March, 2004

Fruits of Thought

Abandoning Quality

The role of quality in the produce trade is a question always subject to much dispute. I’ve never been to a seminar or conference in which a buyer for a retail chain store didn’t insist that quality was the number one factor in buying produce. Yet it is also true that I rarely hear a shipper talk without hearing him complain that all retailers want is price and that they ignore quality.

The radically different perspectives merely prove the old adage that the answer you get depends on the question you ask. Both perspectives are accurate at different moments in the buying process.

The retail perspective that quality is primary expresses itself in the establishment of specifications. These could be detailed chain-specific specs or a simple decision to buy a particular size or grade. In any case, once these specs are established they are usually set in stone. So it is pointless to try and sell a chain U.S. Fancy apples just because they are cheap when the chain sells only Washington Extra Fancy. Most retailers would perceive this as proof that quality is the key factor in their procurement policies.

Most sellers, however, already know the chain’s standard and only offer product that meets the specification. So the frustration for a seller is that he may not be able to get an extra quarter out of the retailer even though this particular shipper’s product is a little better than a competitor’s product. Or, put another way, the retailer won’t pay more to get quality that exceeds its specifications.

The distinction is between the day-to-day trading cycle where quality isn’t a big factor at all and the spec-setting process where quality is the point of the whole process.

The use of spec-setting as the process by which the industry ensures quality product for consumers has some challenges, particularly if chains do not set up their own specs but, instead, rely on grade standards.

In many cases, growers and packers consistently and enormously exceed grade standards — so much so that it is easy to forget what those standards actually allow. To illustrate, my family used to export a lot of Fancy Golden Delicious apples to Europe. For years, the trade went on happily. One year, though, all our customers in Europe complained about the terrible fruit they were receiving.

When the situation was investigated, it was determined that those apples met the grade standard. The problem was that the shippers had for so long shipped product that was far better than what was required that the customers in Europe — importers, retailers and consumers alike — had been conditioned to have higher expectations.

Some buyers seem to consistently get product that is a little better than they pay for. I find this with Wal-Mart, C.H. Robinson and a few others. With Wal-Mart, it is its insistence on returnable packaging that helps, and with C.H. Robinson it’s having its own private label, The Fresh 1.

One can only speculate at Wal-Mart’s actual motivation in asking for product to be packed in special returnable packaging or C.H. Robinson’s motivation in demanding product be packed under its private label, but one possible unintended consequence is clear: Shippers really don’t want rejections on loads that are difficult to resell. It creates a priority system at packinghouses around the country to put only perfect stuff into the loads for these customers.

That Wal-Mart has been getting such good quality product is especially significant because I’m starting to see something that is a change. Since World War II, quality standards have been going steadily upward. But more recently, retailers are abandoning their specs or relaxing them.

Some of this is just the peculiarity of individual chains. One substantial chain in the northeast, for example, has long been locked in battle with a chain considered one of the toughest to compete with in the country. Recently, however, the parent company reorganized the distribution system, and most of the produce will flow through a local service wholesaler. The old specs seem to be falling by the wayside.

More consistently, though, those chains that traditionally served a lower income clientele and now are struggling to compete with Wal-Mart seem to be abandoning spec-based buying to get a lower price point.

It’s a mistake. Before the supercenter, Wal-Mart was rolling across the South wiping out competitor after competitor. Although its fame was for low prices, there was a lot more to it than that. The low prices wouldn’t have helped if mothers found out that the bargain T-shirts fell apart or that the bargain underwear they bought for their school age children developed holes.

Much as Holiday Inn didn’t simply offer a cheap room but also offered a consistent quality experience, Wal-Mart established standards and began testing products. Soon a consumer could buy at Wal-Mart expecting both a low price and good quality.

One supermarket produce director in a fierce battle with Wal-Mart for mostly low and lower middle income shoppers told me that his chain was demanding more margin from produce than ever before — because the chain needed the money to keep grocery prices competitive with Wal-Mart. To squeeze a little better margin, this chain is buying off-spec when it can save a few pennies.

What a disastrous approach. Take the department that really is the hope for differentiating the chain from Wal-Mart and squeeze it so hard it has to keep prices high and buy sub-standard quality in order to produce needed margins.

It reminds one of the story about the goose that laid the golden eggs. Surely the CEOs of these chains know the tale. And how it ends.  pb