May, 2001

Fruits of Thought

Produce Sclerosis

For anyone concerned about the future of the produce industry, there are two imperatives to a prosperous future: First, more and better ways of promoting produce items directly to consumers have to be found. Second, costs have to be driven from the system so that we can operate more efficiently and thus deliver better value to consumers.

What is not so often appreciated, however, is that the structural changes on the trade level often wind up having significant, and unexpected, effects on the volume of produce sold. The focus on formal consumer promotion also can lead to neglect of the informal consumer promotion that goes on every day in stores across America and around the world. And the focus on cost-reduction can lead to inflexibility, which winds up costing the trade, and consumers, a great deal of money.

The woes of the banana industry have been well reported. Not so often discussed is the degree to which “contracting” has contributed to the industry’s problems. The contract serves as a kind of girdle, restraining the natural reactions that markets use to eliminate surpluses. With prices predetermined by contract, the normal supply and demand effect – by which producers lower prices and the low prices entice heavy retail promotions that inspire greater consumer purchases – simply breaks down.

Contracts can and do often include market promotion obligations – such as commitments to run ads X times each year. These are worthy efforts, and the many permutations that contracts have assumed are all attempts to improve upon the market-clearing mechanism inherent in spot buying. But it is worth noting that nobody has been completely successful in this regard.

Similar dynamics are at work on the largest wholesale market in the country. In the aftermath of the “Forbidden Fruit” scandal, volume is down at the market. Not coincidentally shippers have been complaining about a need for an outlet to handle more volume. Hunts Point always had a reputation for paying less than other markets, but also for handling the most volume. Shippers were happy to sell there and come back to sell more, even as they complained that they were getting higher prices elsewhere because shippers needed the volume.

Shippers knew from past experience that they had a much greater likelihood of having product thrown out of grade in New York than they did selling some service wholesaler in Omaha. But the wholesaler in Omaha pretty much only ordered what he had pre-sold or could very predictably move through his limited clientele. It was the Hunts Point wholesaler who was going to actually create demand for excess volume by putting it out cheap and pushing it with foodservice, with fruit stores and smaller chains.

But the dirty little secret is that what gave some wholesalers the courage to buy freely is the knowledge they could get stuff knocked out of grade and renegotiate the price. Now, everything is cleaned up, so those same wholesalers, or new ones that rise to compete or take their place, have no choice but to order conservatively – to order only what one knows one can sell. So we wind up with everyone doing less business.

Of course this situation in Hunts Point is only the coupe de grace to a generation-long trend away from consignment selling and auctions. When my grandfather was plying the produce trade in New York, it seemed as if almost everyone was either a commission merchant or an auction buyer.

The significance to the trade is that both commission selling and auction selling are inherently market-clearing. As volumes increase, prices decrease and retailers react on both the pricing and display side, leading to changes in consumption and shipping programs. With both formal mechanisms such as consignment and auctions in decline – and informal mechanisms such as corrupt inspectors out of business – the produce marketplace struggles to adapt to volume changes.

Retailers also contribute to this sclerosis of the produce arteries. Many have set sizes and grades that they intend to sell regardless of where a particular crop is peaking. And just try to sell a chain on product shipped in a non-standard size box…it has become almost impossible.

Each stratification erected by retailer is like a little dam. Market forces have to flow around it. So the industry loses the ability to handle changing volumes, to adapt to changing crop sizing and to create the kind of consumer reaction that helps markets clear.

It is well worth remembering that in proposing various market structures, nobody intended to hurt the business. Laws that prohibit marketing agents from reconsignment of produce weren’t designed to reduce sales – but they do. Contracts weren’t designed to add an inflexibility into the system that would lead to depressed markets – but that is what contracts do. Retailers who pare buying staffs so lean that they can’t respond to market opportunities didn’t intend to offer consumers lesser values than they could have – but that is what happens.

To be a little Freudian, there has been a touch of grocery envy in produce for a long time now. Much that has happened in produce has been about utilizing category management technology and procedures developed for the grocery business in the produce trade.

The next level, though, is to integrate those technologies and procedures with recognition of how produce is different. Success for the trade as a whole depends on market leaders insisting on finding a distinct produce methodology for growing sales and profits.

In the end retailers, wholesalers and shippers all depend on the two opposite ends of the business: consumers and growers. The challenge is to build a market structure that will take the farmer’s sweetest surplus and efficiently make it the consumer’s greatest treat. It is not quite the same as selling Pampers efficiently.  pb