July, 2001

Fruits of Thought

Cross-Docking Terminals

The Law of Unintended Consequences is always producing, well, unintended results. And it seems that the principal consequence of Operation Forbidden Fruit, the investigation into USDA-inspector corruption in Hunts Point, is dramatic consolidation on the market. Ten years ago, a very large operation on Hunts point might have done around $50 million a year in business. This year, the biggest company will probably exceed a quarter of a billion dollars in sales – and produce prices have not increased.

This is not surprising; the fundamental trend of consolidation has been ongoing for decades. Individual wholesalers that once handled just a specific line – potatoes & onions, Western vegetables or deciduous fruits, for example – have expanded, taking on more units and handling more items.

But events have a way of speeding or slowing down such a process. Forbidden Fruit drove some guys out and made others think it is wiser to find other rows to hoe.

Nobody can defend bribery, and to outsiders looking in, it may seem crystal clear who is right and who is wrong. But I’ve read the court transcripts and spoken to most of the players, and I’ve come to see that the line between bribery and extortion can be a blurry one indeed. If there had been one inspector taking payoffs, then those who paid him off were looking for an edge. But when half the inspection service, including the head of the office, is involved, then wholesalers on the market are operating in a culture that makes it difficult to do the right thing.

It is easy for us armchair quarterbacks to say that every one of the wholesalers should have done the right thing and always refused to get involved in untoward activity. But it wasn’t our businesses on the line. It wasn’t the education of our children at risk.

Although some shippers and grower-representatives have tried to get all they can, hoping for damages and what not, the most interesting part of the whole scandal is how many shippers have stuck with the same wholesalers, even after all came to light.

Of course this is all ancient history now. The inspection service in New York is squeaky clean – and the Law of Unintended Consequences is kicking in again. In the aftermath of the scandal, the survivors are growing by leaps and bounds every day.

The comeuppance, of course, is that shippers will have fewer options of whom to deal with. So receivers will be in a stronger negotiating position. They’ll use this to negotiate on price, on quantity and on market protection. They will use this power to insure that produce is sold at the only price that makes sense – what economists call the market-clearing price – the price at which supply equals demand.

Smart leadership at wholesale markets is starting to think outside the box. For decades now, wholesalers have bemoaned the fact that chain stores have abandoned the markets – using them only for fill-ins or exotics. But as the major chains have consolidated, they have left behind groups of stores serving ethnic neighborhoods and other independents. Some of these customers are substantial, and on a market like Hunts Point, a single customer can buy 100 trailers a week.

In the past, markets have lost these customers, as they would reach a certain size, set up a warehouse and start buying direct. But, today, technology combines with a search for economy, and this has led to a rise in cross-docking throughout the grocery industry.

In dry goods, cross-docking facilities are already common, with massive trailers of Tide, Pampers and Campbell’s Soup lined up on one side of a dock and an army of delivery trucks lined up on the other. It takes logistical genius to make sure everything arrives at the same time and that everything is transferred properly and delivered to stores on time. But done properly, the savings are immense; there is no need to build expensive warehouses, nor to spend money moving product into racks and then out again. Inventory costs drop substantially.

Perishables are difficult to cross-dock in this way. The logistics are difficult, and the consequences are a disaster for perishables if they miss the transfer. But a cross-dock facility in a major wholesale market changes everything. Retailers can use the market as their warehouse, thus saving enormous capital investment. The wholesalers can serve big customers more cheaply since they can avoid hundreds of individual deliveries to different trucks.

Sure there will be questions. Who get to use the cross-dock? What does it cost and who pays? What about products from outside the market?

This has never been done before, and so questions are natural. But I hope wholesalers in New York and elsewhere won’t shrink from the challenge. Cross-docking is a way markets can transform themselves to be 21st century businesses.

The concept of cross-docking requires a big change in mind-sets; the prospect of working together to build a market that has new functionality could be disturbing to some. But today’s megaliths are able to support sharp management and elevate people so they have a chance to think beyond the day-to-day trading of produce.

Won’t it be strange if when history is written the dark days of Operation Forbidden Fruit are seen as a precursor to an age of consolidation in which larger, more professionally managed wholesalers rose to a new level of sophistication and turned a wholesale market in the Bronx into a formidable competitor to chain retailers’ own warehouses and an example to wholesale markets throughout the world?  pb