July, 2004

Fruits of Thought

Wholesale Opportunities

The state of wholesaling in the produce industry is often misunderstood. With major chains having long since made the transition to direct buying, it is obvious that wholesalers can’t serve the same function they served 50 years ago.

But when challenged, aggressive businesspeople find new waves to ride — as did produce wholesalers around the country:

First they zeroed in on foodservice. Second, many became defacto service wholesalers offering regular produce delivery.

Third, a more flexible business approach led to a blurring of the line between brokers and wholesalers.

Finally, many wholesalers and brokers redefined themselves as procurement agents, discovering a core competency that transformed their business prospects.

Today the wholesale business is poised for a revival. The massive growth of Wal-Mart is killing conventional supermarket chains, which is opening up real estate and experienced personnel for independent retailers. Many of these will focus on specialty markets, be it upscale, organic, Asian, Latino, etc.

Then, here is a dirty little secret a lot of retailers don’t want to admit: Most captive distribution centers are not efficient.

Yes, of course, there are exceptions. Wal-Mart’s DC system is quite efficient, but it is also quite new and therein lies a tale. Captive corporate assets tend to become less efficient with time. Perhaps the store base shifts a little west, or a new highway is built to make a location to the east more sensible. If a chain is working with an outside vendor, the chain doesn’t care about that vendor’s sunk capital costs and will shift suppliers to one that is more advantageously located. But if a chain owns that warehouse, the incentive is powerful to avoid the write-down of abandoning the facility and instead operate just a bit less efficiently.

It is not just location, either. Labor gets restive when it knows that it doesn’t have to compete for the jobs. And if the chairman’s nephew is running the DC, well it’s very tough to elect a more efficient choice.

Then everything deteriorates with time. Don’t take at face value all those reports that compare costs at a new competitor, such as JetBlue, to old established companies. All those JetBlue planes are brand new, they are fuel efficient, don’t cost a lot in repairs or downtime for maintenance, etc. Same thing with a DC. In time, they cost more to keep up and operate less efficiently.

So big retailers aren’t so formidable; there are many cracks in the marketplace that provide points of entry for smaller retailers, and this will create opportunities for wholesalers to add a lot of new retail business in the years to come.

To get there, wholesalers will have to overcome these three obstacles:

1) Have facilities ready for prime time.

Even the newest terminal markets in the country do not really meet required standards for food safety and food security. The custom in the United States is that most markets consist of individual units with a warehouse, loading dock, office, etc. The produce is displayed on a platform and customer access to the warehouse is relatively easy. When customer access is banned, it is only prevented by human intervention.

This really isn’t enough. Today, despite the comfort with this system, nobody should be able to walk into a produce warehouse unescorted. This means that new terminal market facilities should look to the common area display system popular overseas (and used in the Boston Market Terminal).

Under this system, there is a common area where vendors have displays and selling desks but the actual produce is stored elsewhere, typically in separate buildings.

This makes it easier to maintain a consistent temperature and thus improves quality, but, even more important, it secures the food supply. Nobody but an already vetted employee should ever be in that building without an escort. This system will simply be a requirement to get business from the government, large retail chains, big service wholesalers and foodservice distributors.

2) Bring the union to the table.

The unions will have to decide if they want to participate in the future growth of wholesaling. Already many cities have a core market that is heavily unionized and a fringe of newer wholesalers that are not unionized.

In most cases, the problem isn’t even so much the wage rates as it is work rules and a willingness to protect slovenly and incompetent behavior.

The industry needs new facilities, but it will be difficult to justify building those facilities if the unions don’t show some recognition of the need to be competitive.

3) Chicken and the Egg

Though shifts in retail are creating opportunities for independents and wholesalers to serve them, it also is true that terminal markets have disappeared from most of the country. In this age of instant transmission of digital images, the practice of “walking the market” may never revive.

But in order for these new retailers to have a chance, they require access to a lot more than the basics. They need a way to buy the items to make all the upscale, organic, Asian and Latino stores a success. Without the stores, the wholesalers won’t thrive; without the wholesale supply, the stores can’t be established. It seems like a big problem, but when you realize what this industry has already survived, it’s really a great problem to have.  pb