Fruits of Thought
Adapting To Consolidation
Consolidation at retail has long been a fact of life for the produce industry. It is a fact newly brought to the fore by the news of additional mergers in the supermarket industry as Fred Meyer moves to acquire Smith’s, Ralphs and Quality Food Centers.
In all likelihood, even greater consolidation is in store for the supermarket industry. After all, supermarkets are the last vestiges of regional retailing. One can go to a GAP or a Banana Republic at malls from coast to coast, but there is no true national supermarket chain. Wal-Mart is in the process of building one though and, in all likelihood, it will take a national competitor to give it a run for the money. Otherwise, what likely will happen is an established national company will fight aggressively, market by market, using profits from other regions to pick off regional competitors one at a time. So consolidation is probably inevitable.
It also causes a lot of hand wringing among suppliers, and not without reason. Larger chains look to leverage their business by buying in quantity; this automatically may mean that smaller suppliers simply don’t qualify to do business with the chain since they can’t meet the quantity needs. In addition, merely getting access to the buyer can be more difficult as fewer and fewer buyers are left to negotiate with suppliers. Sellers also fear the buyers’ leverage; a natural outgrowth of consolidation on the buying end is that fewer, though larger, buyers represent a substantial percentage of a given shipper’s business. That makes it very difficult to walk away from the buyer even if his demands are unreasonable.
Of course, for every action in business there is a reaction, and some of these problems are moderated by that reaction. So, if smaller suppliers are not a viable alternative, then the big retailers are dependent on the very few really large suppliers. This, in turn, means that the few suppliers really able to meet the retailers’ needs probably will have access to the buyers and, of course, retailers dependent on only a few suppliers are limited in the degree to which they can make demands since the buyers also have few alternative suppliers to turn to.
Intelligent retailers realize that saving a few pennies is rarely the most important economy. After all, small savings can easily be eaten up by the price of dealing with inconsistent quality, delivery delays, unavailable product, and even things such as inefficient billing. As retailers get larger, the pressure they are likely to exert is heavily geared toward greater consistency and efficiency. Suppliers will be asked to provide continuous replenishment via computer to save on buying costs and to reduce out-of-stocks; computer invoicing to reduce accounting costs; just-in-time delivery to reduce warehousing costs and shrink; all the while supplying the freshest product possible.
So, for suppliers, part of the answer to consolidation on the buying end is to be progressive in meeting these types of needs. It involves redefining how shippers add value. Instead of the value hinging solely or principally on the product itself, an increasing portion of the value will come from the bundle of services sold along with the product.
Another alternative is for suppliers to pay more attention to alternative buying channels. In selling imported products I used to find that selling straight trailer loads to big chain stores was easy business, and thus very competitive; many times the more profitable business was obtained by selling in smaller lots to difficult-to-get-to accounts.
One proactive thing for suppliers that see themselves as getting squeezed out of the supermarket chain business is to work with clients they can access such as terminal market wholesalers and then actually help those customers build their business. It is a missed opportunity both for suppliers and the industry to exclude small retailers and foodservice operators from the various business-building programs out there.
Commodity promotion groups will likely experience pressure from many growers to run different kinds of promotional programs. Ad rebates and whatnot are acceptable as long as growers perceive supermarkets as their big customers. Very likely, if the market bifurcates and very large shippers sell to big chains, while others look to alternative markets, those “others” will demand programs to build demand among their clientele. This may well prove a boost for total demand.
The tendency among shippers, commodity promotion boards and even 5 a Day is to focus on large organizations because they are easier to deal with. When was the last time you remember anyone developing a program to assist, say, the Korean produce stands in New York City to sell more produce? Yet retail consolidation will make those stands and the terminal market companies that supply them, as well as similar groups around the country, priority customers for many shippers.
There is a loss, especially on the local level, from consolidation. It is difficult to imagine the Los Angeles produce scene remaining as vibrant and industry-minded as it has been if Ralphs and Vons have their decisions being made from afar. So local produce organizations may suffer. On the other hand, having national chains may encourage even stronger participation in national produce organizations.
As always in produce, this is a people business — so much of what will come from consolidation will depend on the people who run produce for the new national supermarket chains. My advice to those people is to get involved in trade associations in the produce industry and keep in contact with all the industry institutions. The good thing about doing this is it brings retailers into contact with produce people who are not suppliers and never will be — this is crucial. The biggest problem of retail produce VPs is that everyone they talk to tells them they are geniuses.
Being surrounded by people praising your brilliance is good for the ego but bad for business. Getting involved in industry associations gives a produce VP the invaluable experience of working with people who don’t want to do business with him and, so, might actually call him a jerk. That probably is good for business and certainly good for the soul. pb