May, 1996

Fruits of Thought

Focus On Advantages Of PLU's

An almost surreal quality permeates the industry debate over separate “up-charges” for applying PLU-numbered stickers to various produce items. On the surface the argument presents itself as a debate as to whether growers should pay or retailers should pay for the cost of stickers and stickering.

This whole line of thinking, though, misses the point. Whether stickering is paid for via a separate stickering up-charge — as is often done with, say, palletization or pre-cooling on certain commodities — or whether it is just another growing, packing, shipping expense included in the product price — as with cartons and packing — in the final analysis, all costs of production and marketing are borne by the consumer.

The actual reason for pressure to label fruit with PLU codes is that the cost to the consumer of shrink can be reduced by PLU stickering, and the cost of PLU stickering at source is less than the loss from shrink due to cashier error, which is avoided by having proper PLUs.

Some of the emotional charge of this issue came about because a study done in Dominick’s Finer Foods in Chicago found that stickering applied at the packing source would increase retail profits by reducing shrink caused by cashier error. It is understandable that growers and packers would see this information and feel themselves entitled to some portion of these increased profits, certainly enough to cover the cost of labeling.

That the study came across this way is unfortunate because, in fact, it did not offer us enough information to let us know if, in the end, retailers would make even a single penny due to PLU stickering. Retailing is bitterly competitive. Not only do supermarket chains compete with one another, they compete with independents, the new Wal-Mart, K-Mart and Target superstores, warehouse clubs, convenience stores, fast feeders and a whole lot more. The notion that supermarkets could adopt source PLU stickering, make a lot of extra profit and just keep it forever is highly unlikely.

The truth is that when a new, more efficient method of doing business is discovered, it may, temporarily, produce higher profits for a few pioneers. Even that is uncertain, because sometimes the leading edge in technology is also the bleeding edge. Long term, though, a new, more efficient method — in this case utilizing source-applied PLU codes — becomes the “price of entry” into a business. Everyone has the new technology and may benefit from better controls and the ability to sell a larger selection, etc., but, usually, everyone does not magically earn a higher profit margin because competitive forces drive profits down.

So if retailers won’t just “clean-up” on source-based PLUs and if, in fact, the cost of stickering, just like the cost of fertilizer and cartons, all winds up in the price, is there a reason why growers and/or packers should want to charge for PLU stickering as a separate up-charge? There are two reasons:

First, growers know that the charge for the fruit is negotiable, and the smaller charges for such things as pre-cooling and palletization are usually not the subject of negotiation with buyers. When negotiations take place, the growers believe that it is more profitable for the extra services than it is to add all the charges together. In other words, there is a bet that starting negotiations by setting a price at say $10.00, and adding a standard up-charge of a quarter for stickering will result in a higher return for the grower when negotiations are all finished than if the opening pitch was the offer for $10.25, including stickering.

Packers have an additional motivation. Although the issue has been portrayed around the issue of recovering the “cost” of stickering fruit, cost is a rather sticky subject itself. After all, if one leases or purchases a machine, what is the cost of procuring that machine? Of financing it? The cost of real estate to house the machine? Training to teach workers to use it? Insurance? Obviously the “cost” of stickering will vary from packer to packer depending on their own methods of allocating cost, their situation — do they have access to cheap financing, cheap real estate, etc. — their efficiency and expertise. What this means is that the stickering charge will be a profit center for at least some packers. In effect, it becomes a way for the packer to make a bit more money without complicating relations with growers in order to get the account. So growers could benefit here as well.

Well if growers and packers have their reasons for wanting to separately up charge for PLU stickering, is there any reason why retailers might want to have this become an industry practice? I think there is one. It is a big advantage for retailers to know the cost of increments of production. Intelligent retailers, if presented with separate charges for different items, are capable of rationally determining if they need or want those services. Some buyers, for example, will take watermelons loose in the truck, others want them in bins, still others want them packed in cartons. Each a different level of service, each with a price applied to it.

Here is the rub: In order for this system to work a charge must be truly optional. It would be absurd to break out costs like seed or, on most items, the carton, even though these are real costs. Though the costs are real, they are inherent in the product and thus unavoidable.

Unfortunately, the nature of the produce industry is that the buyers are, in the end, not likely to have a choice but to accept PLU stickered fruit. Packing to order is the exception, not the rule. A substantial part of the cost of stickering is the capital investment in machinery, real estate and training. Once all that is up and running, the marginal cost of stickering additional product is significantly lower. Most packers that get into stickering at all will find it advantageous to sticker all fruit.

Already the big branded marketers are coming to this conclusion. The article on page 14 of this issue of PRODUCE BUSINESS details how Sunkist decided to drop separate up charges for PLU stickering. As a branded marketer, Sunkist wants that sticker on each orange at least as much as any retailer wants it on there. After all, that sticker not only has a PLU number on it, it also says Sunkist.

This may be the best hope for growers and packers after all. Fighting one’s customers over charges is rarely the strategy for building business. Maybe the focus has to shift to figuring out what else can we say on that sticker that might help us build business.

Everyone has been so focused on the cost of these labels that the benefit of having a ready billboard on all the fruit in America has been neglected. Maximizing this benefit is the real challenge of PLU stickering.  pb