Game recognize game, scale recognize scale.

Prime Future 97: the newsletter for innovators in livestock, meat, and dairy

The first third of the book The Secret Life of Groceries by Benjamin Lorr is on the evolution & early innovations of the US food retail business. This book has crystallized my growing hypothesis that game recognize game, but scale recognize scale. And that has implications for the future of livestock, meat & dairy value chains.

Here's my hypothesis:

• First, the rise of national food brands led to the rise of larger grocery stores.

• Then the rise of larger grocery stores, and larger grocery store chains, led to growth in meat packing plants.

• Then the growth in meat packing plants led to growth in cattle feeding/farrow to finish.

Of course drawing this direct linkage up the value chain might be wrong for any number of reasons, including potentially confusing correlation with causation and also that a million other dynamics were impacting each of these individuals segments.

But today we look at some of the innovations that sparked the early links in this chain, and the potential implications for the livestock industry.

Lorr describes four early grocery innovations that were game changers:

(1) Pre-cut boxes.

In the 1890s, pre-cut boxes began being manufactured. This allowed boxes to be covered with labels. The inexpensive individual container gave rise to the brand as the growth of cost effective and wide spread labeling led to the expansion of brands from just luxury items to suddenly include branded staples. Democratization of packaging led to democratization of branding. The packaged food fad allowed food to be differentiated by brand, which suddenly gave shoppers the power of choice.

(2) Self service grocery stores.

Brands grew quickly as they marketed the consistency of the product and stoked suspicion of the prior grocery model of a clerk behind a counter measuring unbranded products and helping each customer.

One innovator realized that if brands could speak for themselves, then there was no need for a customer to interact with a clerk in order to select a product. The grocery store could become an assembly machine with the customer acting as the conveyor belt.

This inverted assembly line would reduce labor costs and increase the speed of the shopping experience. Thus the first version of the supermarket was created when Piggly Wiggly was born, and a value proposition built on selection.

(3) The shopping cart.

After the supermarket was a thing, an inventor noticed that customers were limited in how much they could buy based on the amount their arms or a small basket could hold. The shopping cart solved that problem.

(4) Rapid scale of self service.

A regional manager for Kroger realized that volume could be the driver of the future of grocery, if you could increase store size, selection, and SKU's to offer more selection to customers and use volume to make it cheaper than anything shoppers had ever seen. "Can you imaging how the public would respond to a store of this kind? We could lead the public out of the high priced houses of bondage into the low prices of the house of the promised land."

Kroger rejected the idea and the manager left to start the King Cullen, which proved his hypotheses incredibly accurate.

By 1965 every grocery store was a supermarket and the race was on to grow, at both the store level and at the chain level. In the 1930's a 6k square foot store was a dizzying experience for customers but that grew to 18k feet on average by 1965 and now of course nobody bats an eye at the 200k square foot Costco experience.

When we think of scale as an advantage, we usually think in terms of economies of scale via reduced per unit costs.

But what if one of the key advantages of scale is greater market access?

National brands like Nabisco, Kellogg, Crisco, and Kraft came of age because these national brands could fill the growing shelves of national supermarket chains.

Large brands worked well with large chains. Customers like working with similar sized suppliers, and vice versa.

It reminds me of how McDonald's suppliers grew at a similar pace to McDonald's, like OSI.

Big companies like to deal with big companies. There's efficiency in big companies dealing with big companies. There's ease in it. There's reliability. There's predictability.

Maybe it's as simple as game recognize game; scale recognize scale.

If this is anywhere near accurate, then there are three potential implications for livestock producers:

1. The fight against the packers is one sliver of a larger consolidation trend through the value chain. Packers consolidated because that was the path to growth, just as retailers (their customers) consolidate in the path to growth.

2. Is cow-calf the next sector to consolidate in order to more effectively work with large feedyards? Feedyards can only work directly with cow-calf producers above a certain size, who can send full truck loads of calves. Doesn't that imply that we'll continue to see growth of large cow-calf operators?

3. The increase in homogeneity at scale creates an opportunity for counter positioning...

Perhaps the most interesting thing about this story is how amidst that 1950-1970's environment of mad dash to scale, the founder of Trader Joe's zigged when everyone else was zagging at neck breaking speed.

Lorr tells a story about Joe’s local egg broker, who approached Joe with a deal on X-Large AA eggs because he couldn't get rid of them. None of the other retailers wanted them, preferring instead Large A eggs. Why? Supply of X-Large AA eggs is limited since they were mainly laid by older hens. And big retail chains like Safeway wouldn't go near them since Safeway’s value proposition was in always having product in stock. Safeway had no interest in advertising X-Large AA eggs and then selling out due to low supply, which would leaving customers unhappy.

This notion of a 'discontinuous product' that was actually better quality and priced lower gave Joe the idea that maybe there were more discontinuous products out there. That insight set Joe on the path to "commoditizing individuality" by "providing products that allowed customers to reflect an identity that rests in opposition to the homogenous mainstream."

The rise of homogeneity in food simultaneously created a lack of uniqueness in food.

Trader Joe's filled that gap. This is my new favorite example of counter-positioning, from the 7 powers by Hamilton Helmer who defines counter positioning as when "a newcomer adopts a new superior business model which the incumbent does not mimic due to anticipated damage to their existing business."

Safeway didn't care what Trader Joe's did around egg merchandizing, because there was no way they would attempt to replicate it - it was completely at odds with the big chain's business model. And that's why it worked.

I'm increasingly convinced that in order to understand the future of something, we have to understand the evolution of the past - how we got here and why. The powers of economies of scale and counter-positioning played out in early grocery retail, and are playing out today in animal protein. The one creates room in the market for the other.

Questions for you:

1. Do you agree or disagree with the hypothesis?

2. Have you seen this dynamic play out in other areas of animal protein or broader agriculture?

3. I want to learn about food retail in other parts of the world, any good books/podcasts/articles?

Aside: it's wild to think about how much the post-WW2 war change for Americans from spending 30% of income on food to 10% had on other developments of the century. We on the agriculture side claim much of the credit for the relative cheapening of food, but I'd love to see some data on the role of the above grocery innovations and distribution.

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