March, 2009

Fruits of Thought

Good Decisions In Bad Times

When times are good, businesses often sustain money-losing operations. Partly it is because they can, as they have other businesses producing good profits. Partly it is out of an abundance of hope that with just a little more investment and tolerance of a bit more in the way of losses, the business will turn around and become profitable. Partly it is because closing down losing operations is often emotionally difficult, and it may mean admitting one was wrong or telling people who may have done no wrong themselves that they are fired.

Bad times tend to simplify such decisions. If core operations are no longer producing bountiful profits, the decision to not spend money one doesn’t have is fairly easy. These are company-by-company decisions, but on the production side of the produce industry they tend to group around a common theme: Fire the customers or customer segments that won’t pay enough to allow you to make a living.

Tanimura & Antle was ahead of the curve on this, announcing last winter that it would no longer sell to unaffiliated processors as the business wasn’t profitable. The months since have seen a bloodbath in Salinas, with River Ranch basically being taken over by the banks and company after company engaging in layoffs. Chiquita stock tumbled recently in no small part because of the results from its Fresh Express subsidiary, which included significant volume declines based on a decision to stop serving foodservice customers that are unwilling to pay a profitable price.

Now it is, of course, easy to fire customers and hard to get new ones. So careful attention has to be paid as to why these customers are unprofitable. If a producer’s food safety program is world class, its traceability investment is substantial and its focus on sustainability is meaningful, perhaps it may well be difficult to sell to customers that are not willing to pay for these values. In circumstances such as these, the whole industry has a stake in understanding why segments of the business are not profitable. In all too many cases, it is about buyers not being mindful of supply chain responsibilities.

Sometimes well capitalized producers intentionally sell cheap. They absorb losses as part of a “last man standing” philosophy, thinking everyone else will reduce production while they will gain market share until they are in a position to raise prices. It is a theory, but usually markets can remain cheap long enough to exhaust anyone’s capital. Mostly, though, producers sell cheap not out of any grand strategy but because they don’t know what else to do.

Some very progressive firms have transformed their whole businesses, striving to get away from being a pure commodity shipper. Producers such as Sun World have done this by focusing on proprietary varieties, and firms such as Mann Packing morphed into value-added powerhouses.

Sometimes it is as simple as deciding to no longer invest in areas earning inadequate returns and gradually transitioning to more profitable ventures. Of course, looking at the situation this way requires one to define oneself and one’s business in less limited terms. If one is simply only a “round, white potato farmer,” then one will certainly face challenges.

But that is very much an old version of the business. The younger participants are often very flexible, not looking to mimic Grandpa but looking for opportunity, which may be the silver lining to the recession. If this economic slump forces us to look at what we are really good at, to think about what customers really need, to open our eyes to how consumers think and to consider how new technologies can intersect with new business structures to create new opportunities, then the recession will lay the groundwork for great success in the years to come.

It can take courage to tell a customer no. But time and again, we have seen good producers get called back when the cheaper alternative turns out not to be so great.

One place producers need to start improving is gathering better numbers. It actually is not always easy to know which customers are really profitable. One customer may bargain hard for a bargain price, but live with it. Another chain may seemingly let you have more margin, but bother you every week for a new fee or booth at a trade show or a hundred other demands. One customer may make orders and stick to them; another can change them 50 times and then reject half the product. Only careful analysis can give insight as to where the real profit lies.

And, of course, today is not all that matters. Many companies wouldn’t talk to Bruce Peterson when he joined Wal-Mart, and it had all of seven supercenters; others partnered with Wal-Mart right away. It is not a coincidence that some of those early partners are now the biggest players in the industry.

Nobody wants to speak well of a recession. People lose jobs, homes, businesses, and many get hurt very badly. Yet the truth is that in tough times we all make the tough decisions that enable us to get better. What seems like terrible loss in closing operations is really like pruning little branches that were sapping strength from the main trunk. If you clear them clean, the fruit comes in larger and sweeter than ever.  pb