Riding The Roller Coaster:
Roberta Cook Of UC Davis Explains How Economic Fluctuations Create Marketing Opportunities
Jim Prevor’s Perishable Pundit, November 4, 2011
Each industry is given little gifts. Some force of history or fortuitous circumstance brings forth something incredibly good, which we have done nothing to deserve. Such a serendipitous occurrence brought us, in the produce industry, Roberta Cook.
What an incredible honor she does us by speaking at the inaugural Global Trade Symposium held in conjunction with The New York Produce Show and Conference.
We asked Pundit Investigator and Special Projects Editor Mira Slott to get us a “sneak preview” of her talk:
Dr. Roberta Cook, PhD
Cooperative Extension Marketing Economist
Department of Agricultural and Resource Economics
University of California, Davis
Q: What are the key issues you’ll be discussing at The New York Produce Show & Conference?
A: In terms of my talk at the Global Trade Symposium, I want to delve into several issues. There will be a lot of international attendees and a couple of high profile speakers addressing global trade themes. Of course any domestic player who sells imported produce is touched by global trade. Any domestic player that buys US produce is in competition with global buyers, so he too, is touched by international trade. A good niche for me is to focus on the U.S. market and top food industry trends. I’ll highlight those trends to set the stage for how they are impacting the industry.
First is the recession and economic downturn and its impact on produce sales in the U.S. Then I’ll look at international trade, produce trends tied to global issues and the potential impact of recessionary problems abroad on the U.S. market, showing data on imports and exports and how that has changed.
These market structures are relevant to retailers as well as those on the shipper/grower side. Retailers in the thick of it can benefit from more detailed information.
Q: What are the most significant structural changes affecting the competitive environment? And what information will most benefit Northeast produce industry executives attending your presentation?
A: One outgrowth of the economic downturn is the accelerated growth of private label, so I’ll have a section on the consequences of that in my presentation. I’ll also discuss select fruit and vegetable trends, and the share of production of fresh vegetables by state. This will be important for context of where the Northeast fits in the competitive landscape, and in the growth of local markets.
California accounts for one half of the value of fresh vegetables produced in the U.S. and about one half of the value for fresh fruit as well. The latest data on fruit has just come out. I always anxiously await the latest data to use and manipulate for different calculations.
If you’re involved in selling fresh produce or marketing it, the structural changes are momentous. A fewer number of buyers are purchasing products, and chains are changing how they buy, coinciding with growth in private label and issues on the production side.
If you’re a Northeast player, you’re not in the dominant part of the industry in terms of who controls supplies, and who is controlling a lot of import deals as well. It all ties together.
Coming back to select fruit and vegetables trends, I have some targeted information on per capita consumption trends and on specific products that would be particularly relevant to the Northeast produce industry, such as what’s happening in production and imports/exports for romaine and leaf lettuce. And I plan to discuss fresh broccoli trends. Broccoli would be of special interest because it ties into Miguel Gomez’s presentation.
Q: How is per capita consumption changing, and where is the growth?
A: While there is a gradual increase of consumption over time, it is also shifting and there is product substitution of consuming one over the other. The products losing out are ones that have been high in the past. For example, carrot consumption trends are declining but growing for chile peppers. I will give attendees a feeling of the mix and of how it’s shifting. I have scanner data for the top 10 fruits and top 10 vegetables to highlight relative values of commodities.
Q: You’ve no doubt sparked attention of some of our readers, who are trying to come up with that list of the top 20…
A: Well, I’ll get them started. The Number One product, including vegetables, is now berries, which might surprise some.
As the last section I have for my presentation, I will want to examine information on consumer trends, and also touch on local and organic, in terms of consumer attitudes.
Q: Returning to the economic downturn, how is this translating to consumer purchases?
A: A top food industry trend relates to shoppers migrating to retailers with strong value credentials. This is not new but really accentuated during the recession.
Q: When you say strong value, does that mean price?
A: I don’t like to say price. A product could have a higher price but represent good value. For example, demand for fresh is growing during the recession. Whole Foods was negatively hit but has been able to turn around.
People are paying attention to the price they are paying for goods and where they get the most value, and many retailers have lowered prices to close the gap with low-price competitors, but haven’t done so in a manner that works best for them.
Q: What pricing strategies are they employing?
A: New pricing initiatives include more every-day-low-pricing — Wal-Mart’s concept — from retailers that never did this in the past like Safeway. Price-impact stores are implementing a variety of retail strategies, and non-grocers are going into perishables.
Retailers are scrambling to offer what means something to consumers. They are trying to develop more effective pricing strategies and ads that will represent values to consumers.
Q: Produce is such a low-margin industry to begin with. How much room do they really have to slash item prices on the retail shelves? Don’t they have to look at other cost-cutting measures?
A: Cost-cutting is widespread. Retailers have been trying to retain margins; all formats have been affected by the economic downturn. We may technically be out of a recession but consumer behavior hasn’t changed.
All retailers have experienced downward pressure on margins. When firms start to cut costs, if they don’t understand how that affects performance, they may lose consumers and get migrations to other formats.
Now retailers are trying to focus on efficiency gains and become more productive, and they’re utilizing information technology to become more efficient.
One way to cut costs is to lower the inventory levels. SKU rationalization, referred to as SKURAT, is being implemented very aggressively by retailers, including Wal-Mart. Even the value-oriented retailers have experienced SKURAT.
One of the ways if you’re a retailer to generate more revenues is to free up inventory because a retailer has millions of dollars invested in inventory in its stores. We’re seeing chains getting rid of lots of items on the shelf that are tying up inventory.
Q: Is this just category management intensified? Couldn’t that strategy backfire if consumers were going to that store because of the selection?
A: Very painful lessons have already been learned in the last two years by Wal-Mart. Wal-Mart eliminated 15 percent of its SKUs, and now it’s announcing to its customers it is putting the SKUs back in.
Even though they gained shoppers during the economic downturn, they lost existing customers to competitors. Channel blurring trends have been going on for two decades but it is now accentuated.
Wal-Mart changed how it merchandised; going more to private label and deleting SKUs. In doing that, it alienated its core, loyal shoppers. There’s a reason that Wal-Mart has shown negative same-store growth for 13 quarters in a row.
Q: But in an economic downturn, doesn’t a chain like Wal-Mart usually shine when consumers are forced to tighten their purse strings and just shop for the staples?
A: You bring out an important point. This is not intuitive. People would have thought Wal-Mart would have been one of the few successful retailers.
This relates to retail strategies, scrambling to what represents value to consumers. There was this big wave to SKURAT. Supervalu did it aggressively. These retailers are already reevaluating strategies.
I like to make this point: I’ve been watching the industry since 1985, and I’ve never seen a time of more dramatic change concentrated in such a short period of time.
Q: That’s quite a pronouncement. Could you expound on this?
A: Within this turmoil, there is massive retail corporate restructuring to generate cost-savings and efficiency gains. We’re seeing a lot of buying systems, including fresh produce, in flux right now, with retailers changing how they procure and merchandise produce. This presents important implications for suppliers, which are very retail-specific. Each chain is doing something different.
Another major trend is store brand private label. That’s one way retailers have tried to provide value to their customers by utilizing private labels to offer lower price points and gain consumer loyalty. Private label is not new but is also accelerated during the recession.
Q: But this isn’t the first time we’ve had a recession or severe economic volatility. Why is the speed of change so jarring now?
A: The economic downturn really increased pace-of-change. In other downturns, we saw retailers making adjustments at the margin. This case is dramatically different because retailers are so dramatically impacted.
Years ago, we didn’t have all this channel blurring. The recession affected all retailers the same. As this recession hit, we were already in a more competitive retail environment so it hurt retailers of all types. Conventional chains didn’t use to have all this competition.
Q: What are the solutions?
A: I’ll address the basic bottom line. It is very important to be account-driven in marketing strategies if on the supply side; where as in the past, shippers sold commodity products the same way to different customers. Now success requires an understanding of the needs of specific accounts and trying to work together with those key accounts to improve performance with their category of products.
As a supplier, if you can focus with key buyers on how to sell more effectively to consumers, then it is possible to do a better job providing the right product at the right price at the right time and at the right place.
We have these big retailers and in the market structure section of my talk, I show just how few buyers we have. They have multiple divisions and banners, and different consumers serving even within those banners, and we haven’t exploited information technology of how to merchandise in store effectively.
Chains in the past were too broad in their marketing strategies, not getting down to the needs of shoppers in each different store. We’re seeing more information sharing between suppliers and retailers working together on how to better serve consumers, and in that process, there can be a reduction in shrink.
Q: How do sustainability strategies fit in the equation?
A: Sustainability is a global trend as a means to become more efficient, and a whole mantra driving non-value-added costs out of the system. When you consider shrink, just think about the specific pronouncements by Wal-Mart of the percentage it wants to reduce shrink globally and domestically as a way to be more sustainable; from new construction methods to eliminating waste, covering every aspect of doing business.
Q: From all you will be covering during your presentation, it sounds like we should add a few days to The New York Produce Show and Conference! You certainly will stimulate intriguing conversations. If you had to pinpoint the most pressing challenges facing the produce industry, how would you break those down for each segment in the supply chain?
A: The biggest challenge is to become consumer-centric. From the perspective of the grower/shipper, typically in the past when I would speak with California growers and ask, who is your customer, they would joke, the back of the truck. That is changing. Suppliers are much more focused on who they are doing business with, and strategically on accounts they serve.
As buyers become more consolidated, it becomes more and more challenging for smaller shippers to compete with large companies for mainstream products. Therefore, as a shipper, as you start partnering up with key accounts, you have to think strategically about the ones you’re not going to serve anymore. You can’t spread yourself too thin. It is very important to not short your key accounts. Now we have shippers doing account analysis looking at profit-and-loss statements per account, asking, which retailers are the best options for us?
Q: With all the economic volatility and strategic turmoil you describe at the retail level, can’t those profit-and-loss statements change on a dime? Isn’t there a dilemma that suppliers face when there is a consolidated buying pool? Suppliers wrestle with hedging their bets rather than putting all their eggs in one large retail basket. If Wal-Mart is restructuring its buying strategies away from long-term contracts to have greater flexibility on procurement, couldn’t that put a supplier at risk?
A: What you describe happening at Wal-Mart is absolutely true. But more generally, I always hear suppliers say loyalty is not a two-way street.
Retailers have to think much more strategically to have enough of the product they need. Markets can change week-to-week, day-to-day. Nevertheless, there is more pressure today for vertical coordination through the system. The long term trend is toward greater vertical coordination, which will continue to drive out costs.
The Wal-Mart model is a strategy to drive out costs. And now we have other retailers focusing on that as well because pressure to compete is so intense. One of the ways is trying to work more closely with key supplier accounts and going more direct to the source.
I do observe with top food industry trends, conventional retailers experimenting with formats oriented to ethnic groups. Almost all chains have developed a format for the Hispanic population. Retailers are using information technology to have the right product at the right price tailored to individual stores; where in the past, chains would make blanket decisions, putting a certain percentage of organics in every store, which didn’t make sense.
In looking at projected ethnic population trends, I did analysis on data I got from the Census showing average annual expenditures by race. Asians and Hispanics spend a lot more than Whites and Blacks. Hispanics have larger families and are shopping more in retail stores and eating out less. In regard to Asians, there is a lot more consumption of fruits and vegetables.
Q: Don’t these demographic shifts provide an opening for niche players?
A: There will still be independents doing a better job of serving ethnic markets. Overall, we need to become more consumer-centric, and this has to happen at all levels of the supply chain. Wholesalers play that role for independent retailers and restaurants.
The whole trend is to drive out non-value costs. If you can add value, you’re relevant. You can have very successful wholesalers and independent retailers.
Everybody has to figure out how they can add more value than their competitors. They have to think much more strategically and become much more focused.
There are a lot of risks putting all eggs in one basket. This is a critical point that buyers are few and larger, which is challenging for firms. Some firms are making the decision they don’t want one customer representing more than a certain percent of their business.
In my presentation, I will give my latest estimate on losses in the U.S. distribution system. It comes back to shrink. We always talk about the U.S. having the most efficient distribution system in the world, and we might, but regardless, we do have significant losses in the fresh produce system.
Average retail shrink is six percent. That’s a general number, as it’s hard to estimate it since each retailer is different. Our industry has been forced recently to think much more critically of how we can increase efficiency in the system. We have to strategize on how we can buy and sell more efficiently and how suppliers and buyers can interact more efficiently. Every firm has to do that.
Leave it to Dr. Cook to point out that which is both obvious and often unseen:
First, that a knowledge of global trade is not only important to people actually importing and exporting. Every supermarket, for example, even if it does no direct importing, is buffeted by global trade every day. Is the rising middle class in Brazil, Russia, India and China — the so-called BRIC countries — going to compete for the best Washington State cherries? That drives up prices and limits supply. Is a depression in Europe going to reduce demand for Chilean, New Zealand and South African produce — that fruit will be looking for a home, some of it in North America — that creates opportunities.
Another session in the Global Trade Symposium focuses on the global chain for proprietary grape varieties. We wrote about the Grapery, Mack Multiples and Sainsbury’s efforts with the Cotton Candy grape here. One high end US retailer called and asked why he didn’t get the deal. How about this for a theory: If one does a promotion with a US chain nobody but Americans know about it. If you do a promotion with a UK chain, everyone in South Africa and 50 other grape-growing countries hears about it. In the global market for grape varieties, releasing volumes to a British chain willing to do a big promotion, is a great way of getting growers around the world interested in planting certain grape varieties. A powerful example of how international trade in intellectual property can impact in which country grapes get marketed.
Second, the key issue is a reduction in the number of high volume buyers and the question is how producers ought to deal with that situation.
Dr. Cook points out the importance of not shorting key accounts. She is right, of course, yet when Mexico had its freezes and product was very short, we saw lots of vendors intentionally pulling product from their biggest customers to divert to small guys. Why? Well, they didn’t have enough product, so they were going to have to short Wal-Mart’s order by 72%. But Wal-Mart bought so much that if they shorted Wal-Mart 74%, they could supply hefty allotments to smaller chains such as Wegmans or Schnuck’s. They figured Wal-Mart would be equally upset with a 72% or 74% short, but they could win a friend at a smaller chain.
More broadly, we are especially interested in hearing Dr. Cook expound upon this search for efficiency. Wal-Mart’s problems in this area are, we believe, related to a failure to customize the response to the concept. It may be true that Aldi or Sav-a-lot can operate inexpensively by keeping assortment low.
We are not certain that this knowledge tells us very much about what we ought to put in a 200,000 square foot supercenter.
One other interesting point about being consumer centric is how being international can play into this. Both HEB and Wal-Mart have used intelligence gained in serving Mexicans in Mexico to do a better job with first generation Mexicans in the US.
If you want a treat, come see Roberta Cook’s presentation. Let us know you would like to attend the Global Trade Symposium right here.
You can register for everything The New York Produce Show and Conference offers right here.
Hotel rooms here.
And travel discounts here.