increasingly ask higher quality for lower costs is resulting in increasing competition between countries. So, the Netherlands is getting more and more competition. Exports of China have exploded, but due to the high perishability of fresh mushrooms this country doesn’t supply Europe. For the same reason, Ireland mainly focuses on the UK, rather than on continental Europe. Hungary, however does compete with the Netherlands. Both Poland and Hungary have experienced tremendous growth rates in their exports over the last decade. As wages have a 40% share in cost price, low wages in these countries have contributed to this growth. Compared to Poland, however, Hungary has more competitive advantages. What are these advantages? First, quality meets western Europe standards well. Second, Hungary is able to benefit from the shift in consumer demand towards new varieties, as this country is a large producer of oyster mushrooms. Third, Hungary is able to deliver year-round fresh mushrooms, whereas Poland faces supply difficulties in the hot summer months. This has, which you all know better than I do, to do with problems to maintain the optimal temperature of 18 degrees Celsius. So far, we have discussed the main drivers of the mushroom industry. Now let us turn to how they affect the sector. Most drivers are affecting the downstream part of the chain. Consumer demands change rapidly, and they increasingly have higher demands in terms of quality, variety and food safety.
The mushroom industry itself, however, still is rather supply-driven. This has everything to do with the high perishability and the fragmentation, which both limits innovation. Here is an example. Today, consumers don’t want to eat three times a day, but rather like to snack all day long. So it is important for food to be everywhere. Some industries have responded well to this. The fruit sector for example has developed bite-size pieces, that don’t need to be peeled and one can eat in a hurry. And I also found already some types of fruit in vending machines. However, I have the opinion that the mushroom industry has not yet responded to this trend. Why, for example, don’t we combine pre-cut carrots and pre-cut mushrooms with a dip and a bread roll to fill a lunch box? To summarise, what does this sector need? It needs a chain restructuring that can support the shift towards a demand-driven industry.
In the old chain concept, one could afford to be supply-driven and throw products over the fence. However, this chain concept, with infrequent deliveries, long lead times and limited control over the flow of goods is no longer sufficient. To deal with these new consumer issues, and integratedchain is needed. When all parts of the chain are linked, it is much easier to control the flow of goods in the most efficient way. This results in a number of advantages: an optimal assortment, decreasing lead times and lower stock levels. Furthermore, an integrated chain can also support the flow of information through the chain, therewith facilitating tracking and tracing. Traders also have to change. They have to do more than just ship boxes. Only traders who meet certain requirements will be regarded as serious partners. While perceptions differ about the growth rates, we have to agreed that E-commerce will change the business. I know that some of you might see threats while others see numerous opportunities. I belong to the latter group and I would like to take the opportunity to stress the advantages of new technology. I believe that this can support the shift towards a new chain. In a new chain the flow of information is as important as the flow of goods. Business to Business E-commerce is able to support both the flow of goods and the flow of information. It can also make the chain shorter, more efficient and more transparent.
Rabobank has recognised the importance of E-commerce. A few months ago Rabobank International has announced the launch of vTraction.com. Vtraction is an independent operating E-commerce company. The company facilitates the development of business-to-business food and agricultural exchanges of our clients. And the company also invites you to participate or to co-invest. The ultimate aim is to bring expertise together. Up till now, more than 150 companies have joined vTraction.
Ladies and Gentlemen, I have presented to you five drivers for change in the western fresh mushroom markets and also their impact on the value chain. And I think I may say that we all here are working in a challenging environment. Why is that? Compared with other industries, the fresh mushroom industry is relatively supply-driven. This has everything to do with the perishability of the product and the fragmented industry structure. There is little innovation and, actually, we can almost say that this industry is a single-product industry. The result of the commodity approach is a vulnerable industry, which leads to increased pressure on both prices and little countervailing power towards supermarkets. The supply-driven approach conflicts with the increasing and continuously changing preferences of consumers. Consumers ask for a less commodity driven approach, realigned with specific niche products. Products that support their life style and products that have different varieties for different eating moments. What is the way out? I believe that there is only one way out. And that is to move away from the commodity status. Innovations, which take into account the increased snacking habits of consumers, can create a new impetus. To achieve this, a less fragmented and more integrated chain is needed. The industry has to understand better consumer demands in order to change the supply driven nature of the industry. As a result of this costs can be lowered and varieties increased. I believe that the companies recognising this and acting upon this, can increase their profits, their positioning and the winners for the future.