June, 1988

Fruits of Thought

At The Auction

In this issue we print an important letter from Jan van Meervald, managing director of Dole Europe. The letter points out that auction sales in Rotterdam have been causing the industry problems this year. Many blame the auction system for causing losses and low returns to shippers who have shipped to Europe.

And indeed, some exporters from the United States and other areas have been taken to the cleaners by disreputable people who represent themselves as marketing agents, charge a high commission, and then do little more than consign the shippers’ produce to auction. But the real lesson here is the importance of shippers investigating who they will be dealing with, After all, even if no auctions existed, marketing agents could consign produce to a big wholesaler just as easily as they can consign to an auction.

Yet Mr. van Meervald is a very sharp man and exceptionally knowledgeable about the industry, and when he says that the trade in Europe could move the same volume of fruit at a price $1 or $2 higher per box if no auction existed, he certainly knows what he is talking about.

However, this is not the compete story. In times of surplus, auctions tend to depress prices. In times of shortage, auctions tend to drive prices higher. The reason is simple: Auctions remove the element of personal relationship from the transaction of a sale.

No seller ever gets more for fruit than what he asks for, and a sales organization, looking to keep its customers and maintain good relationships, will not want to seem abusive by raising prices excessively when a market is short. They will raise prices, but nothing like what an auction can do when supplies are scarce. Equally, a marketing organization anxious to keep its shippers in business is unlikely to drop prices as quickly as they would fall at an auction. In addition, buyers are likely to fight harder against rapid price increases and be more tolerant of slow price declines when dealing with the same sales organization week after week. At an auction, however, cloaks of civility fall aside. The most loyal buyer will ram a knife in the heart of his best supplier and still point out that he paid a nickel more than anyone else.

It is interesting to consider the advantages of auctions so marketers can learn how to better serve their shippers. First, an auction provides shippers with a firm price within hours. To shippers who have to pay their own growers, having quick accountings of exactly what the produce brought is worth a lot. Second, at an auction there are virtually no claims. What is sold is sold, and the shipper does not have to worry about hearing buyers’ pleadings for help two weeks later. Third, auctions generally pay very quickly and offer few credit problems. Finally, an auction allows the shipper to sell what he wants to sell, whereas a marketing agent usually has certain demands: He doesn’t want this size plum or that variety of apple.

The prime thing that killed the auctions at the receiving point in the United States was the decline of the railroad car. Once a direct buyer didn’t have to buy in railcar quantities, ordering direct became a lot easier. The universe of potential buyers expanded enormously and real economies of direct buying began to present themselves.

If a wholesaler needed oranges, it saved money, time and handling to ship them directly to the wholesaler. In addition, the nature of the auction was transformed by the decline of the railroad. When the produce was virtually all coming in by railcar to a central location, with the railroad giving the auction free rooms to operate from (as in New York), the auction could operate very inexpensively. But once the railroad stopped being the center of things, and the auction had to rent a place, receive the fruit, etc., the auction started having expenses like those of any large wholesaler. This made it very difficult to compete with direct buying.

The development of good communications systems with inexpensive telephone, telex, computer and fax communication all made it a lot easier to buy on the F.O.B level.

Finally, on imported shipments, the diversification of receiving points and the development of containerization both chipped away at the supremacy of the auction. If you are bringing in produce on a break-bulk basis, it makes sense to have it all sold in one place at one time as with an auction. On the other hand, if you are bringing produce in containers, the produce is now on wheels. It only makes sense to have it sold without unloading the containers so that you can deliver the containers directly to their destination.

The reasons the auctions in Rotterdam have survived may be related to the port’s role as a central distribution point for Europe, as well as the large amount of break-bulk cargo that arrives there.

As chains and selling organizations have grown, many segments of the market are demanding a more consistent selling and buying approach. But for many buyers and sellers, this consistency denies them their vital marketing edge. These organizations — often no more than one man and a telephone — can move more quickly when an opportunity presents itself. For these people, their edge lies not in stability but in change and their ability to capitalize on it.

When I think of these people and I think of the auction, with capitalism at its purist, I think of my grandfather, president of the United Fruit Buyers’ Association, Inc., for many, many years. He thought auctions were an ideal way to move produce, mostly because he believed that since auctions were so public and open and obviously fair, they encouraged good feelings and cooperation among the trade. He took pride in his ad that appeared in every issue of the New York Daily Fruit Reporter and read, “Harry Prevor, Auction Buying Specialist.”  pb