November, 1998

Fruits of Thought

Through The Looking Glass

The weather was balmy in New Orleans, but those who attended the Produce Marketing Association Convention in October couldn’t help but feel the chill wind of consolidation as it swept through the industry. Coincidentally, PMA was held just as Kroger announce its acquisition of Fred Meyer. One could see the blood drain from the skin of those suppliers who worked intensely with Fred Meyer and did not have an “in” with Kroger.

Of course, it is not just Fred Meyer and Kroger. For years now, strong regional chains have been merging with or been acquired by larger players, and good customers for many shippers, wholesalers and brokers have simply disappeared.

The implications of consolidation on the retail end for marketers are, indeed, ominous. Conventional wisdom is that as retailers get larger, they will require larger suppliers. Many also believe that there will be a place for the boutique operations specializing in obscure items or small niche markets. For the medium-sized shipper, however, the future doesn’t look bright.

Perhaps. The implications of retail consolidation on the produce industry are more complex than the implications on, say, dry grocery. First of all, while it is preordained that the most efficient way to purchase, say, diapers, is with massive buying, that is not necessarily true with produce.

There are items that are very competitive in one region but can’t compete at all on a national basis. There are small quantities of really high-quality product that simply can’t be acquired if one needs to buy only in very large quantities.

What this means is that simply because ownership is consolidated, produce procurement doesn’t have to be. Sure, these large chains will try to have a master contract for bananas, but it is not a foregone conclusion that one nutritional supplier of, say, sweet corn, is the way to go.

A number of years ago, Waldbaum’s in New York was acquired by A&P. Initially the operation was kept distinct but, over the years the stores have become more and more like an A&P. That is not what Waldbaum’s customers wanted, or they would have shopped at A&P in the first place. Recently, management pulled out some of the old Waldbaum’s specs and merchandising plans. So, on a test basis, they have been remerchandising individual units based on the old Waldbaum’s ways – the results aren’t public, but I understand that they have been very favorable.

Which teaches us something about consolidation …. If the operating units of A&P and Waldbaum’s are both owned by the same holding company or investment group, there is hardly any impact on the produce trade. If they are operationally combined and procure as one company, there is major impact but, also, major danger for the retailer in attempting the combination.

Much consolidation is financially driven. Not being grocers, and for that matter rarely buying groceries themselves, the investment bankers and financial guys who drive these deals tend to view supermarkets as interchangeable boxes. This just happens to be wrong. It is especially wrong as perishables become increasingly important.

The success of all these deals usually depends on efficiencies being realized through the combination. To the extent a chain extracts other efficiencies, it creates a window of opportunity for new competitors. This especially applies to produce.

Perhaps it is a quality opportunity – there are just so many acres of that really prime product. Products are grown where land and weather combine to create perfection. It is simply not possible to order 50 trailers of a size and get that really perfect crop. One can just order the top grade, which is not the same thing.

Perhaps it is a price opportunity – it is not true that large buyers always pay the lowest price. Big buyers are very restricted in who they can buy from. Almost by definition, large buyers will pay around the average price. If the industry consolidates and there are ten operations that purchase 80 percent of the crop, how can they all possibly be purchasing it under market? In fact, the price opportunities are for the smaller, more flexible buyer, who can change on a dime and accommodate a different size, grade, pack, etc.

So, predictably, consolidation means that smaller operators will operate under a floor set by the big guys. These independents will often offer better quality and be able to procure less expensively.

This in turn means they will be very profitable. The high profits of independents will be noted by Wall Street, which will observe that by splitting up big national chains into smaller regional operations, they could increase return on the deployed assets. The trend will then be to divest and rationalize. Since this trend will have the terrific impact of allowing Wall Street boys to make more money breaking apart what they put together, we can be sure it will be well received.

So the logical consequence of consolidation is de-consolidation. It is only a matter of time.  pb