February, 2014

Fruits of Thought

A Value Beyond Price

When this columnist was in his salad days and green in judgment, he went to work for his father. After a baptism on the loading dock, we were given the job of buying for export, and we quickly learned that buying simply for price was not a wise decision.

Sometimes it was a matter of knowing the vendors and knowing your customer. For example, my father, Mike Prevor, gave me a list of customers and said that when we were buying apples to ship out of Baltimore or Norfolk, these companies preferred Turkey Knob brand. Why? Through years of experience, my father and these customers found that they always delivered a heavier pack.

Why these particular customers? They were in markets that sold by the pound rather than by the piece. We typically paid a little more to the old Byrd and Fredrickson company — now the orchards and the brand are owned by Bowman Fruit Sales — but our customers made more money on the heavier pack, so there was good value for the money.

Other times, the issue was knowing the internal dynamics of a company. Over the years, we bought millions of cartons of Florida grapefruit from almost every packer, mostly for shipment to France. We had our cartons pre-positioned in many packinghouses. At the time, though, Ocean Spray was making an effort to build its fresh business, and our agent in Vero Beach, Carl Fetzer, tried to buy Ocean Spray grapefruit when he could. Back then, at least, Ocean Spray’s focus was really the juice business, and Carl found that if quality was at all marginal, Ocean Spray sent the fruit to be juiced and left the best fruit for the fresh market. We didn’t get any bargains, and sometimes we paid a few pennies more, but the fruit made sound arrival at a higher rate than other fruit we bought during those years — so a  bargain elsewhere might not have been a bargain at all.

On other occasions, it had to do not with the produce but how the company would behave if there was a problem. Our tomato buyer was named Izzy Seidman. He was an amazing man. As far as I knew, he had no home — since in those pre-cell phone days, I could reach him at a local Holiday Inn on any day of the year wherever tomatoes were being harvested that week.

Once again, we shipped countless loads of tomatoes and bought from everyone at one time or another, but Izzy used to buy from Six L’s, now Lipman Produce, when he could. Why? Two reasons: One, when tomatoes were tight, they would always protect us and we would get most of our order filled. Two, because if we had a problem upon arrival down in Puerto Rico, they worked with us. We rarely lost money due to a bad delivery. Once again, there were often cheaper alternatives, but what good is buying cheaper if you don’t have product when things are tight or if you lose when the vendor won’t stand behind its product?

What is interesting about these three procurement lessons we learned in produce buying is that none of these examples were “part of the deal.” Turkey Knob didn’t guarantee heavier packs — they just delivered. Ocean Spray didn’t warrant that its grapefruit would make good delivery overseas, but it diverted the fruit that most likely would not make good delivery. And Six L’s didn’t sign a contract promising to always get us tomatoes or to make adjustments for problem deliveries overseas — it just did so. It is these often intangible factors that make it wise to not try and drive every penny out of the supply chain.

A few years ago, when Wal-Mart abandoned much of the procurement system that had been set up by Bruce Peterson in its early produce days, we questioned whether its efforts would actually be profitable. The plan basically replaced dedicated suppliers with a rolling auction system. One can argue about whether the new system — from which Wal-Mart has backtracked a bit — saved a few pennies on procurement. What became clear, though, was that under the old system every vendor had dedicated teams that bled Wal-Mart blue. Once those disappeared, out-of-stocks went up. It is doubtful there was a win for Wal-Mart.

Today the issue is Safeway. The word on the street is that the company is dressing itself up for a sale to Cerberus. Whether that is accurate or not, it is certainly true that the company has been calling in vendors across the entire grocery industry and demanding price cuts, including retroactive price cuts. Only a few produce companies are affected as of yet, but we are told that the program will expand to cover more produce vendors.

This is another example of being penny-wise and pound-foolish. First, we doubt doing this will help sell the company to Cerberus. These are sophisticated players, and the first thing they will look at is whether such activities are producing the kind of sustainable earnings that will justify borrowing money to buy the company. Second, Safeway is blessed with vendors who have stuck with the company through thick and thin over the years.

Especially in perishables, these vendors “take care of” Safeway in ways no Safeway chief executive could ever imagine. Safeway may force vendors to work for less or it may lose them to competitive vendors desperate enough to take the offers being made. In either case, what some distant executive sees as a “good deal” is not, because produce involves a range of quality, availability and service — and if Safeway pays less, it will get less. Guaranteed. In general, putting one’s vendors in a position where they are not even sure if they want your business anymore is not a path to vendor alignment or, ultimately, commercial success.                                       pb