May, 2000

Fruits of Thought

Begging For More

My phone has been ringing recently. It seems that a large supermarket chain recently sent letters to suppliers congratulating them on being selected to participate in some kind of “partnership” program. Of course what makes so many produce suppliers run for the hills when supermarket chains mention “partnerships” is that the letter always starts out talking about being partners and always end up instructing suppliers on how much money to send over. This letter asked everyone for a quarter a box.

Suppliers are rarely happy about these letters and often leap to accusations of bribery, blackmail, etc. These are fighting words and really not appropriate to the situation. From both a legal and moral standpoint, supermarkets, like all businesses, are free to ask suppliers to structure payments any way they might choose.

In truth, these payments probably don’t make much difference in the context of regular purchases from major shippers. After all, shippers aren’t stupid and they well know that they are perfectly capable of quoting a quarter higher than they would otherwise sell for.

The big losers in the industry when these programs are adopted are the occasional sellers to the chain, such as wholesalers being used for fill-ins. Whereas a shipper selling regularly to a retailer can generally have one salesperson instructed to quote a particular chain, wholesalers are generally organized around commodities. Big wholesalers may have a melon guy, an apple guy, a western citrus guy, etc., and these salespeople may not deal with a particular chain for weeks on end, so teaching everyone to charge a quarter more to this one buyer is not likely to work as well.

The answer, of course, is that casual suppliers have to just say no to these programs. When a chain needs a fill-in, it goes where the product is available and, unless a wholesaler or even a tertiary shipper can negotiate a volume incentive, it is probably better to just walk away. There is a risk, of course, but if the chain is only coming to you when it is desperate, you’ll probably keep the business anyway.

The real loser of these “partnership” programs is actually the chain itself and the consumer. Both lose because these programs make a store less dependent on good merchandising to turn a profit. All of the sudden a buyer can no longer purchase the best product, or get the best value. All of the sudden the buyer’s hands are tied with another imperative: Has this supplier agreed to pay us a quarter a box?

It is not really surprising that these kinds of programs are increasingly being foisted on produce. Financial people, rather than good merchandisers, increasingly run supermarkets today. This does not mean they wouldn’t like to sell more food, it just means that their personal area of competency is not in the sale of food. So in the face of a need for higher profits, these managers would be acting far beyond their area of competence if they proposed to boost profits by selling more produce.

But a quarter a box straight to the bottom line is something they can put in the spreadsheet. And, by the way, if shippers do increase their price as a result of this program – so much the better. The chain bases its retail prices on a percentage mark-up. If the chain can both capture a quarter a box and get a higher mark-up because of a higher base price, the chain wins both ways.

Some larger marketers have tried to compromise with the retailers, offering to allocate a set amount per box or offer a flat fee, but require that the funds be taken in-kind rather than cash and be used to boost sales. These programs run from direct promotional support for a shipper’s products – demos, advertising, etc. – to a broader concept of assisting the retailer in doing a better job – training, merchandising assistance, care and handling information, often going far beyond the commodities a particular shipper sells. The truth is that many a produce VP has whispered to a supplier to hang tough on this stance, because it is often the only way the produce department can get the budget to do the training and other things a good produce director wants to do.

The retailer widely considered the most successful in America today is Wal-Mart, and the company is famous for being an extremely tough negotiator. But I’ve found that most suppliers actually don’t mind dealing with the company because it is also famous for not getting involved with nonsense. Sure Wal-Mart wants the quality, and it wants the price, it wants the terms, it wants the service. But the notion that Wal-Mart would prefer one supplier to another on all these grounds and yet would exclude the supplier because it didn’t join a program would be anathema at Wal-Mart.

One would hope that somehow, someone could get through to top management at supermarkets: Produce particularly, and perishables more generally, are the items that set the reputation of a store and that, uniquely, can drive customer preference. You hire top people to run your produce department. Well, give them some budgets to meet, then get out of their way and let them make it happen.

This is a business where one day’s weather can change where the best product comes from. To restrict the choice of vendors because of a “partnership” program is a loser for your stores and your customers.

Unfortunately, those imposing these programs are unwilling to listen to suppliers. But the fastest growing supermarket in the country is Wal-Mart’s Supercenter division. Perhaps they’ll listen to Wal-Mart…while they still can.  pb