June, 2001

Fruits of Thought

Profit Squeeze

The Washington Apple Commission recently allowed to lapse a special assessment that funded consumer promotion. I had argued for the assessment, but I have come to think that I made a mistake.

Not that consumer promotion is a bad idea; in fact, the industry as a whole, including the apple industry, needs more of it, not less. No, my regret is that I endorsed a program that was limited to three years, thus implicitly endorsing the notion that something quantifiably useful could be done through three years of consumer promotion. The truth is that with a product as well known and ubiquitous as the apple, it could take decades before consumption patterns change in favor of fruit.

But the assessment expired without any serious attempt to renew it because staying the course was simply not in the cards for apple farmers that aren’t making any money.

In fact a lot of businesses aren’t making money. The stock market is far down from its heights, energy prices are putting pressure on operating results all across the industry, and the national economy may already be in a recession. How will the produce industry respond?

Certainly there can be shifts in the trade – although these are very speculative. One could imagine more of a focus on basic items – potatoes, onions and cabbage – and less on high-priced specialty produce. It is possible that in a recession, people would cut down on eating out in restaurants, which could shift business from the foodservice to the retail channel.

But even these relatively modest effects are uncertain. The bottom line is that recession or not, the produce industry will sell more produce this year than last.

Profitability squeezes, as are occurring with energy prices, are a different matter than a recession. There are only two possible solutions. One is to use energy more economically – this can involve everything from shifting processing to low energy cost states, to buying more energy efficient equipment, to phasing out products and services that are too energy-intensive, plus old standbys like checking thermostats and generally conserving.

The second solution is to price appropriately. There has been some outcry from buyers lately complaining that many shippers have added energy surcharges to invoices. It is not a moral issue – shippers have the right to price their products any way they choose and, one would suppose, buyers will demand that a surcharge be removed if energy prices decline.

Obviously buyers and sellers both need to know, in advance, when extra charges – for pallets, energy, etc. – are going to be applied, but whether higher energy prices are passed through via surcharges or via higher prices is of little interest. The bottom line is that all costs of production will be passed through or many suppliers are powerful enough to pass through their costs – it is an immutable law of business.

Where producers can make an error in a profit-squeeze environment is to squeeze expenditures that are not related to the problem at hand. One California shipper I know just cancelled a consumer promotion program he had slotted for New England. The program involved billboards, radio and had a trade promotion tie-in. It was well thought-out and had taken a large effort to develop. This shipper killed the program because of energy costs affecting its bottom line.

The way a given business reacts to difficult circumstances – be it a general recession or just particular profitability issues – determines, to a very large extent, how the business will be positioned when the current crisis passes. As such, businesspeople struggle to maintain their means of production under even the most difficult circumstances.

This seems to make sense, but what is not so widely recognized is that the world has changed. That the most important assets of most businesses are no longer their production capabilities but, rather, their brand and reputation.

If Nabisco offered you a choice between giving you every factory in which Oreo cookies are produced, every truck that transports them, every warehouse that stores them or Nabisco offered to give you the Oreo name, counterintuitive as it sounds, you would be better off taking the name. This is because it is the brand that entitles its owner to two linear feet in every supermarket in America.

That is just another way of saying that if Nabisco finds itself dealing with a recession or profitability issues, its primary goal should be to maintain and enhance the value of its brands, including Oreos.

When the going gets tough, the smart start brand-building. They use the lull in marketing to increase awareness of their brand and perception of its attributes. And when the deluge is over those companies that kept steadily building their brands and reputations wind up picking up the bulk of the business.

There is no false start in business, so by the time the starter’s gun goes off to announce that the economy is rebounding and the race is on, those who just start revving their engines are already eating dust.

The “Apple Guy” is going to fade and, perhaps it is as it should be. The great problem with long-term commodity promotion is that there is no way of assuring that those who pay for the promotion reap the benefits. But for each one of us, for each individual business in the produce industry, the stakes are different. If we build our brands and enhance our reputations, we will reap the benefits.  pb