January, 2004

Fruits of Thought

Demon Wal-Mart?

The past few months have been my chance to get beat up a bit by my friends at the big supermarket chains, some of whom didn’t like my column, “Two Cheers for Wal-Mart”, which was published in October. I can understand the discomfort, and I appreciate those who offered their insights, but many of those who were angry strike me as being a little bit in a “Shoot the Messenger” mode. I didn’t create the situation and am hardly the first to notice that Wal-Mart is getting bigger and posing a radical threat to the conventional supermarket industry.

Sometimes demonizing the enemy is motivating. I’ve been to some meetings of the National Grocers Association, the trade group for independent retailers, and the meetings have always had the feel of an anti-Wal-Mart revival meeting. But exuberance is no substitute for strategy, and the recent attempts to demonize Wal-Mart as the source of countless problems from low wages to community disintegration are not likely to solve the problems confronting supermarket operators.

Much of the strategy necessary to deal with Wal-Mart is beyond the ken of produce executives. Safeway’s focus on acquisitions of regional players has obviously been a disaster. Whether it was Randall’s, Genuardi’s or Dominick’s, in market after market, Safeway paid top dollar for distinctive retailers but drained them of distinctiveness in order to buy in quantity and reduce costs. The strategy failed, but produce executives didn’t dictate this strategy.

In the past, new retail formats, including the supermarket itself, have been quickly copied and so no competitor could be said to have a real format advantage. Yet supermarket chains have shied away from the idea of offering their own supercenter format. Kroger bought one in Fred Meyer, but there has been no national rollout. Target is trying its own more upscale format, but since the demise of Kmart, there is literally no national competitor to Wal-Mart in the supercenter business.

Since the supercenter is a very successful format, it is indeed odd that the supermarkets would be content to surrender that entire business and fight for, instead, only the food business that consumers do not want to buy at supercenters. But once again, this has scarcely anything to do with produce department executives.

The whole effort to compete with Wal-Mart on price is being conducted in a backwards manner. You don’t buy 10 supermarket chains in the hope you will reduce your expenses and that these reduced expenses will enable you to lower prices.

It reminds one of the opposite strategies, which is how the Japanese built their auto industry. In the early days their volume was too small for the economy of scale needed to be price-competitive. But the Japanese took a leap of faith and priced the cars as if they were already selling at mass production levels. The Japanese knew they would lose money, but if the low price attracted sales and the production line worked at capacity, they would have a profitable business.

In a sense, supermarkets that want to compete for the mainstream consumer need to take a similar leap of faith. They need to price products competitively. Although Wal-Mart may be efficient, there is no logistic bonus that can compensate if sales dropped 30 percent. Unfortunately, once again, produce executives are constrained here by their chain’s demands for current returns.

Culturally, the obvious complaint against supermarkets is that they see price dips as opportunities for margin enhancements. But, once again, this is something that comes from the top. When was the last vice president of produce chastised for producing excessive margins? It should actually happen frequently and never does.

Herb Kellerer, long time CEO of Southwest Airlines, tells how he was often called by stockholders demanding that Southwest raise prices. The callers would explain that from Dallas to San Antonio the next cheapest fair was hundreds and hundreds of dollars more than Southwest. There was plenty of room to raise prices and still be the cheapest airline. But Kellerer didn’t think of this as an opportunity for margin enhancement. He kept his eye on the competition: in this case, people driving rather than flying.

That kind of focus on the competition usually leads one to lower prices so as not to allow competitors market space. But the public companies controlling big chains demand current returns, not a strategic investment in maintaining market position. That is not the fault of produce executives.

But I think the cultural card works deep and infiltrates produce on a lot of levels. A big regional wholesale grocer has a policy that when it clips the bills of shippers, if the shipper wants to know why it did so, this wholesaler charges a $250 fee to find out.

I can say this doesn’t seem fair. I can say I’m not really sure how it can possibly conform to PACA law, which requires prompt payment of an invoice — not clipping it without explanation or support. But the most interesting thing about this policy is what it reveals about the culture and why, long term, retailers who depend on wholesalers who play this type of game will be in trouble.

If an invoice reduction is legitimate, it means a problem of some sort occurred — the truck was short, damaged goods delivered, etc. Mistakes are very expensive to the whole system, and if you want to be successful at today’s produce trade, what you need to do, at once, is sit down with the shipper and analyze the cause of the problem. Work together to make sure it never happens again.

Another approach is to consider a problem a profit opportunity to clip a bill and charge for access to any information on the matter. Short run, a big operation can make millions on those $250 fees. Long run, only those that reduce the mistakes by working together get to stay in business.  pb