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Memo To Supermarket CEOs: Don’t Kill The Goose That Lays The Golden Egg... Overpricing All Produce Items To Support Cheap Banana Prices Is A Disaster Waiting To Happen

Jim Prevor’s Perishable Pundit, September 22, 2011

The produce industry is facing a serious threat — at the hands of top supermarket executives. CEOs are demanding that produce directors and VPs lower banana prices as a signal of overall price competitiveness for the store, but then expect the same directors and VPs to make up the margin on other produce items, this is resulting in other items being overpriced, thus hurting volumes and new product innovation.

Bananas are by far the Number One selling produce item, and it is not uncommon for bananas to account for 1% of total store sales.

Other categories, such as berries or tomatoes, may often rank higher than bananas in produce but that is because these categories include many different items. So the berry category includes strawberries, blueberries, blackberries, raspberries and sometimes organic versions of these items, plus some specialty berries. These often have many SKUs representing many different package sizes.

Though some firms sell red bananas and others specialty and organic bananas, they are typically such minor items that the standard Cavendish bananas stand as a one-item category.

There was a time in which bananas were also the profit powerhouse of the department, producing generous gross margins to go along with high sales.

Although produce directors would, of course, sometime put bananas on ad, they were mindful that it was difficult to make up margin lost by advertising a high volume item with increased sales or profits on low volume items. Yet, with the growth of Wal-Mart, deep discounters such as Aldi and Save-a-Lot and the general intensity of competition, top supermarket executives see banana prices as a key signal to consumers regarding the price competitiveness of the overall banner.

They may be right. We’ve made the same point many times, including when a recent visit to Wal-Mart Express led us to an Aldi undercutting Wal-Mart prices on bananas. You can see that article here.

There is absolutely nothing wrong with a retailer deciding it wishes to offer low prices on particular items. Even utilizing bananas as a loss leader is not immoral.

However, if the purpose of offering low price on a particular item is not to maximize produce department profitability but, rather, to attract consumers to the whole store, then the store has to subsidize the loss of margin on bananas out of a whole store marketing budget.

Now some CEOs think that the banana companies can be ordered to accept lower prices, and typically businesses try to accommodate the needs of their customers. Yet, rest assured, though one can get contractual changes, in the end those changes have to be paid for, and the retailer will wind up paying on some product, at some time, in some way.

Everyone — from the First Lady to the retail produce executives and their superiors — would like to see higher produce sales. One important factor that stands in the way of produce reaching its sales potential is that top supermarket executives — in their quest to one-up the competition — are demanding that their produce executives both give away bananas at ridiculously low prices and, somehow, make up the margin within the department.

This means that the rest of the items in produce are priced too high as they have to make up this margin. This weighs disproportionately on new and innovative products and burdens all the rest of the department.

Other categories have been severely damaged by this dynamic. Competition in “wet salads” in the deli, for example, led to intense pressure to sell potato salad, macaroni salad and coleslaw with no margin or negative margins. Since pot, mac and slaw are the big volume-drivers in the department, this created the pressure for very high mark-ups on specialty salads that account for just a small portion of the category.

Whether in wet salads or produce, this dynamic always leads to a reduction in innovation as new low-volume products often are forced to struggle with excessively high-margin requirements. It also serves to distort sales in the department as high prices for everything from berries to tomatoes to potatoes depress sales. It also opens the door for competitors from Walgreens to farmer’s markets to not be so out of line on prices on these non-banana items.

Supermarket CEOs should act to make sure that their overall store promotional needs are paid for by the overall store promotional budget and that, in the desire to be cheap on bananas, the stores don’t kill the rest of the department.

Of course, it should be noted that there is a paucity of data supporting the notion that giving away produce is an effective means of enhancing a store’s price image. A cheap price on Coke or Tide clearly tells consumers that they are getting a bargain. A cheap price on bananas might raise the issue of whether the bananas are not really the best.

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