Much More Than Meets The Eye

By Jim Prevor, Editor-in-Chief, Produce Business

It is practically a truism that consumers often say one thing and do another. It is also true, though, that the actions of businesses are not in line with their own interests. This fascinating quote is a great example:

“According to FMI, retailers see a product and merchandising innovation as the No. 1 way to drive top-line growth and differentiation in a deflationary marketplace. This was ahead of pricing and promotional strategies, in second.”

Retailers are almost certainly correct in this assessment. So one would expect retailers’ procurement policies would focus heavily on supporting those producers that are highly regarded for product and merchandising innovation. In fact, however, the opposite is true; retailers are increasingly focusing on private label.

Now, why is this?

There are certainly a few retailers — Trader Joe’s comes to my mind — whose focus on private label is a focus on developing unique flavor profiles. This ability to offer a differentiated sauce or cookie can be a tremendous competitive advantage.

But in most cases, retailers are not developing unique flavor profiles… as much as possible they are trying to ape current branded flavor profiles that consumers already love. In fact, what private label is all about is removing a tranche of cost from the system — the money that branded producers spend on marketing and research and development.

With this expenditure gone, retailers can split the funds and offer consumers lower prices while making higher margins. This is true in most grocery items, but rarely so in produce, where margins were never that thick, to begin with.

In any case, whatever the margins are, when the retailers succeed in driving them out of the system, it leaves questions: Who is going to spend the money to develop new products for the category in the future? Who is going to market and fund merchandising efforts that will introduce these new products and expand consumer interest in the category?

In fact, the drive to a private label means less product and merchandising innovation, and that means a tougher future for retailers.

It is also true that we must carefully review the research results. Here is an example:

“In a produce-related example, Nielsen Fresh found retailers introduced more than 500 new organic produce items in 2015 with corresponding sales increases of 14.9 percent.

Although it is a little unclear what this precisely means, the opportunities for confusion abound. One possibility is that these 500 new organic items helped increase organic sales by 14.9 percent — great news! But, surely, these 500 items required space that had previously been devoted to non-organic produce – so how much did those items decline in sales when their space was reduced? Was there a net increase in sales – organic and conventional?

Another possibility is that retailers, anxious to reduce their SKU count, decided to handle only organic on low volume SKUs. So, previously they were handing, say, a conventional leek; some consumers were asking for an organic leek, but rather than take on the expense of procuring, warehousing and displaying a separate organic SKU, the retailer decided to eliminate the conventional leek and replace it with the organic one. Do this across a few items and a climb of organic sales of 14.9 percent is very easily obtainable – but the increase in total sales is much smaller because the conventional SKU sales in these categories are now zero.

Another thing to consider is the issue of price vs. volume. Most reports on sales are given in dollars, not pounds. Yet retailers are not only concerned with dollars; they want to know that the “share of stomach” in their service area is also going up. If 500 new organic items take the place of 500 conventional items, and if the organic items are priced 20 percent higher than conventional, and total sales of these 500 new organic items come in at 15 percent higher than the sales of the organic items they replaced, then although dollar sales are up, pounds of produce sold are down. And, most likely, this retailer’s “share of stomach” is down as well. That may not be a triumph after all.

Another issue is to distinguish between the substance of a program and its marketing. It may be true that, say, putting up signage with cut-outs of farmers and showing video and brochures highlighting local farmers may produce a sales bump. But from that story alone, we can’t divine the importance of “local” vs the importance of marketing. Perhaps cut-outs of a multi-generational Italian farmer, with videos and signage, would also be a story consumers would like. It is important in testing to try one variable at a time.

Innovation is crucial, and an enormous opportunity abounds for produce, where new varieties and new products are created by fresh-cut forms every day. But “tis many a slip ‘tween the cup and the lip,” so pay close attention to what the best information we have actually means.