January, 2009

Fruits of Thought

New Face Of Retail

Are retailers integral parts of the produce industry or just customers of the produce industry? It is a question on which practically everything depends, and 2009 may be the year in which a great divide between buyers and sellers becomes evident. The new year may also find established industry institutions unable to cope with the change, and new rules of engagement may have to be written.

The produce industry has long been a unique place in which buyers, especially retail buyers, have been perceived as engaged participants of the industry. This perception was justified by the specialized nature of produce. Because expertise in produce was useless in most areas of retail, people who developed produce expertise either stayed in the produce end of retail or went to work on the production end of the industry. It was rare for retail produce executives to wind up running greeting cards or canned goods at a retail company.

In addition, the fast pace and specialized nature of produce encouraged most senior executives to avoid produce. They didn’t understand it very well, certainly couldn’t improve it much and so were content to demand a contribution to overhead and let the produce experts figure out how to make it happen.

This exceptional relationship, where buyers are both customers and part of the industry, has long been illustrated neatly by the unusual nature of produce trade associations. Most trade associations are horizontal. The Food Marketing Institute, for example, represents supermarkets; the National Restaurant Association represents restaurants. Although vendors may exhibit at trade shows, sponsor industry events, etc., they have no vote in these associations and are seen as representing a distinct industry.

In contrast, the produce trade associations have always seen themselves as vertical associations, with full voting membership running the full course of the industry from farm to fork. This vertical integration has been of enormous benefit to the industry. Whether the issue is traceability, sustainability, food safety or any other supply-chain issue, the integration of the buying end of the business in consensus building has moved the industry toward solutions for these supply-chain issues.

Yet now, one senses a divide. The obvious spark for a change is the economy. As retailers have repositioned themselves as deliverers of ‘value’ to consumers, the supply-chain commitments that once were sincere initiatives now seem to be washed away in massive corporate commitments to beat any price.

The overt story is simple... and serious. Many buyers, though sincere in their desire to see supply-chain improvements, are unwilling to constrain their supply chain to only those producers and vendors that have implemented such improvements. It is not really that the buyers want to purchase from sub-standard producers; it is that they do not want to give up the bargaining leverage fostered by a willingness to buy from anyone.

This creates an untenable situation. The best growers, the best packers — the ‘class’ end of the industry that invests heart and pocketbook into doing the right thing — are compelled to compete on price with producers that make no such attempt.

This issue is at the heart of the economic problems of production agriculture. The underlying story, however, is more complex.

On a personnel level, the skill sets required by a buyer of, say, fresh-cuts at Wal-Mart would scarcely be recognized by an old-time produce buyer. The spreadsheets and reports are not very different from those used in lingerie or toy sales. So we can expect many retail executives to find opportunities in places other than produce.

The growth of contract buying, the use of UPC-coded clamshells and bags, the plethora of laws and regulations related to nutrition or country-of-origin labeling, the increase in 52-week supply and the growth of larger suppliers capable of year-round supply and a broader line of items — all these make produce less ‘exceptional’ in a large retailer and thus make top retail executives more willing to get involved.

If you take Wal-Mart, as the largest buyer in the industry, and you think about the loss of experienced industry executives such as Bruce Peterson, Bob DiPiazza, Wayne McKnight and Danie Kieviet, it seems, from a produce industry perspective, an enormous loss. Then you realize that Wal-Mart didn’t move quickly to find more produce experts to replace them. One has no sense that top executives at Wal-Mart think having been

Chairman of PMA is a meaningful credential for its top produce executives.

In good times there is margin for fluff but in bad times the mettle of men... and of companies... is fully disclosed. Wal-Mart sees this as its time to shine, when its relentless pursuit of value can win customers. If some big producers suffer because Wal-Mart lowers a standard for a cheaper producer to sell to Wal-Mart, well so be it.

The same thought process is true of many retailers. The great heyday for retail involvement in the trade was with VPs of regional chains — Vons, Dominick’s, Stop & Shop, Grand Union. There are a few left, including Wegman’s, from where PMA’s current chairman hails, but they are few and far between.

Today’s problem is retailers’ willingness to see top producers suffer even when they invest to meet supply-chain needs. This is a consequence, however, of produce leadership perceiving their futures in retail rather than produce. That is a problem with consequences not likely to dissipate when the economy turns around.  pb