September, 2009

Fruits of Thought

When Price Trumps Standards

The greatest threat to the future of the produce industry is this: We rely principally on large buyers to set and enforce standards for important supply chain issues such as food safety, traceability and sustainability. These buyers, however, find it difficult to turn adherence to these standards into a compelling competitive advantage with consumers. This leads to constant pressure to ditch the standards in order to get less expensive product. The savings on this product directly translate into either higher margins or an opportunity to offer consumers a lower price, an attribute with proven appeal.

This dilemma is placing enormous financial pressure on the best growers and packers in the industry, while providing a marketing windfall for the soft underbelly of the industry — the countless producers that work without any sense of supply chain responsibilities beyond what they have to do legally to stay in business. Sometimes they don’t even worry about that.

Fulfilling supply chain responsibilities and operating at the highest standards on matters of food safety, traceability, sustainability and other matters of industry concern is only possible with much advance planning. It can take years of effort and involve substantial expenditures to meet the high standards dictated by demanding buyers, yet the buyers’ decision to make “exceptions” and buy outside their network of vetted vendors takes two seconds.

This means that there is an enormous dichotomy between the vision discussed at meetings, where requirements for ever-enhancing standards are outlined by important buyers, and the day-to-day experience of vendors working with the actual people charged with procurement, who often find it expedient to purchase based on price.

This dichotomy creates a burden that does not fall evenly across the industry. Since the mediocre producers never paid any attention to these tough buyer standards, they invested nothing to conform to them, so a decision by buyers to not require producers to conform with previously announced requirements costs them nothing, and, in fact, just means that another customer is now available to them. On the other hand, the top-quality producers — those who take supply chain responsibilities seriously and invest the time and money to meet these standards — are left in the position of having paid a substantial amount of money to conform to standards, but find themselves thrown into price competition with those who have not done the same.

The public examples of this are legion, though only the tip of the iceberg. Produce Business’ sister publication, PerishablePundit.com, recently featured a letter from a producer explaining how Tesco simply abandoned its famous Nature’s Choice standards when limiting its supply chain to approved vendors would have proved costly.

Sometimes, buyers present the waiving of standards as compassion for producers, and that is the way the postponement of requirements to conform to the Produce Traceability Initiative have been presented. But seen from the perspective of competitors who managed to conform by the initially declared deadline, the move is a sucker punch.

The latest move in this arena involves private label, already a source of stress for producers who find themselves pressured to commoditize a business they have spent the last two decades trying to de-commoditize. Once again, though, we are hearing of buyers adding insult to injury. To start, these buyers put enormous pressure on producers to do private label and demand that they do so based on marginal costs only, meaning substantially reduced margins for the producer. Then, after the producers buy and inventory all this expensive private label packaging material, the “exceptions” creep in. Buyers are presented with an opportunity to buy less expensive produce and don’t order their own private label, the very product they claimed was at the focus of the chain’s marketing and image efforts during negotiations.

Of course, one can blame the producers and point out they should be more mindful of these possibilities in writing contracts and making deals. And, certainly, private companies are free to deal with one another on any terms they agree on. Yet the industry as a whole can’t be better than the sum success of the companies that compose it. So we can’t, as an industry, be indifferent to the consequences of the trade’s habits of procurement upon the production base.

And all we are mentioning here is the issue of conformance to pre-announced standards. If we can’t do that, what is the chance for innovative producers to actually raise standards? Ideally, we would like to have a situation where producers could walk in the door at a buying office, demonstrate how they are exceeding standards for supply chain responsibilities and this would be worth something to the buyer.

Yet, at best, the individuals who buy have no incentive to pay more for higher standards and, in this value-oriented economy, the buyers increasingly don’t seem constrained to even uphold announced standards. In this environment, all that is left to enforce higher standards is mandatory government regulation. If that is where we come out, it will be our own actions that are to blame.  pb