June, 2014

Fruits of Thought

Global Platform Transforms Procurement Paradigm

As United Fresh and the Food Marketing Institute (FMI) review their on-again/off-again cooperation with a unified event in Chicago, one can only wish the parties well. There is substantial reason to believe that the combined event will be significantly more successful than such events would have been if done separately. FMI represents a highly consolidated industry, and its active membership is mostly C-suite executives, whose procurement focus is on things such as massive IT systems and front-end systems, which are vital but a tad dry. Most importantly, the Top 20 of its membership is so large that any vendor will do custom presentations at a drop of a hat. The size curve drops so dramatically that it is not clear the vendor community even wants to pursue them.

The produce industry is diverse and fractured, and United’s participation adds life and color to what would otherwise be a dry FMI event. The industry is wedged in this position because of the wholesalers, distributors, brokers, exporters, etc., and the commonalities of these folks have very little to do with the Top 20 supermarket chains.

As a short-term expedient, it was probably wise of United to coordinate with FMI, but when one thinks of the supermarket industry, one thinks of the famous line from William Butler Yeats’ poem, The Second Coming, written in the aftermath of the first World War where the very foundation of the order that ruled the world was destroyed in the massive carnage of the “war to end all wars . . . . Things fall apart; the centre cannot hold.”

Wal-Mart is the mighty leader, with its volume dwarfing all that surround it. Yet the titan lives in the shadow of giants that have fallen before it: The Great Atlantic & Pacific Tea Company, Sears, Roebuck and Company and others. If someone came along with a good offer to sell every supercenter, wouldn’t the wise course be to sell? After all, only a slight pivot of sales to online models would decimate all brick-and-mortar retailers with their high-fixed costs and lack of location flexibility. And Wal-Mart’s greatest asset — countless millions of square feet of retail space — would instantly become a massive liability.

The great tie that unifies mature markets around the world is the rise of the hard discounter. We see it most strongly in the U.K., where ultra-efficient supply chains simply can’t be forced to give more blood — but when everyone is ultra-efficient, there is no competitive advantage in being efficient.

In the U.K., the retailers were being clever eliminating brand loyalty and brand equity by focusing on private label product. Then they turned around and found that ALDI and Lidl could do private label too. Suddenly, there was no way for consumers to compare accurately between chains. There was also nobody to make the investment to persuade the next generation to build the category.

So everyone is cheap, everyone sells private label products that can’t be compared easily, and everything seems the same. What’s left for retailers to make continuous price “investments” for competitive edge?

The demand among retailers is transparency, but that factor almost always translates into a vendor reaction to avoid investment. Transparency in the supply chain translates into retailers not allowing producers to get the kind of return on invested capital that encourages more investment. As a result, the vendor community won’t be able to raise money. It is a dark vision of gradual decay as sunken investments are patched together.

The whole method of procurement is being transformed. What is really involved in a global branding initiative — such as C.H. Robinson’s move to Robinson Fresh? They unveiled this new strategy at The London Produce Show, and with good reason. It is not a problem to be Rosemont Farms, Timco Worldwide or FoodSource if you are just selling regional chains or even national chains. However, if a firm wants to go to Wal-Mart or Costco and say it wants to make a global tender for business, it needs a global platform. Marketing expresses the strategic direction of the firm.

Buyer receptivity to this is driven by a search for consistent standards — especially on food safety, traceability and sustainability. Branding is becoming more crucial than ever, because it establishes a commitment to supply chain responsibilities.

Look at the supply base being transformed before our eyes. Think of a product such as avocados. There was a time when it was perfectly viable to be a marketer just of California avocados. Now it is not just a matter of finding a counter-seasonal source; it is having 10 sources: Mexico, Peru, Kenya and so on.

One would despair, but this new procurement paradigm is Schumpeterian “creative destruction” at work. It will destroy the retail base as we knew it; it will destroy the supply base as we knew it. But through the haze, a new global vision is emerging, with different ways of sourcing and selling products, and also ways consumers will find beneficial. The challenge itself is to be the one who sees through the haze.    pb