Sounds + Food 'n' Retail

I suck up data wherever I go (it's a curse, I know). Just last week, as I was waiting for my laptop-drive to be installed, I sat in a German bank and came across a magazine, called VR-future. Two articles caught my eye, one on the Bio*-boom in Germany, and another on Switzerland—a country that fascinates me, but that's a story for another day. 

The bio-trend article consisted of an interview with Dr. Alexander Gerber, the Germany CEO of the BÖLW (the foundation for organic products in Germany) and revealed some interesting info on this segment. While it focussed entirely on Germany, I do think it brings some interesting insights on this topic in general. (*: "bio" being the German term for organic)

Now, I should say, that I'm generally weary of the word "Boom," as I inadvertedly associate it with the word "Bust." Any market is subject to the laws of supply and demand, and a boom usually suggest an explosion of one or both, eventually leading to some fall-off after a while. I have no doubt that the same will happen to the Bio-sphere as well. There are also particularities about the organic market which I do not like, and I will go into those in my final thoughts.

The rest of this post is structured as follows. I will begin with the definition of organic, then some stats on sales, after which I will look at employment-trends, and expected areas for growth. I'll conclude with some final thoughts, to answer why I am bearish on this whole organic trend.

So, what is "bio" or organic?
From Wikipedia:

For crops, it means they were grown without the use of conventional pesticides, artificial fertilizers, human waste, or sewage sludge, and that they were processed without ionizing radiation or food additives. For animals, it means they were reared without the routine use of antibiotics and without the use of growth hormones. In most countries, organic produce must not be genetically modified.

Bio-Sales
Worldwide, while the percentage is low (Wikipedia reports 1-2% of food), it is showing far quicker growth than conventional food. In the US, Wikipedia reports a 17-20% annual growth of organic food in the last few years before 2004(!), compared to 2-3% for regular food. 2.6% of food sold there is organic. In Europe, while I don't have the stats on exact growth-rates, the percentage of of agricultural land being used to grow organic produce, is on average 3.9%, with Austria (11%) and Italy (8.4%) leading the pack.

In Germany, the annual revenue from bio-products with discounters and supermarkets has more than doubled since 2000, up to € 4,6 billion in 2006. And, at the moment (2007), Bio-products have a 3% share of sales in small food-stores, which is expected to double by 2010. The level of food-prices, held low by government subsidies, is expected to rise in the future, which… will probably not mean much to the bottom-line of retailers and producers. And, apart from the ethical considerations, bio in Germany has very much become a lifestyle product, translating into lower price-sensitivity. According to Gerber also, a new bio-supermarket opens every week.

With all this positivity, there is the somewhat counter-intuitive trend that farmers in Germany are complaining about falling incomes, and annual growth in their area has slowed down from 20% in 2000 to 0,4% in 2006. I imagine that is so because the market is maturing and because large buyers are pushing the prices down. A similar trend is being reported in the documentary, The Future of Food. Gerber also mentioned that there is a lacklustre support from the German government and the European Union in terms of subsidies.

Employment-trends
In general, the organic sector is a pretty people-intensive industry. While I don't have global stats, in Germany, about 160.000 people are involved in creating, processing, and selling bio-wares. In the last 7 years, the employment in bio-related sectors has doubled, especially in processing and sales.

On the farming-side of things, a third more people are employed than in traditional farming. And there is a need for people in production, processing, and sales, especially in the last two areas. In addition to this, the bio-sphere is very consulting-intensive, meaning there's also a need for highly trained personnel.

With is all this need for people, the German education-system does not yet offer truly specialised courses in this area. There is a program, however, co-sponsored by the BÖLW, the government, and the companies involved, which offers training for practitioners interested in working in the organic industry. Generally however, "learning by doing" is encouraged in this field, which, incidentally, also explains the high number of consultants.

Growth-trends
Gerber sees three areas for growth: Small cities, food-venues, and apparel/cosmetics. Regarding the first, Bio-supermarkets and -shops are starting to be set up in German cities with less than 50.000 people. And there are many of those in Germany.

He also expects growth in food venues, both fast and traditional, who currently receive around 25% of food-related spending, in which bio is still only taking up a very small percentage. Finally, Gerber also expects a larger bio-component in textiles and cosmetics, though I have no stats on how important that industry is.

Some final thoughts
The organic value-chain seems to be organised in a fairly similar fashion to the traditional way of producing, processing, and selling farm-goods. Some points of note are the way that bio-products are produced, the accountability-aspects, and the educational ones.

For the first, the natural way of producing these products will require some serious adaptation by producers and distributors. And since information is such an important component to bio-products, and by now a legal requirement, it will also require producers, distributors, retailers, and marketeers to set up new procedures for extracting and exchanging information. Finally, the fact that this is a fairly new market and official training-courses seem as yet to be lacking, there is a need for educating both businesses and consumers.

All of this translates into higher costs of production, which is reflected in higher prices for consumers (Wikipedia reports this to be 10 - 40% more than with conventional products). It is only a good thing that the end-products have lifestyle and ethical value, meaning that customers will be less price-sensitive about them. But will this be enough in the long-term?

In general, farming is already highly dependant on government-subsidies, which is already a bad sign for bio-produce as that seems even less efficient. And the increased demand for goods like wheat and dairy-products, from countries like India and China, means that there is actually a need for more, rather than less efficiency in farming.

Also, the current boom in food-education seems one that is limited. Eventually, the market for information will mature, customers will know all they need to know, and will be looking at other differentiators, most likely price. Large retailers, who are able to keep prices down when needed, are better-positioned for this, versus the more specialised shops who seem to be purely focussed on lifestyle, and hence high prices. Eventually, as the market becomes mature, I expect there to be a fall-out for both smaller bio-shops and in the area of consultants and niche-marketeers.

All in all, while I'm no expert on organic produce, and while I am fairly optimistic about demand continuing to rise, I'm not sure if there are still big profits to be made on the supply-side, even though there seems to be explosive growth in that area.

That said, I'm not bearish on all things organic. Bio-food in food-venues like restaurants and similar is very intriguing and, I think, will fit very well into this environment, where fresh food and good food is a strong differentiator. I'll have to collect more data on this, but I'll definitely write something on business in this area in the future.

The picture is courtesy of Petdiscounters.com and was chosen purely for effect.

I'm preparing a few posts for this week, but had the chance to watch a documentary about Dutch artist, Candy Dulfer this evening. She made a very favourable impression on me. Her most famous song, "Lily was here," was a spontaneous collaboration with Dave Stewart, recorded some 18 years ago. Stewart, whom she describes as her mentor, in turn describes her style as "very fluid," and her knowledge of riffs "encyclopaedic," which makes her an excellent collaborator with other artists.

Love the song, love the person. Enjoy!

There are few things in this world I hate more than electronical problems. Yesterday, I had a new harddrive installed in my Mac-laptop. I could have done it myself, but, by my estimates, it would have required me unscrewing and rescrewing approximately 40 screws. So, no thanks! I was in Germany on this occasion and gave the shop my mobile number. The only problem, I found out later, was that my phone refused to roam.

While I was waiting, I saw some beautiful atmospheric places, which I wanted to photograph. Only on that day, my neverfailing camera decided it was a good day to never turn on again... great!

When I came home, I tried to install OS X Leopard (the new Mac-OS), but it somehow screwed up and I was up until 2 a.m., trying to fix it (i.e. re-install). Along with that, my new harddrive makes some strange popping sounds every five minutes, which I unsterstand is a software-issue, but since this drive was advertised to be quiet as a mouse, it's annoying nevertheless.

So, yesterday could very well be described as bland and just plain uninspiring. I'll take a few days off from this blog, to focus on the essentials, and will hopefully be back in full force by this weekend.

HBS Working Knowledge, in an article on lean principles in services industries, lists the four principles that the Toyota Production System is based on:

Rule 1: All work shall be highly specified as to content, sequence, timing, and outcome.
Rule 2: Every customer-supplier connection must be direct, and there must be an unambiguous yes or no way to send requests and receive responses.
Rule 3: The pathway for every product and service must be simple and direct.
Rule 4: Any improvement must be made in accordance with the scientific method, under the guidance of a teacher, at the lowest possible level in the organization.

I love stuff that saves me reading a whole book, but would this work in a food / retail environment? I can't say 100%, but I can hypothesise.

Let's take a restaurant or coffee-shop. The way I see the information-flow is in the shape of a funnel, which is wide on both ends and quite narrow in the middle.


(If the words are unclear, it's, from left to right, a. customers, b. information, d. goods, and b. production (though the last should be c.))

Essentially:

1. customers have a ton of choice when they order
2. they narrow down this choice to their selected items
3. pass it onto the waiter
4. who passes it onto a kitchen
5. where another wide selection of ingredients is narrowed down
6. and the end-product is produced
7. which is again delivered to the customer.

And let's take a look at how this would work if the rules were applied.

Rule 1 - Specification of content, sequence, timing, and outcome?
Content is the stuff on the menu, which can be set to a limited number of choices, matching the availability of ingredients in the kitchen. Sequence are points a to d on the picture. Timing is an unwritten agreement between the customers and the food-place that their order will be delivered as quickly as possible. Outcome will be the satisfied customer (who will pay for his order).

Rule 2 - A direct customer-supplier connection / yes or no communication?
Again, this should be possible, by making the menu as transparent as possible and the kitchen organised to produce pre-specified combinations quickly. As for the direct connection, there are several ways this could be happening. A low-tech way would be a number associated with an item on the menu. Little miscommunication can happen on the way to the kitchen. One high-tech way being used right now is electronic notepads, which communicate with the kitchen or bar. I'm not a fan of it, because I think it erects a barrier (of slowness) between the customer and the waiter, but ok, it's a somewhat direct link. Another way could be to simply give the customer an electronic menu. It works online, why couldn't it work on a food-venue environment? The customer presses some buttons, the kitchen gets the order, the waiter delivers or the customer picks it up. Simple (but probably expensive).

Rule 3 - Simple / direct pathway for every product or service?
I'm a little confused by how this differs from rule 2, so I'll probably have to pick up the book after all… damn.

Rule 4 - Bottom-up scientifically co-ordinated improvements?
The key to successful growth is writing a manual / formula that can be reproduced over and over. If you can capture the components of quality that distinguish your venues from competitors, you can take over the world. What this rule means to me is that with a manual should come expertise, and this expertise should be used to train people from the lowest level upwards. The lowest level in the restaurant-scenario is the customer or the customer-interface. Placing experts in that vicinity, ensures a good bottom-up approach and improvements that are targeted at improving the customer-experience. This will also provide quick feedback about what could be wrong in other parts of the supply-chain, e.g. the communication, the timing, the quality of the food/drinks, etc.

Final thoughts
Now, of course, I won't pretend that these four rules are a replacement for me learning more about lean operations. I'll definitely be picking up The Toyota Way, to grasp the more subtle nuances. This was simply an exercise to see if lean principles can be applied to other—non-car—areas. I think they can. At the same time I don't think that leanness is necessarily an excuse for frugality either. It simplifies operations to focus on other areas instead, like e.g. improve the end-product quality for customers.

• Seth Godin on Permeability - essentially he presents a simple test to see how well integrated an organisation is. Also food for thought for top-managers at a firm. Do my employees know my name and what I stand for? If not, why not?
• Hugh MacCleod on De-Commodification - his current business is wine, and he rightly asks about guarding against being just one of the many. His answer: blogging, aka. micro-branding. I think he could've dug deeper.
• S.B. Johnson on Literary Style and word-count - this one made me think. Steven analyses the average words-per-sentence in best-sellers and classics. His conclusion: books with an average sentence word-count of 20 words or less sell better. Made me count the words of my own sentences in my blog-posts.
• HBR on managing innovation - a nice Q&A in regards to management, creativity, disruption, and solutions. Answers are broad and range from deconstruction, to isolation, to building communities.
• NYTimes on a strange cultural trend in Japan - apparently fear is the new black and designers are creating clothes resembling everyday street-objects, like vending-machines. I can't yet draw any conclusion from this, except that Japan is a different place.

These and more can be found in my ever-growing list of bookmarks.