November, 1997

Fruits of Thought

New Products Will Build Sales

By far the most frequent request I receive is from growers to write columns lambasting retailers for keeping prices high even when F.O.B.’s are low. I’ve addressed the topic numerous times over the years and each time I have had a number of angry growers to deal with. This is principally due to the fact that, although I understand the frustration a grower feels when F.OB.’s are out of line with retail prices, I also know the real world truth: F.O.B. represents only one consideration in retail pricing.

Many costs — trucking, warehousing, retail rents, etc. — are simply not affected by the F.O.B. for a particular product. In addition, there is real question on some products whether lower prices always translate into increased demand. Some products seem to have “set-points” or key numbers that trigger demand, and dropping prices below those levels don’t seem to have much effect on retail sales.

Beyond this it is reasonable for retailers to make a profit, and handling more product is expensive; if a store cuts its gross profit in half and increases volume by 35 percent, it is not a good trade for the retailer. He has greater expenses due to selling more product and less gross profit dollars. It is also true that each retailer is entitled to have a merchandising philosophy. One may be cheap on produce but dear on meat; another, vice versa.

Finally, there is the issue of the effect of price cuts on other produce items. Growers who complain that retailers haven’t dropped the price at retail to reflect F.OB.’s need to be careful about what they wish for. After all, the same retailers are probably not quickly dropping the price of other produce items when F.OB. numbers fall. This is significant because the biggest impact of a reduction in price for one item is a reduction in demand for other items.

Indeed, today, perhaps the biggest single challenge facing the produce industry is whether retailers are willing to step up to the plate and make the investment necessary to build the produce category through new products. Anyone who walked the floor of the PMA show in Anaheim saw the truth: in an age of high technology products, fresh cuts and more, the produce industry is witnessing a literal avalanche of new products. Some tie in home meal replacement items — soups and salad bowls, some snack products — with dips and spreads of various sorts; some are simply high-tech packaged versions of existing products.

Yet over and over I see retailers taking these products, giving them tiny displays, attempting to make 60 percent gross margins and then eliminating them when they don’t meet movement requirements. This is absurd, and, long term, will hurt both retailers and the produce industry.

In the grocery aisles there are real proprietary products, and powerful consumer brands predominate. This is rarely so in produce. Even innovative products cannot easily be patented and few brands have any real power with consumers.

Companies the size of Procter & Gamble can pay to introduce and develop a market for a new product. In produce, however, this is an unreasonable expectation for manufacturers. So, the future growth in produce, to the extent it will come from new products, can only come about because retailers nurture these products and bring them along to build the business.

It has happened in the past. I remember years ago Harold Alston at Stop & Shop talking to me about baby carrots and how he was working to build demand with larger displays and more promotions that the sales of the product immediately justified…and without attempts to make crazy margins.

As it happens it is not really asking retailers to make much of a sacrifice when I say they should work closer and more energetically to bring along new products.

Retailers need to both accept lower margins on new products and make greater commitments to the products — that means more space and more promotion. Of course, this is impossible to do with every new product that comes to market these days. So this means that retailers have to be more selective in which new products they feature.

Basically, there is no point in handling one of these new products at all if the retailer is not prepared to stick it out and try to build the business. This means selecting products a retailer believes in, carrying the product for months, even years, at substandard margins and incurring promotional costs as the business is grown.

This is a difficult challenge for many retailers because it requires a different approach than retailing has followed in the past. It requires more of a foodservice approach. Traditionally, retailers viewed themselves as passive participants in new product development. Manufacturers produced new products, retailers put them on the shelf and if they sold kept stocking them. If not, the products were history. If McDonald’s wants to introduce a new chicken product it reaches out to chicken-product manufacturers with a set of specifications. The product needs a certain flavor profile and must be prepared by a particular cooking method; the price has to generate X dollars, etc., in other words, foodservice operators research their customers and develop products they believe will sell.

Retailers need to move closer to this model. Even if they don’t lead the development of the product, retailers need to make decisions about which products they will carry. These decisions, of course, need to be based on good knowledge of the retailer’s customers. Armed with this knowledge, retailers can select which products will work.

It sounds like a lot of work, and it is, but industries grow, in large part, on the success of new products. Retailers who choose products wisely and invest responsibly to build, not destroy, markets for these new products are setting the stage for their own growth and that of the industry as a whole.  pb