March, 2012

Fruits of Thought

Obstacles To Wholesaling

The world is filled with business books that detail how companies succeed. Yet most are of limited utility, because the very same companies that succeed typically go on to fail. Although in some cases, it is because success changes the company radically and the executives decide to abandon the methods that led to success. In even more cases, it is that the world has changed around the business, yet the executives keep doing the same old thing.

Such had been the case for hundreds of independent wholesalers. As a result, many no longer exist. The transformation of wholesaling has been glacial, so all have had fair warning. As soon as President Eisenhower unveiled plans for the Interstate Highway System in 1956, the writing was on the wall. All of a sudden, the need to buy a full rail car of product and have a location on a rail siding would disappear, and that would dramatically expand the number of buyers who could buy direct.

By the late 1960s and early 1970s, this author’s father, then a New York produce wholesaler, started opening supermarkets as he saw the writing on the wall with longstanding supermarket customers buying more and more direct, cutting out the wholesaler.

When Wal-Mart launched its first Supercenter in 1988, it set off a wave of consolidation as other retailers bought up regional supermarket chains. All of a sudden, there was no Vons, Stop & Shop or Dominick’s, as independent entities to sell. New York, with its enormous volume and diverse market, was mostly exempt, but many other parts of the country saw wholesalers with a much more limited customer base.

While wholesaling as an industry has been in trouble, individual wholesalers often began to do well in part because they consolidated the business as they became full line houses and took over the business of those who sold out or closed.

New obstacles have emerged now making it difficult for traditional wholesalers to thrive. One big change is that most major shippers now grow to program-sale schedules. They may turn to the street when they have an oversupply, but they used to have an oversupply every day — that is no longer true. Food safety and traceability issues have also led buyers to prefer steady-supply relationships. Although wholesalers can provide this — indeed many of those looking to provide this steady supply will sometimes fill in and buy on the street — it is not clear that wholesalers have a competitive edge in this area.

So does this mean that most wholesalers are done for? Not at all. Most produce wholesalers are small businesses. Large, high volume players in major cities can have annual sales well below $100 million annually; $50 million is very respectable, and many don’t have $10 million in sales.

What this means is that the success of these companies does not depend on macroeconomic factors or the strategic direction of the industry. It depends on the intelligence, initiative and industry of the owners of these companies and, often, of the intensity of the desire of the next generation to be there and to pass on the business to their children. If the thought is to stand on a dock waiting for customers to come and buy commodities, that isn’t a strategy likely to see much growth.

Many wholesalers have had the idea of getting into forward distribution, often because they find themselves with excess capacity and, done strategically, that can be a winner. Done randomly, though, it just converts the best shippers into a fee-based business. That can be problematic as the minute there is a fee on the P&L, all one wants to do is reduce it.

Where are the big opportunities for wholesalers? There are many. The trend to ethnic independent retailing is opening a large window for those willing to adapt. Niche items, such as specialty and organic, can make a wholesaler an everyday customer for those who wouldn’t normally buy. Buying a farm would even make sense, as it would let the wholesaler redefine itself as “direct” and then piggyback every other item on the order.

We would say the main strategic goal for a wholesaler is to identify must-have items difficult to procure on a national basis and then use those items to piggyback other sales. The two most obvious: Processing, especially fresh-cut fruit and custom programs, and locally grown programs. Nobody has been able to make fresh-cut fruit work as a national shipping item, so if a local distributor can become a leading local processor and packer able to do what customers need, often in small batches, it will wind up with the customer base and distribution network to do a lot more business. Same goes with local. These efforts are mostly a pain for big buyers. But if a wholesaler consolidates 100 sweet corn growers and can make volume programs, it will find the door open to customers it never would have had.

There are loads of profitable and successful wholesalers all across the country. They are the survivors because the owners adapted to a changing world. If the next generation wants to continue this legacy of family business leadership, its obligation will be to adapt once again.                 pb