November, 1999

Fruits of Thought

Internet Analysis

The most prominent “new product” at the Produce Marketing Association Convention in Atlanta was not a type of produce item at all. It was, instead, an application of technology – a new system to buy and sell produce over the Internet. Each system was, of course, different, but all the backers were proselytizing the coming of a new age in which buying would be made easy and would happen simply over cyberspace. Is this the future?

Well, it depends upon what one means when talking about using the Internet to buy produce. In fact, an awful lot of produce is bought over the Internet right now, through e-mail, and e-mail is ubiquitous in business today. But this, of course, is a change of degree and not of kind from the manner in which produce has always been bought and sold.

Most of the promoters of the new trading systems are talking about something different. They are claiming their systems can be the marketplace for produce, and on this point, I think they have their work cut out for them.

The problem is that produce is not completely a parity that one can buy by grade alone in the way an oil company can buy crude oil or a grain trader can buy winter wheat. Trade brands mean a great deal for all kinds of reasons. Some of these relate to product quality – under the rubric of a Fancy grade apple, there is a wide range of quality. Very often buyers prefer one shipper’s product to another because they find the pack consistently heavier or the strapping on the pallets done more conscientiously. Some people use the cartons in display and prefer one carton to another.

Beyond the product itself, though, produce is still susceptible to problems. From the truck driver hijacking the load, to product arriving frozen, to a simple failure to make grade – problems occur and the party one is dealing with is very important. That is why, for example, many Blue Book trading members try very hard to only deal with other Blue Book trading members. Trading members have agreed in advance to let the Blue Book arbitrate disputes rather than go to the PACA.

So the blind auction model that some propose for the Internet seems unlikely to work. When auctions were a big part of how we sold produce in America, they were destination auctions. The apples were not auctioned off in Yakima; they were delivered and inspected on the railroad pier in New York before New York auction buyers made a bid. And even then, buyers knew who the shipper was.

Yet if the model is not simply a blind auction, one of two things will happen; either A) These new services won’t really be services at all but just a kind of grouping of individual company web pages, sort of an on-line brochure of the industry without the service fulfilling any transactional purpose; or B) there will be tremendous incentives for buyers and sellers to deal directly and go around the Internet trading services.

Each one has its own business model, of course, but, on average, the services seem to want to charge a commission or transaction fee of one to two percent of the transaction. This sounds small but when you consider that many a grower hires a marketing firm for a commission of 6 or 7 percent, the percentage of the sales budget is very high. Inevitably, even if the systems are great and have everything available, people will go on line, find who has what they want and then go around the system and call directly to save the commission or transaction fee.

There is a lot that computers can make easier in the produce buying process. It is often difficult on items such as apples to put together a straight trailer of a particular size and grade or to put together a multi-trailer order. Even today, there are many brokers who make their living by basically being in touch with all the shippers and thus knowing who is heavy on certain sizes and grades and light on others.

One day full integration with shipper inventories will probably be available, and this will make buying easier. But the transaction-oriented web sites are still far from this kind of integration.

The bigger problem, though, is that this type of rapid fire dealing – so familiar to me as a trader of produce as it was familiar to my father, grandfather and even great grandfather when they were trading produce – is not really the growth area in produce today.

Increasingly large buyers need larger vendors and can’t have their supply chain at risk to the vagaries of wheeling and dealing. The top ten retailers, the top five service wholesalers, the top five foodservice distributors are buying more and more of the produce, and it is not at all clear that they will derive any benefit from these transactional web sites.

These big firms may do things in house – Wal-Mart has a proprietary system already. Or perhaps they will just use e-mail and continuous replenishment software with selected vendors. But it seems unlikely they will need multitudes of shippers to list their product through a commission-charging site.

Of course the future is always unknown, but the actual purchasing function – the placing of the order – isn’t that hard over the phone, fax or e-mail. The hard part of procurement involves projecting demand, evaluating the quality of suppliers, allying one’s company with the supplier that will cover you even after the freeze has cut volume way down or will cover you when the sale moves product faster than anticipated. So far, at least, the Internet companies haven’t found a way to make this any easier.  pb