May, 1995

Fruits of Thought

Reality Check

I recently received a very thoughtful letter from a produce salesperson in California. I would like to print the letter but cannot because it was sent to me anonymously. Although we can withhold a name from publication, we must be able to confirm the letter is authentic.

I am almost sure this letter is authentic, as it is really only a more articulate and heartfelt expression of the most common complaint among growers: That retailers are profiteering at their expense.

Like Sysiphus futilely rolling his boulder up the hill, growers have repeated this complaint for as long as I can remember with no apparent result. I get calls and letters on the subject, and wherever I travel, this is the number one column I am requested to write: One blasting the retail segment for failing to either pay more for produce or cut prices to consumers.

Just recently I was giving the keynote address for The Florida Watermelon Association and I got to hear individual growers urging “united action” to get retail pricing and payments in line.

I understand, emotionally, the complaint of the growers. My family was involved in growing operations, and I know the frustration of having the most beautiful and bountiful crop in years and earning little or nothing because the crop was so abundant.

But intellectually, this claim makes little sense.

Certainly the bottom line of supermarket chains gives us no reason to think that they are over charging. For most, a profit of two percent on sales is doing pretty well.

So the argument has to be more subtle: that supermarkets set excessive mark-ups on produce and inadequate mark-ups on other items. It is not really clear what this means though. It is true that supermarkets generate a disproportionate amount of their gross profit from produce operations. But gross isn’t net, and produce incurs enormous costs on retailers that dry grocery items, for example, do not.

Refrigeration and capital invested in refrigerated racks…a whole separate warehouse and distribution system…even the necessity of having cashiers pause a few seconds to weigh things is an enormous expense. Having worked in retail operations, I remember vividly how much produce we wound up dumping because it went bad.

So, that disproportionate gross profit derived from produce, is quite a bit smaller when it comes to net profit. Even if the net profit from produce is disproportionately large, that still doesn’t tell us much. Pricing in a multi-product environment such as a supermarket is basically a function of merchandising strategy.

Whether you should make a little profit on every item or a big profit on some and take a loss on others is a question of utility. Few growers have the merchandising expertise to cogently critique retail strategies.

And the whole claim seems suspect to begin with. After all retail is a bitterly competitive arena, with supermarkets, super centers, warehouse clubs, convenience stores, farm stands and others constantly fighting it out. These retailers kill each other over-storing, double and triple couponing, etc. Surely some retailer would have adopted a bargain basement produce strategy if it was doable and effective.

At the same time, I think retailers have much to do with growers’ unhappiness. To be a retailer is an isolating experience. As vice president of produce for a big supermarket chain, it is terribly easy to go through life always being told you are correct. The suppliers need you too desperately to risk alienating you.

That’s why those retailers who get involved in national produce trade associations are doing themselves and their companies a favor. Involvement in these organizations lets the retailer come in contact with distant growers and wholesalers who will never supply them. It is this involvement that opens the door for some truth telling and lets retailers hear some criticism. This is usually good for business and always good for the soul.

Unfortunately, the supermarket chain itself is far worse than the produce director. I condemn supermarket chains for the kind of arrogance they show and contempt for suppliers by sending out “To Our Valued Supplier” letters. These letters are the kind that announces a new warehouse has opened so every supplier will be expected to send two cases per store of each item free of charge. Or that a “donation” is “requested” in exchange for which a supplier will get a listing in the “book of contributors.”

These types of letters do not maximize retail profit. They antagonize people needlessly. Sending a letter like that to the produce supplier who has been working with your retail chain for three generations and who has worked hard to keep you supplied in good times and bad is offensive.

If you need something from the produce supplier, you pick up the phone, explain the situation and try to come to an accommodation. Retailers who deal with family businesses should realize they could get much more if they weren’t so arrogant.

Don’t misunderstand me, supermarkets have obligations to their shareholders to maximize profits. I think it unfair to expect retailers to think of the farmers’ costs. That retailer has to compete with other retailers, and, if growers sell their product below cost, that is the grower’s problem not the retailers’.

Of course, grower/shipper/packers have their faults as well. And a big one is that many project a sense of entitlement, that, because they produce something, they are entitled to a profit. One grower stood up at a meeting and explained, “… as an entrepreneur, I am entitled to a fair return.” Actually that grower had it exactly wrong. As an entrepreneur, he is entitled to what he persuades the market give him. No more, no less.

Lately packers have been complaining about retail demands for PLU codes on each piece of fruit. Understandably, this means costs and hassles for the packer. But the entrepreneurial packers will realize that retailers are asking for this because it is more profitable for retailers to carry prelabeled fruit. So an opportunity exists for packers willing to seize it. And it is those who seize opportunity who are the true entrepreneurs.  pb