May, 2004

Fruits of Thought

Outreach To CEOs

The orders supermarket CEOs are giving to their produce directors these days are very clear: Increase margin and reduce shrink. In an age where Wal-Mart, Costco and Whole Foods are the three biggest challenges to conventional supermarkets, it is hard to think of a more counterproductive strategy.

The CEOs are driven by short-term considerations. Profits on grocery items are being squeezed hard by the Wal-Mart situation. In effect, many supermarkets find themselves in a Catch-22: if they lower margins to remain competitive, the supermarket makes less dollar profits because Wal-Mart’s competition prevents volume from rising even if prices are lowered. On the other hand, if the supermarket chain does not lower prices, then volume drops as customers are lost to Wal-Mart. The supermarket is left with lower volume and the same margins, so dollar profits drop.

With debt service fixed and dollar profits dropping on grocery, supermarket executives are pinching perishables to make up the difference.

These orders are typically contradictory, which is a major problem. High margins, whether through raising prices or purchasing cheaper products of lesser quality, generally slow movement of produce, which tends to increase shrink, not reduce it.

And, indeed, efforts focused on decreasing shrink are inimical to the common advice that conventional supermarkets need to become the “anti-Wal-Mart”, emphasizing a broad assortment of perishables and specialty items to accentuate the difference between a Wal-Mart supercenter, with its more limited selection confined to high volume items, and a conventional supermarket.

In effect, top supermarket executives are talking in contradictions: raise margins, reduce shrink, be the anti-Wal-Mart.

Very few supermarket CEOs have risen through the ranks of the produce department and most simply don’t know what the impact of their orders are when it comes to produce.

They don’t understand the relationships between margin, shrink and product assortment. They just look at spreadsheets and budget reports and note that if they can cut shrink 20 percent and increase margins 20 percent, the produce department will produce even more profit.

There are answers to all these issues. Every produce retailer should have a Good Practices program to ensure that produce is being handled properly, which will minimize shrink. But this is far different from ordering produce directors to reduce shrink. Those orders get translated down to the produce managers, and the first things they do is order the bananas green, eliminate the order for slow-selling specialty items and reduce the order for everything else.

Next thing you know, shrink is down, but out-of-stocks are way up and the department looks drabber than any Wal-Mart since it is lacking variety. Oh, and profits drop faster than shrink does.

It’s a real problem for the produce industry because what should be a fantastic opportunity to increase produce sales is turning into a negative. CEOs are giving orders that are having the effect of reducing quality, raising prices and restricting assortment.

This month, the produce industry has an opportunity to start fighting back. As The United Fresh Fruit and Vegetable Association is holding its annual convention and trade show in Chicago, co-locating with FMI, the supermarket industry association, the opportunity exists for the produce industry to reach out and educate the top management of supermarkets.

It won’t be easy. United’s seminar program is designed to serve its grower/shipper constituency. A completely different type of seminar needs to be offered to appeal to top level supermarket executives.

Industry members exhibiting at United will have an opportunity as well, but few are prepared to take advantage of it. Let us hope that some supermarket CEOs do come in to learn more about produce. But who will be there to talk to them? Is it a peer? Someone able to discuss the dynamics of the industry? Someone familiar with Wall Street and the pressure that implies? Will the person at the booth be able to interact with top management of supermarket chains? Or will they get a junior salesperson saying, “This is our new label on the potato.”

Most produce firms have nobody really competent to interact with supermarket CEOs. Those companies that have this level of expertise usually have it in their own senior management levels and typically don’t keep their own CEOs hanging around the booth for days on end.

It is a bit of a long shot. Typically if a supermarket CEO decides to make produce a major initiative, he is going to call his produce director in, ask him to find a half dozen of the smartest people in produce and have them visit the office. If the CEO feels he needs to know more in-depth information about growing and packing, he may visit the fields. It is not typical for supermarket CEOs to hope to learn about produce at a trade show.

Still, there is a chance. And with consolidation, influencing even one supermarket CEO can be a very big deal.

United is in a new place and it will, in time, evolve into a new type of event. It can’t be the old United or another PMA; it has to find its own heart. The place where the produce industry intersects with the top management of supermarkets is not an impossible dream and it may be a much-needed idea. But it is a long haul from where the produce industry is today.  pb