The Financial Times has an article titled, Walmart Aims to Cut Supply Chain Cost, that reports on Wal-Mart’s efforts to reduce supply chain costs.
First, the piece highlights Wal-Mart’s intention to avoid third-party procurement companies:
Walmart is launching a drive this year to cut billions of dollars of costs from its supply chain by combining its store purchasing across national frontiers in a new stage in the globalization of its business.
The effort is part of plans by the world’s largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than through third-party procurement companies or suppliers.
Eduardo Castro-Wright, the head of Walmart’s US stores, has said that the retailer sees the opportunity to consolidate global sourcing as “a major source of leverage for the company in years to come”.
Second, the article speaks to Wal-Mart’s intention to use multi-national regional buying and negotiating to reduce costs:
By the end of the year, the retailer plans to be directly purchasing sheets and towels for its stores in the US, Canada and Mexico, as well as its clothing for its Faded Glory line and for licensed Disney character clothing.
It also plans to expand initial combined purchasing of fresh fruit and vegetables for its stores in the US, Canada and Mexico, after an initial pilot test with apples that it says led to a 10 per cent reduction in purchasing costs.
Third, the report explains that Wal-Mart wishes to expand direct importing:
The direct purchasing of fresh produce, using procurement offices in producing countries such as South Africa, New Zealand, Brazil and Chile, builds on the established practices of the company’s Asda subsidiary in the UK, which in turn reflects the higher use of direct sourcing in Europe.
In a piece about Wal-Mart titled, SPECIAL EDITION: Wal-Mart’s Global Food Sourcing Initiative Closes The Peterson Era And Threatens Sustainability Of Agricultural Base, we spoke of Wal-Mart’s efforts to transform procurement with a pilot project on apples in Washington State. The gist of the change was that instead of a relationship-based system, Wal-Mart would basically put its supply contract out for bid. Now this article says that Wal-Mart is claiming that the pilot project is saving it 10% on the cost of apples.
When Wal-Mart looks to create supply chain efficiencies, it not only helps itself, it helps the world. So, if there are intermediaries that are not adding value, then Wal-Mart should try to buy direct.
The produce industry is very complicated, though, and neither the top executives at Wal-Mart nor the reporters at the Financial Times are really able to assess the success or failure of the efforts to reform the produce supply chain.
Although the claim that apple procurement costs went down 10% in the Washington pilot project is mysterious — how, after all, could Wal-Mart know what its procurement costs would have been under an arrangement it never entered into? — the bigger point is that even if Wal-Mart’s number is correct, it is surely only a portion of the story.
There are so many other factors that go into successfully running a produce procurement operation. For example, very often suppliers provide product that exceeds the required quality specification. What if suppliers provided just a tiny bit lower quality product — still meeting spec — but lower than they would have provided their best customer? That tiny deviation in quality multiplied across millions of Wal-Mart shoppers results in less satisfaction with the Wal-Mart experience, and what is the cost of that?
Or what if some future day there is a shortage of a size or variety and Wal-Mart’s competitors get a slightly higher allocation than Wal-Mart would have under a relationship-based system. That means Wal-Mart stores would be out of stock and competitors in stock. What is the cost of that?
In addition, in produce you can’t look at one procurement system versus another over a couple of months. You have to look over many crops of varying conditions. The Pundit Grandfather was a major auction buyer in New York City and, for decades, the President of the Fruit Auction Buyer’s Association, and what he taught the Pundit about auctions is that they tend to go to the extremes. We wrote about the issue in Pundit sister publication, PRODUCE BUSINESS:
In times of surplus, auctions tend to depress prices. In times of shortage, auctions tend to drive prices higher. The reason is simple: Auctions remove the element of personal relationship from the transaction of a sale.
No seller ever gets more for fruit than what he asks for, and a sales organization, looking to keep its customers and maintain good relationships, will not want to seem abusive by raising prices excessively when a market is short. They will raise prices, but nothing like what an auction can do when supplies are scarce. Equally, a marketing organization anxious to keep its shippers in business is unlikely to drop prices as quickly as they would fall at an auction. In addition, buyers are likely to fight harder against rapid price increases and be more tolerant of slow price declines when dealing with the same sales organization week after week. At an auction, however, cloaks of civility fall aside. The most loyal buyer will ram a knife in the heart of his best supplier and still point out that he paid a nickel more than anyone else.
You can read the whole column here.
The point, obviously, is that if one has a relationship-based procurement system, prices tend to both rise slower and fall slower in response to market changes than in an auction system. So, during a time of surplus, an auction-based procurement system will tend to produce savings, but during times of tight supply it is going to cost more, much more.
For all kinds of reasons, Washington apples are among the easiest items to procure. As the VP of Produce at one of America’s largest chains commented to us when he read our original piece on Wal-Mart’s experiment in Washington, “Apples are not raspberries.” Put another way, even if the savings were real on Washington apples, that would say precious little about the applicability of this system to the procurement of other items.
Finally there is an obvious Achilles heel to this 10% savings claim. The producer doesn’t generally make a 10% profit if one loads in the cost of capital. So this reduction in price, if real, can’t simply come from producers agreeing to profit more modestly. It has to mean that the producers, due to supply and demand, are accepting a loss in order to avoid the bigger loss of dumping product.
To put it another way, this mode of procurement — if it produces a 10% lower cost of produce — is a violation of everything Wal-Mart purports to believe about sustainability. It goes beyond price, it doesn’t give producers the assurance they need to invest for the long run. It encourages them to do anything to beat the other bid, whatever the long term implications.
The truth is that when it comes to produce, Wal-Mart is wildly overestimating the impact of volume — at least over the long term. The Financial Times article quotes the head of Wal-Mart’s US stores:
Mr Castro-Wright has estimated that shifting to direct purchasing could reduce costs by 5-15 per cent across the supply chain within five years — suggesting potential savings of $4bn-$12bn if the retailer were to meet its long-term goal of shifting to sourcing about 80 per cent of purchases directly.
This may be so, but in produce Wal-Mart is not buying any more “direct” than it used to. It is simply negotiating with its focus now on short-term pricing rather than utilizing long-term affiliation to develop secure supply sources with desired quality and brands. Even the profit to be gained from direct importing is mostly a chimera. Typically US importers of product, such as Chilean fruit, operate on consignment so they are really just functioning as the sales force. Eliminating the US company doesn’t eliminate the function of importing and sales, so the intrinsic savings are few.
The Financial Times piece makes the case for Wal-Mart’s scale to produce great savings:
With annual sales of more than $400bn, Walmart is famously tough in negotiating with its suppliers, exploiting the scale of its buying to gain discounts.
Yet in produce the actual sustainable reductions in price one gets from increasing orders dissipate quickly as volume increases. If one goes from buying one case a day to two cases a day, there are big savings because the cost of selling — the salesman talking to the buyer, providing samples, sending an invoice, collecting the money… all get cut in half.
So there is a steep reduction in cost as one makes selling and transport more efficient by buying in larger quantities. But once one exhausts these efficiencies — the sales cost is insignificant, the transport is the most efficient, say a trailer load or a railcar full or a charter boat full in different contexts — there is no longer any savings to be gotten from higher volume.
For a while, increased volume, especially used wisely, may continue to get cheaper prices because the competition for the customer — and hope that eventually they will pay more — leads to a highly competitive market. Plus these midsize buyers have the flexibility to clear out relatively small lots of produce that, for some reason or other, vendors want to be rid off.
Think of the independent chains, some of which we talked about in this PRODUCE BUSINESS cover story. They speak to a wholesaler or a shipper and get offered an $8 price as a special deal because the wholesaler or shipper is looking to clean up a lot. The buyer asks how many they have and then offers $6 to clean up the volume. This sale may well be unprofitable for the vendor but is necessary to liquidate inventory either to make room for new product or to avoid dumping product.
As volume continues to increase, however, those unprofitable sales cannot be sustained. In the produce business, it is very helpful to have a guy who will always buy your product — even at a distressed price. We recall, as a major importer of honeydew melons, the value of having a fruit salad guy willing to buy. Though these sales can be useful for a few percentage points of one’s volume, most of the sales have to pay a price sufficient to support the business.
So, cumulatively, Wal-Mart, Kroger, Safeway, SuperValu and Costco cannot buy below the market — they are the market — and they have to pay a price sufficient to incentivize the necessary investment to sustain the companies and keep production in line with consumer needs.
The problem here is that the executive incentives at Wal-Mart are not in sync with the multi-year investment horizons on products such as apples. In the short term, the decision of Wal-Mart to engage in an auction-like procurement process may well result in buying cheaper.
Long term, however, the uncertainty as to whether a company will have a market for its products will discourage investment in orchards, packing houses, etc. This will lead to higher prices, but the connection to Wal-Mart’s policies will be too difficult to decipher and, in any case, those who made the policies at Wal-Mart will be off to other jobs.
Each year, the PMA FIT Leadership Symposium — presented in partnership with Cornell University — provides the industry with a unique form of leadership development. The program brings experts who are not experts in the produce industry together to stimulate the intellectual juices. This is very important because otherwise the industry stays in its internal feedback loop. New ideas, new ways of thinking and new ways of confronting challenges and finding opportunities combine with great networking to cause the program to attract many returning participants year after year:
Last year, we previewed the Leadership Symposium by running some interviews with the 2009 speakers:
Leadership Symposium Offers Stimulating Speakers
PMA FIT Awards 1st Tip Murphy Scholarship: Michael Engeman Of LaManna In Australia To Attend Leadership Symposium
Scholarships Offered To Attend PMA Leadership Symposium In 2008
PMA FIT Kicks Off New Year With Leadership Symposium
Produce Leadership For All Ages
This year we wanted to profile a speaker who arrived in the US with a suitcase, one hundred dollars and without speaking any English… and has built a very successful career specializing in something he calls “relationship economics.”
We asked Pundit Investigator and Special Projects Editor Mira Slott to get a little preview of his approach:
Q: How does your expertise apply to the produce industry?
A: I’ve worked with transportation, logistics and other supply chain folks, and several packaging companies, but as far as growers, hands-on in the field, no. What I’m an expert in, and the reason I think I’m speaking at this 2010 Leadership Symposium event, is the topic Adaptive Innovation — getting from Point A to Point B, branding, packaging, marketing, positioning, people and business dynamics, processes and process change.
Q: Could you highlight key strategies and lessons you’ll be sharing with attendees?
A: Let me give you some talking points, some bullet points. I define Adaptive Innovation as re-inventing your business model, your revenue model and your value proposition through a circle network, through a strong, diverse, value-based portfolio of relationships. And more prudently, the fact that innovation is not an event; it is ideally a repeatable proposition that doesn’t have any one weak link.
Let me take a sidestep; if you think of Apple, a lot of innovation that comes from Apple is Steve Jobs, and we all saw when he took a medical leave, everyone was questioning and everyone was concerned whether Apple could remain the innovative company it is without this really forceful figure.
A company needs to be scalable, leverage a social network and build and execute a repeatable process. I break it down into five critical steps: Number One is value creation. You have to get succinct value. I hear too many times from the produce industry that lettuce is a commodity. Getting lettuce from field to store is not the value; you need to understand the value chain and work on value-chain disruptions. If you don’t, someone else will. What is the added value, what is the perceived value?
Q: Doesn’t that first require you to define and understand your markets and customers? Is your goal to meet perceived needs and desires; or beyond that, to create new value yet unrecognized or undiscovered?
A: You cannot date everybody. Unfortunately, the produce industry often has a trunk-and-tree mentality, spreading out more and more, growing branches so far away from what the company is really good at, and that’s how branches start breaking.
Wal-Mart knows who it’s trying to date; it drives that mission, which is unequivocally the low-cost leader, and understands value creation very succinctly.
Q: Is Wal-Mart’s supercenter concept an example of the scalable, repeatable process you speak of, which it leveraged across the globe for more than $100 billion in profits?
A: Number Two is developing very unique differentiators. And I emphasize, absolutely unique. There’s no confusion with Wal-Mart. People can’t compare Target to Wal-Mart.
Q: Didn’t Wal-Mart at one time test more upscale product lines promoted in chic fashion magazines, which fizzled? Were the executives wrong for trying to broaden their core customer base, or in doing so, did they risk confusing their established, diehard consumer following?
A: You’re right that Wal-Mart’s higher-end strategy flopped, but I make a strong argument that experimenting and failing is not bad, in fact it is critical to moving forward.
Q: So for companies to reach new plateaus, management must encourage risk-taking and pushing the envelope. Couldn’t that involve plowing resources in potentially futile projects? Won’t employees want to align themselves with initiatives designed to guarantee a high chance of success upfront? Further, in publicly run companies, I’d think pleasing the stockholders with profitable returns could create additional pressure against botched short-term projects…
A: Number Three, failure is part of the process; it provides an opportunity for informal learning, yet a lot of organizations frown on employee teams failing. In a commodity-heavy business, calculated failure is important. In trying, you lost batches of produce, but you learned how to do it better next time.
The American Society of Training and Development (ASTD) will tell you the impact after experimentation and failure is change of behavior. Studies have shown that 86 percent of what you’re exposed to in class you forget in 30 days. Contrast that to what you learn on a daily basis, in the field or supermarket or restaurant. That is when a light bulb goes off. Failure has enormous value; you have to have confidence to fail.
Q: I’ve heard you speak of Encyclopedia Britannica’s tenured reign utterly collapsing in the wake of free Internet information fueled by search engines, coupled by the company’s complacency to the Wikipedia phenomenon and an inability to adapt to a changing world. How does a company protect itself from such demise? From food safety issues to debilitating droughts and freezes, the fresh produce industry faces unique challenges….
A: An overwhelming road block is mindset. Number Four is the idea of what I call a signal scout; unfortunately a lot of companies look at revenue, what you generated last month. This is a rear view mirror mentality, or a lagging indicator. There needs to be a shift in mindset to leading indicators. What is the car three cars ahead of me doing?
A lot of people know how to get industry trends, but don’t know what to do with them.
How do you bridge the gap between identifying a trend and adapting faster than the competitor?
An analogy is sending college scouts to high school games because you want to identify those winning players. For the produce industry, obesity is a big issue and so is eating healthier, but companies have to be savvy enough to tie those trends into unique, value-added business strategies.
Q: How does one differentiate between a fad and a trend? One minute, it’s all about fat-free foods, the next, it’s the high-protein Atkins Diet, and then whole grains and fiber… Similarly, sustainability has created all kinds of claims, marketing tactics, and mandates, often putting companies in precarious business predicaments…
A: You have to build in mechanisms to come back to the Mother Ship. We’re not talking about chasing fads. It’s a matter of creating tentacles through relationships to bring early insights back to you, and then being savvy enough and nimble enough to make course corrections. It’s being more astute about your green story, within the context of a green culture.
Q: Wouldn’t a company’s infrastructure, size, and business model exponentially impact its speed and ability to create and implement new ideas? For example, a produce manager at an independent specialty chain might have more autonomy in re-merchandising or shifting directions to accommodate customer nuances or stay ahead of local competition. Contrast this elasticity to a mega corporation mired in bureaucracy, where employees must wade through layers of executives to get basic policy approved.
A: I hear that excuse all the time. Even if you are part of a huge, brick-and-mortar, hundred-year-old company, you can create a nimble team. Take my little department or subgroup and get them to be more agile. I hope this is a message that each person attending the Leadership Symposium can take back with them.
Q: What is the last component in the five-step scenario you’ve been outlining?
A: Number Five involves talent scouts. I met with Jim Collins, author of “Good to Great,” and “How the Mighty Fall,” and he identifies the key stages in a company’s decline.
First is losing the talent; when you do too little too late to stop your best employees from leaving, it’s those critical innovation hubs you lose. I talk about flight risk. Why did they leave? What didn’t they find within the organization to make them stay? How can you identify up-and comers, and what can you do to retain them and help them to develop much more?
Q: Don’t many executives encase themselves with like-minded people that tend to agree with their plans? And could this mentality stifle the process for growth?
A: I’m reminded of what happened at Shamrock Foods, a 100-year-old company based in Phoenix, Arizona. The CEO wanted to manage accounts more effectively back in 2007, so he put together a 36-month plan, but became incredibly unhappy when the plan was not taking place. People weren’t sharing what problems they were encountering. He needed to create a more candid culture, where employees felt OK to make mistakes.
Unfortunately, a lot of executives are sheltered, and surround themselves with “yes” people. What are you doing to create tentacles inside your organization? Get away from direct reports and go deep into the organization to find out what is going on.
Q: Doesn’t this play to your mantra about generating real-world experience, meeting with growers in the field, visiting the packaging facility, checking out the way your product is being sold, etc.?
A: That’s right. It’s paramount to have your finger on the pulse of your business. Nothing replaces walking distribution centers, going to restaurants and seeing how products get from Point A to Point B. Look at your customer’s customers. What did your customers do with your product?
As a supplier, you may have shipped the fruit on time, but it sat on the dock for three hours, degrading the quality. No wonder your product was not selling. I suggest suppliers go to stores to see how product is merchandised and how the category is managed. You may have sent a great product, but it wasn’t refrigerated properly on the shelf. A relay race is seldom won by one leg; how well are you at passing the baton?
Q: Could you share some specific action steps companies can implement to disrupt the value chain and create a more viable business?
A: First you need to plant seeds; we’re going to put all the ideas on a white board and explore all the possibilities. Then you need to prioritize. You don’t want to chase every fad or trend on the radar; but examine the most effective and efficient ways to go after opportunities.
Q: Even if you identify a plethora of good opportunities, companies don’t have unlimited finances to invest…
A: Not only finances, but human capital, time and a myriad of resources need to be considered. Developing the idea is the initial step, but more importantly is creating a road map. How are we going to make it successful? What are the employee contributions, and what are the go-to-market strategies?
Q: Here it sounds like you’re working to avoid failure…
A: A lot of people are good at Monday morning quarterbacking, postmortem. You need to shoot all possible holes in an idea beforehand and start to mitigate risks. Set up scenarios, what if this happens, what are the consequences, what could the competition do, etc., to preempt new problems.
After identifying key trends, how do I bridge the gaps, what are my capabilities to address them? The next stage is commercialization, how do I take those ideas to market, efficiently as I can; think big, start small, scale fast. Take teas and natural juices, the idea was a huge one. Snapple got the attention of Coca-Cola and Gatorade, but execution is key; the teams have to be held accountable.
Q: Once again, it comes down to the people…
A: On the people part, there are four principles: like me, know me, trust me, pay me.
You’ll invest time to know me, and only when you trust me will you pay me. It doesn’t have to be monetary; you can buy ideas, perspective, and devout faith, to believe the person when he or she says this is just a bad idea, you shouldn’t pursue this and this is why. Give and take, judge in a back-and-forth process to nurture trust.
Q: At retail, chain executives are challenged to retain employees. And with the great turnover, they are concerned about making substantial investments in training. What tips can you offer to retailers that could create a more loyal and productive environment to spur innovation?
A: Look at attrition, and ask, why did the employee leave? You shouldn’t be losing retail managers at the rate of retail clerks, and distribution managers should be committed.
The other thing to push back on is, people in the produce industry say, we’re in a mature market, and we can’t innovate commodities.
Q: Does that mean jumping outside the industry for a different perspective? Awhile back, we ran a cover story in our sister publication, PRODUCE BUSINESS: “Beating Junk Food Marketers at Their Own Game.” It built the case for re-inventing the best ideas from processed food companies to entice kids into the produce department and win them over.
A: During my speaking engagement, I’ll share case studies in various industries to reinforce my key points. The industry is in trouble if it only thinks about produce myopically. There is a reason why five executives at Home Depot spend a week at Starbuck’s. From changing mindset to market share, it behooves people to learn from other industries.
When I hear produce companies saying that what Apple Computer does is not applicable to my business, I respond, really? In designing their products, Apple executives observed kids and how kids play with toys; realizing there’s a certain way people interact with technology, which comes from our childhood. The produce industry must look beyond its own four walls, and ask, how do we do things differently?
Q: An example I like is how yogurt companies transformed a staid category with innovative products, creating a fun, tasty and playful experience…
A: Produce already has the most naturally gorgeous colors, but somehow produce companies have become determined to shove it in a box or out of reach because they don’t want kids pulling out fruit from the pyramid and have it crashing down. I say, don’t build the pyramid then. Give people a chance to experiment with the produce.
The way to elaborate beyond a commodity is to build an exceptional customer experience. My wife shops at Whole Foods, not only to give the kids a cart of their own. Around every corner, she finds cooking demos, tastings, and people giving out recipes and suggestions, teaching her how to make dinner differently. It is the experience that draws her back.
Q: When the economic climate is shaky, and consumers are slowing down spending, some companies choose to hold off on new product development or shutter store expansion plans. What is your advice on that front?
A: That is the worst thing a company can do. When the economy goes bad, there are three fundamental areas companies cut back on: marketing and advertising, traveling and entertainment, and training and development, and throw R&D in there as well. Now you’re not coming up with new ideas, and you’re not investing in your biggest asset, which are your people. Economic scenarios are cyclical, this too will pass, and when we come out of this economic downturn, those that have invested in those areas are the ones that are going to hit the ground running.
Q: In a way, it takes a bit of audacity to act aggressively in uncertain times… Are you suggesting that hunkering down and waiting out the storm could actually put your company in a less-secure position?
A: It absolutely takes courage, but it also takes servant leadership and savvy leadership. What are you doing in the time you have to stash cash and be liquid enough and to build a position that even when a bad market does hit — and it will hit — and it will hit worse for people that are short-sighted, you are primed to capitalize on opportunity? In my speech, I’ll have very specific charts showing those that innovate outpace their competitive peers on a very consistent basis industry after industry.
Do you really think nobody else thought about music on this little drive? Sony had the Walkman and they owned that market. Apple comes out with the iPod and iTunes and they completely eat Sony’s lunch.
Q: Why did Sony get so blindsided?
A: Sony was myopic to the early trends, and in Apple’s case, it was not just about the hardware, it was also about the software, so the whole iTunes, iPod, iTouch navigation was what absolutely won people over. I’m on my third iPod. I bought the first one, and said, wow, this is cool, and then started building an emotional attachment.
Q: Isn’t that notable, because copycat competitors will inevitably try to enter the category; whether it’s offering a better price or designing another newfangled feature? Are you saying the edge comes when consumers already feel a certain loyalty or comfort level with the original product or brand?
A: That’s a huge point. You’re not just a head of lettuce; you’re that brand of lettuce or that packaging of lettuce, or that particular orange juice. I went to Publix and took a picture of the orange juice aisle. I counted 27 different brands of orange juice… what sets one apart from all the other ones? It’s destructive; do we really need 27 brands of orange juice? It dilutes the commodity that much more. Is there a better, different way to deliver the benefit of that orange juice, or why buy it to begin with? How can I shrink the time from the groves to my fridge?
I’m going to bring an example of new Coca-Cola packaging that is probably very different than anything you’ve seen. Look how long they’ve been around and they’re still a huge definitive brand. Last I read, The Coca-Cola Company has $80 billion in brand equity; that’s not the value of their company, that’s the value of their brand. It’s mindboggling. They protect that brand; they invest in that brand, in good times and bad times. It’s very defining, and people become emotionally attached to this brand.
Q: In the produce industry, there are a few key brands, but you don’t have the same kind of brand significance as you do in many other industries…
A: My perception is, a lot of people believe produce cannot be branded. The Number One road block we also run into in our consulting work is mindset. The three legs of the stool are mindset, toolset and roadmap. You can shift your mindset that you, in fact, can brand effectively. It’s what are you willing to do that your competitors aren’t. When was the last time you drank 7-Up or Dr. Pepper or Fanta or Tab?
Q: How nostalgic; you’re making me feel really old right now…
A: No, no, I drank RC Cola and all those too! Coke consistently did what those other brands weren’t willing or able to do. By the way, Coke also tried New Coke. Remember that?
Q: Yes, briefly! It appeared to be a flash in the pan, one minute hyped as the best thing ever, and then vanishing into oblivion…
A. What do you think Coke Zero is? Coke Zero is another iteration following what they learned with New Coke. They applied the lessons, and Coke Zero is actually doing fine.
Q: Why did New Coke fail?
A: New Coke failed because they changed the taste. Now you were messing with my emotional connection and brand attachment. At its core, Coke had the following… that customer loyalty to the brand. The company changed a core, familiar characteristic, and those are fighting words now. As they learned that expensive lesson, they applied it quite effectively to Coke Zero.
In my work, I try to help people change their mindset, get them to think differently. One of the fundamental challenges I run across is the naysayers. Like, that’s never going to work, we tried that years ago, that never happened. Well, what could we have done differently? Don’t you think the market has changed just a little bit in the last few years, do you think buyer behavior, and buyer taste preference has changed in the last few years? If the answer to any of these questions is yes, then why don’t we take what we learned and apply it given the new market trends and data trends and take another attempt at it. The other idea is “coopetition.”
Q: I’m intrigued…What is “coopetition”?
A: At some point you could be considered head-on competitors with another company, an example, I use is Starbuck’s and Pepsi. They’re both in the beverage business. Starbucks knew that even though there is a Starbuck’s on every corner, they still had a geographic reach; Starbucks wasn’t in grocery stores, so they partnered with Pepsi — coopetition — and Pepsi distributes their cold drinks in grocery stores, leveraging each other’s strengths.
Starbuck’s knows how to build great products — those Frappachinos have been around since 1997 — and Pepsi has the distribution. Where coopetition works really well is when there is a common mission and common vision. Pepsi didn’t have a coffee drink so it was a really good fit. Starbuck’s brought the coffee product and Pepsi brought the bottling and distribution and they both benefit from it enormously. So, we’re talking common mission, common vision, or common enemy. Think of legislation. If this legislation passes we’re all going to be in trouble, so let’s work together to fight this common enemy.
Q: Food safety would be a really good example of the need for coopetition in the produce industry…right?
A: Bingo. During the whole peanut contamination nightmare, you had one bad processing plant… in this case bad people poisoning the industry and basically bringing the whole industry down to its knees. So everyone in the industry came together to reassure the moms that Jiff is still good and safe to eat…
Q: In the produce industry, often news of relatively small produce recalls or outbreaks seem to spiral out of control in the media, creating consumer confusion and a warped perspective in the safety of all produce. How does the produce industry better manage and communicate food safety issues?
A: What I believe in is industry integrity and the truth. The Produce Marketing Association has a fiduciary responsibility to say this particular organization or company or incident was unfortunate, but it happened. It is not to say that every strawberry we pick in California is bad. The key is taking a proactive stance and not waiting until disaster hits the fan. I’m mesmerized by how many people sit on the sidelines, just waiting for things to happen. An old manager of mine drove into me the meaning behind W-A-I-T. We Are In Trouble if we’re waiting on something, right?
If you look at that whole Tylenol disaster, Johnson & Johnson went to the market and said we think there is a problem and we’re going to pull all of the products off the shelves. It cost the company billions, but they saved their reputation, and they exponentially benefited from that return of influence.
Q: At the time, many analysts questioned the company’s strategy of trying to salvage the brand, recommending Johnson & Johnson scrap the Tylenol name completely, convinced the scare had permanently marred the brand. Ironically, the company not only restored trust, it became a leader in driving safer packaging reform, launching sealed security bottle tops, which are now an industry standard.
A: I don’t remember, when the peanut issue broke, any industry authority saying in clear-cut terms, this plant screwed up, or made a mistake, explain the problem, apologize effectively to the consumer first, but having said that, emphasize that peanuts are still healthy, peanuts are still good for you, and there are still peanut growers and processors that do this legitimately and do this right, and by the way, here’s a coupon for 50 cents off your next peanut butter product.
Q: Pesticide use has become another hot button. In certain cases, special interest groups have promulgated false or distorted information, not based on sound science, which has tarnished the produce industry… How does the industry respond to a concern about pesticides on peaches, for example, or pesticides inadvertently blowing into a residential neighborhood from a nearby farm, to set the record straight, while reassuring consumers?
A: This isn’t a biblical religious comment, but the truth really does set you free. Consumers, businesses, everyone has a BS radar. I don’t believe that every pesticide is bad, but I need someone to truthfully tell me, you know what, there are some that are harmful, or maybe this group used it and it was a mistake and we learned from it, but that doesn’t make the whole industry bad. By the way, with lack of information, people start creating their own version of the story.
Q: That’s important too, because the produce industry has not always had a reputation for being media savvy, or for jumping out in front of an issue…
A: I met this executive, while on a flight, who said his job was to keep his clients off the front page of the Wall Street Journal for the wrong reasons, and being proactive when something hits. The Tiger Woods story started as a car wreck and now it’s a career wreck. I’m not a huge fan of the silent strategy. I recommend taking a leadership stance, especially if truth is on your side, and reiterating all that which is good; especially in crises, people forget, so point to all the healthy aspects of peaches, of peanut butter, of spinach, strawberries, whatever.
Q: As journalists, we want to do an interview with the CEO of the company connected to the outbreak, to get the truth out, to tell the whole story and provide a proper perspective. Unfortunately, companies in crisis often hire a PR firm to communicate sound bites third-hand. The PR person may be unknowledgeable and provide inaccurate information, or give the impression the company is hiding something…
A: It would be much better if the CEO would come to the phone. In hiring the PR firm, the company is just digging a deeper hole.
Q: Could you address industry relationships with government entities? The produce industry has had its share of communication breakdowns with FDA, negatively affecting the handling of food outbreaks and recalls. Serious problems surfaced during the spinach crisis, and more recently with the relentless Salmonella Saintpaul outbreak debacle… Debate ensues on the balance between government regulation and industry self-regulation. Could you share your insight?
A: I believe in balancing scope and size of government. Certainly companies need to build a respected and healthy relationship with government and agencies. But unfortunately, many industries refuse to push back. If you look now at Tom Donohue and what the U.S. Chamber of Commerce is doing, and this isn’t a political statement, they’re pushing back on an administration that has a pro-tax and pro-spend policy. They’ve taken a stand there with factual information that taxation hurts small businesses. And this country’s lifeline is all the small mom and pop stores that run our every day lives.
Q: Well, political statement or not, what is the main point you want to get across here?
A: Develop respected, healthy relationships but also push back when you see government entities outwearing their welcome, or respecting that which can be a productive asset. I think FDA is an asset, and I think EPA is an asset, but when they start encroaching that benefit for the end consumer, and they start recommending, or forcing or suggesting obtrusive legislation, then I think the industry should certainly push back.
Q: In some of these outbreaks, FDA’s actions may have been different if they had a better knowledge of the industry. For example, it makes no sense to stop the sale of spinach from a state that couldn’t have been in production during the time of the outbreak.
A: It is the produce industry’s responsibility to educate them and not with some memos. Nothing replaces feet on the street, or feet in the groves, or in the processing plant. As the president or CEO of the organization representing the produce industry, go get the top ranking FDA officials and take them to the processing plant and explain to them and show them in person, not by sending e-mails back and forth.
We create these 40-page structural analyses and documents that nobody reads. I learned this from working with several non-profit funds. When you get people emotionally engaged and you appeal to their logical self-interest, you have a much higher chance of getting things done. Show that high ranking person, not some low-level bureaucrat, but take someone in authority in the field and show them why this outbreak occurred, and here is what we’re doing about it.
I would go one more, not just knowledge, but actual insights. They don’t want to know everything you know about the tomato business. They want insight to make a good decision. We’re all dying from information overload. Let me show you our value chain from the field through distribution. Educate them through the process and they’re much more likely to make the right decision.
On his website David highlights this phrase:
“The only way to see the big picture is to make the right connections.”
It makes us think of the old story about the blind men and the elephant, where each sees only a part of the creature and misses out on the whole. Connections are really a way of extending one’s vision so as to see things you wouldn’t have seen before, to see things more accurately and completely.
There are still some slots available for the program. You can see the schedule here.
Learn about all the speakers here and review all info about the program here.
It is three nights in Dallas and a once-a-year chance to think outside the box. You can register right here.
The estate tax has expired. Barring a change in the law, however, it will come back with a vengeance on January 1, 2011. The Wall Street Journal ran a piece, Rich Cling to Life to Beat Tax Man, about the machinations some people went through to make it into 2010:
To make it easier on their heirs, some clients are putting provisions into their health-care proxies allowing whoever makes end-of-life medical decisions to consider changes in estate-tax law. “We have done this at least a dozen times, and have gotten more calls recently,” says Andrew Katzenstein, a lawyer with Proskauer Rose LLP in Los Angeles.
Of course, plenty of taxpayers themselves are eager to live to see the new year. One wealthy, terminally ill real-estate entrepreneur has told his doctors he is determined to live until the law changes.
“Whenever he wakes up,” says his lawyer, “He says: ‘What day is it? Is it Jan. 1 yet?’”
And in fact there is statistical evidence that when estate tax rates change, the timing of deaths shift a bit. Although, of course, we cannot be certain whether the time of deaths actually shifted or if the reporting of the deaths was shifted:
In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.
Joshua S. Gans (University of Melbourne) & Andrew Leigh (Australian National University), Toying with Death and Taxes: Some Lessons from Down Under (2006):
Of course, if this year the headline was about the rich clinging to life because the tax was due to expire, what will the headline look like next year when the tax is about to be reimposed? The Wall Street Journal article hinted at the answer to the question:
The situation is causing at least one person to add the prospect of euthanasia to his estate-planning mix, according to Mr. Katzenstein of Proskauer Rose. An elderly, infirm client of his recently asked whether undergoing euthanasia next year in Holland, where it’s legal, might allow his estate to dodge the tax.
His answer: Yes.
United Fresh is involved in an ag coalition that has called for an exemption for family farms from the estate tax. This is an attempt to address an undesirable side effect of the tax — families may have to sell their farm to pay the tax. We suppose it’s a better solution than nothing and understand why United would want to stand with the various farming groups that it may need on future issues so we can endorse United’s involvement.
It is, however, nothing but special interest politicking as there is no reason why a family should have to sell, say, their produce wholesaling business, to pay the tax any more than they should have to sell their farm.
The estate tax is a foolish tax. We wrote about it almost a decade ago here, and the basic points remain the same:
1. The estate tax is unfair.
People already paid their taxes; it is their money to do with as they will. If two brothers sold their produce company and each made $10 million after taxes, if one brother goes and blows all his money playing baccarat in Monte Carlo, on what ethical basis do we tax the prudent brother who took care of his money?
2. The estate tax is inefficient.
Fortunes are spent on legal and accounting to avoid this tax. One reason it has been so hard to get rid of the estate tax is the insurance industry always lobbies to keep it. So many bright people, who could be using their intelligence and industry to do something useful, are, instead, working to minimize estate taxes.
3. The estate tax reduces the productivity and time horizon of many who could contribute.
Wealthy people have enough money for their own lifetimes. So, in many cases, the only motivation they have to work is to leave behind a gift to those they love. If a person decides to keep working, he will first pay income tax on his earning and then pay an estate tax on his bequest. If the income tax is 35% and the estate tax rate 55%, for every $100 this person earns, he actually gets to apply $29.25 to his intended purpose — this doesn’t count social security taxes, Medicare taxes, state or local taxes, etc. For many, they will be lucky if they have a quarter out of a dollar to pass on.
People may love their children but few want to work hard so that the government gets 75% of their earnings in taxes so their children can get 25%, so highly experienced doctors, engineers, business people, etc., just go play golf. That is a horrible waste.
Greg Mankiw, the noted Harvard Economist, came out against the estate tax.
Ed Prescott, the Nobel Prize-winning economist, also opposes the tax.
Martin Feldstein, President Emeritus of the National Bureau of Economic Research, wants to kill the tax.
Gary Becker of the University of Chicago favors permanent repeal.
Many of the arguments in favor of such a tax don’t actually deal with the kind of tax that actually gets imposed. So you will hear advocates speak of the dangers of great concentrations of wealth. That might be an interesting point if someone was proposing to tax multibillion dollar estates, but no such law has ever been passed or seriously proposed.
The estate tax has one other peculiar effect — it biases against family businesses. Large publicly held companies are not affected by the tax. If their shareholders have to sell shares to pay the tax, they are bought by other shareholders, so a public company is immortal and can last forever. In contrast, a family that owns a business often has to mortgage or sell the business to raise money to pay the taxes; this burden on each generation makes it much less likely that a family business can survive.
For an industry like produce, filled with family-owned businesses, this is a public policy issue as likely to affect the future of the trade as any regulation on food safety.