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03/04/2011

"Just start running"

Until last year, Jürgen Pahl served in the function of managing director of Metro Group Buying as head buyer of the Düsseldorf-based retail giant. Since the beginning of the month, Pahl is Senior Partner of the consultancy Kerkhoff Consulting.

Mr. Pahl, you are probably still very familiar with the industry's demands for higher sales prices, aren't you?

Certainly. And it's not really surprising that, at present, raw material problems are especially dramatically formulated. Of course, the industry makes reference to any analysis in support of these concerns or problems to thus justify higher sales prices. That's part of the business.

So, are many forecasts dubious and the industry's fears just scare tactics?

The reason that this topic has such a strong focus in the general public is partly due to the fact that markets have become much more transparent in recent years. By now, we know exactly where individual raw materials are traded and which corners of the world are presently either arid or flooded. But there really is no denying that prices will further increase in the long run.

Could you venture on a more accurate forecast?

That's like crystal ball gazing – and that's precisely what makes it all so difficult. But I can see no supply problems within the next ten years; however, there'll be certainly volatile price developments.

Does it mean that – in the medium range at least – the risk of inflation coming from foodstuffs is thus manageable?

At least I cannot detect as of which time we'll see any dramatic topping over of price thresholds.

What does that mean in concrete terms?

The so-called natural price of products will move up in the long run. If price thresholds are crossed above which customers are no longer willing or able to purchase a particular product, there'll be more than a few high-volume markets turning into niche businesses.

In many newly industrializing countries, high food prices recently sparked off rioting. Is that a realistic danger here as well?

In Germany, consumers will also have to spend a higher percentage of their income on foods. Compared to many other countries, that percentage is relatively low today. One thing for sure: The demand for staple foods will continue unabated. But the situation may be entirely different for classical semi-luxury foods and tobacco, for example.

Yet, it might not be the best option for the trading business to just simply await the developments without doing anything.

No. Although there can be no ideal solutions, problem awareness will definitely be necessary. These issues are, however, not adequately dealt with so far. That's due not only to those responsible in leadership but also to the organizational structure. A paradigm shift is required here. Speed is always a competitive advantage and sometimes it's necessary to just start running.

But the question is: Where to? Should the retail business acquire entire plantations in Africa?

It's very difficult to extract the politic dimension from the problem area of increasing raw material prices and decreasing productivity. Yet, getting more control is not only possible but also desirable. Your suggestion would present just such a possibility.

A realistic one?

A lot is conceivably possible. But, at the end of the day, getting into farming and production will result in an alienation from the core business – and that's always difficult. Moreover, the trading sector would thus be faced with the same problems. Contractual farming will protect against rising prices only up to a point. Moreover, you will have to deal with crop failures or questions of an efficient distribution of goods. And finally, only global retail giants will have appropriately powerful procurement organizations worldwide. Smaller enterprises will hardly be able to set up and implement similar organizations.

Coop Schweiz and Migros are successful with direct procurement and own production operations.

Yes; and the German retail business is also thinking very hard about similar models. But in my opinion, it's hardly possible to operate trading and production equally successfully. What would you do really if the industrial business starts to grow disproportionately?

Then you could sell the products to other dealers.

But if a major customer drops out, where would you sell your goods then? I just don't think that this can be a functioning model in the long run. Also, don't forget that the food trade is selling thousands of products consisting of hundreds of raw materials. What would you concentrate on?

Coop boss Loosli says that own production for water, meat, fish and bakery goods is a must.

That's interesting ground. But once again: Going into own production is fraught with risks just like investments in contract farming. Arable areas are limited worldwide. Accordingly, retailers can only become active in a supplementary way in this area. And they must be able to fall back on additional suppliers to have alternative options. Also, just in passing: When you consider the luxuriant and rich fruit and vegetable departments used in retailing as a marketing instrument but which also stand for high write-offs, the question will be as to how stocks can be handled more efficiently.

So, retail companies will not become giant agro-businesses in the future?


I can't picture that – as long as they are not able to greatly minimize their risks, for example by means of genetic engineering and the use of genetically modified foods.

The retail business might at least be in demand as a helper for self-help. Many experts think that promoting small farmers is an ideal solution for the forecast production bottlenecks.

That may be. However, there is little leeway for such investments in the tough competitive environment we are in.

And what do you think of a greater involvement on raw material trading markets?

The retail business is not used to handle money market elements – except for protection deals, so-called hedging.

But where do you see potentials?

Supplier relationships must be getting a long-term basis. The point can no longer be just selection but rather a pro-active, creative function. Especially on the part of house brand producers, the retail business can also promote cooperations. In many companies, however, that will require a changing of the guard in purchasing.

Wouldn't it be necessary to greatly expand purchasing departments, for instance by also taking bankers and agricultural experts on board?

The existing buyers much rather will have to permanently exchange experiences with these experts to thus increase their know-how. Additional challenges are clear product ranges and price segmentation.

Will house brands be making life even more difficult for the industry?

Development potentials of house brands are exclusively connected with the power of brand-name products in the pertinent segments. Increasing raw material prices hardly affect any set-off since they concern all manufacturers in the same way. Nonetheless, there will be changes due to that. When threshold prices are exceeded, house brands will be developing much more towards becoming alternatives of A-brands. In contrast, the importance of the entry-level price will be reduced. In this process, supermarkets will have system advantages because they are better in conveying price trends to their customers. On the other hand, discounters should be getting problems because they will have less maneuvering room to be cheaper.

Martin Mehringer and Gerd Hanke talked to Jürgen Pahl