Beef Merchandising Is Complicated-But Producers Pay One Way or Another

By Will Verboven Contributing Editor

Will Verboven

The past few months up here in the cold north has seen some heated outrage by the urban media, political parties and self-appointed consumer defenders over the rising cost of food, including beef. Higher food prices during our long winters is nothing new; it’s a seasonal hazard. But this year, it was accompanied by lettuce shortages and big profits by the large grocery store chains in Canada. It got even worse when a pricing fight between Canada’s largest grocery chain and the world’s largest potato chip manufacturer saw their chips disappear from grocery shelves, including my favorite variety.

All this commotion exposed costly and questionable food merchandising and promotion practices and allegations of profiteering by the big retailers. That caused claims of price gouging by the big grocery chain cartel. There was also an implication that consumers paid for merchandising costs. That’s blatantly misleading – I maintain that primary farm product producers pay most of those costs, not the consumer. It’s done mainly through downward price pressure from processors and retail buyers. It worsens in the beef industry, where producer checkoffs are also used to pay for merchandising and promotion costs. The naïve consumer would be oblivious to that reality, being most are convinced beef is magically created in their local store.

Coincidentally to the outrage, a Canadian government-supported task force was developing a grocery code of conduct, also known as a code of practice (COP), to deal with dubious fees and marketing charges arbitrarily applied by retailers against their suppliers. Codes are instigated for various reasons – to deal with bad production practices (perceived or actual) or to be proactive before government regulation is imposed. The Canadian livestock sector already has COPs. Those codes are updated with changes in technology, research and public opinion. Livestock COPs were developed with scientific expertise, particularly in humane handling, and approved by a stakeholders committee with a direct interest in the sector. They are not designed to consider ideological or lifestyle perceptions of animal agriculture. Much of what follows probably applies to American beef merchandising.

Part of what the code task force exposed were practices like forcing suppliers to pay for flyer ads and rent for shelf space, charging unloading fees, applying penalties for shorting orders and making arbitrary deductions contrary to contractual arrangements. The meat counter operates somewhat differently from regular grocery shelves, mainly because brand differentiation is not that obvious. A consumer is usually faced with a generic meat product and is unaware of which processor supplied the meat.

Although that continues to be the practice, some changes have occurred in product branding. Many years ago, Alberta processors started using the Alberta Beef brand. It became identified with quality and consistency. Jump forward 30 years, and we have sophisticated Canadian beef promotion and merchandizing programs. That effort took millions of checkoff dollars, which is a bone of contention with many producers. They feel that since they do not own the meat in the store, the processor and retailer should promote beef directly to the consumer. That has changed somewhat with some processors developing their own brands, such as Sterling Beef. However, the processors’ primary merchandising effort has been to compete with each other to become the exclusive supplier to a grocery chain.

Becoming an exclusive supplier is simple – a processor needs to guarantee a retailer that their meat products will consistently be at the lowest cost. But that’s just the start. To get a retailer’s attention, the processor has to offer discount feature programs, paid flyer ads and in-store promotions. There could also be deals with pre-packaging – rather crucial because many stores don’t have on-site meat cutters. None of that merchandising comes for free, and it limits the ability of processors to promote directly to the consumer. For the retailer downloading those costs onto processors is a way to reduce their merchandising expenses, thereby increasing profits.

Producers might wonder how they became involved in meat promotion and merchandising. Alas, in Canada and, I suspect, the United States, the exact rationale is lost in the mists of time. It’s been said that producer involvement started when beef consumption was declining and was being out-competed by chicken. Then it was realized that processors were not going to promote beef at the retail level because processors were already spending their merchandising money competing with each other to become suppliers to retailers. No processor would promote a generic meat product to consumers that might benefit their competitors.

Producers back then were aware that branding was valuable, as evidenced by the mystique surrounding the name Alberta Beef. But that brand wouldn’t work if beef promotion was to become national. So provincial beef producer groups, under the auspices of the Canadian Cattle Association, agreed to finance a national beef promotion program. It started modestly but eventually grew into Canada Beef Inc., a respected agency providing global Canadian beef promotion and merchandising services. It’s a friendly competitor with the U.S. Meat Export Federation.