July, 1994

Fruits of Thought

Fresh-Cut Challenges Ahead

New technology always leads to unintended consequences. As a result of new ways of doing things, or of new policies instituted, things happen that simply hadn’t been anticipated by the designers of the innovation or policy.

When President Nixon temporarily embargoes the export of soybeans in an attempt to moderate inflation, he never anticipated that the Japanese, concerned about the security of their food supply, would invest heavily in planting soybeans in Brazil, thus creating a major new competitor for U.S. farmers.

Welfare policies, designed with the most magnanimous of intents, are now being indicted as causing illegitimacy, family break-ups, dependency and, indeed, the very destitution they were designed to ameliorate.

So, it should be no surprise that when new technology, new products and new ways of doing things enter the produce department they also have unintended consequences.

We’re starting to see this in the area of fresh-cuts. The industry has reached a critical mass in which almost all supermarkets are selling some source of regionally packed fresh-cuts. New vendors and expanding lines from existing suppliers are vying for retail attention, and consumers are coming to not only buy the product, but expect it on the shelves.

By all indications, this trend has quite a road to travel before it reaches its zenith. The fruit people are researching vigorously to find out how they can ride the fresh-cut juggernaut. Regional “choppers”, in business for decades cutting cabbage and coring lettuce, are adding equipment to maintain their markets. National processors are opening new facilities, and lettuce shippers are worried as customers reduce space allocations and, sometimes, orders for lettuce as fresh-cut swoop up sales.

As the unintended consequences of fresh-cut salad mixes start to become evident, I’m beginning to hear a roar of anguish from retailers as the growth of fresh-cut salad mix sales is playing out. Despite the seemingly high profitability of fresh-cuts themselves, it seems that two big challenges are looming in the not-so-distant future:

The first challenge relates to competitive pricing on the fresh-cut items themselves. The produce department, by its nature, has always been a high profit one for supermarkets. Its high profit was due to the fact that supermarkets could get higher gross margins on produce than on most grocery items. This, in turn, was possible because of the enormous difficulty consumers have had on comparing prices on produce items.

In a department with little to no brand competition and variations in quality and price occurring almost daily, the consumer often wouldn’t know if the price difference was due to varying quality, a market change since the previous week, or the fact that one store was just trying to charge more than another. The result was often simply to buy the product and trust that the store was treating the consumer correctly.

With fresh-cuts, this is all starting to change. These products are clearly branded, the products generally offer consistent quality, and the pricing generally does not fluctuate in the way the raw commodity does. Now this may sound like the Holy Grail that produce marketers have been searching for, but the unintended consequence is that it makes consumer price comparison easier. This places enormous pressure on prices.

Many stores running EDLP (Everyday Low Price) formats have exempted produce from their pricing policies, but that “exemption” for produce will not survive the fresh-cut age. Chains that go high-low will all use fresh-cuts to trumpet that week’s sales. This poses the specter of another unintended consequence of fresh-cuts: lots of dumped product.

It’s one thing for a chain to see sales of Campbell’s soup drop for a week because a high-low format store trumpets low prices on the soup. The store just holds the soup for next week. But if a promotional price trumpeted loudly enough causes consumers to reject one chain’s fresh-cuts as overpriced, that product may simply go unsold and dumped.

The second challenge facing retailers is a reduction of overall profit margins as a result of less sales of salad ingredients. For many years, stores promoted iceberg lettuce at very low mark-ups, then made their profits selling tomatoes, peppers, mushrooms, etc. This was a merchandising strategy actively encouraged by the lettuce industry. Back in the days of the California Iceberg Lettuce Commission, the trade was filled with ads saying, “Display Iceberg Lettuce And Sell A Salad.”

Increasingly, however, retailers complain that when they display fresh-cuts they sell fresh-cuts only. And those stores selling principally for home use (as opposed to those with a big office lunch trade) are reporting that fresh-cut sales are causing dips in the sales of iceberg and, even worse, dips in the sales of high profit associated salad items.

This means changes are going to be made that will affect everyone. Retailers may have to rejuggle their mark-ups on different products to maintain profitability. Shippers and marketing boards may want to start promotions tying fresh-cuts with other salad items. Fresh-cut marketers themselves may find it in their interest, both to encourage use and to assist retailers’ profit margins, to promote fresh-cut salad mix as both a complete salad and as a salad base, perfect to customize with mushrooms, tomatoes and other produce items.

It’s important that the industry act quickly to address this challenge. Fresh-cuts are still new, but patterns get established fast. Unless they are specifically told it is O.K. to mix salad mixes with other products, consumers may think it is “wrong”. And the consequences of that mindset spreading could be serious.

Perhaps it surprises some that such a perfect product as the branded fresh-cut salad mixes would be the cause of such severe challenges for the industry. Such is the nature of the law of unintended consequences. However we solve all these problems, you can bet on one thing: Our perfectly designed solutions will have other consequences which were unintended. It’s exhausting, but exciting and, after all, it’s all these consequences that keep us all gainfully employed.  pb