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“Buying Direct” Is Not The Same As “Buying Local” — C.H. Robinson, Wal-Mart And The Perils Of Public Disclosure

Jim Prevor’s Perishable Pundit, February 9, 2011

Among the many achievements of the Pundit Poppa, is that he was, banana giants aside, the first person to take a produce company public. He also took it private again.

Such thoughts occur as we review C.H. Robinson’s recent press release announcing its Fourth Quarter Results. The release contained these lines:

For the fourth quarter, our Sourcing revenues decreased 6.5 percent. Sourcing net revenues decreased 4.2 percent to $31.7 million in 2010 from $33.1 million in 2009, primarily due to decreased volumes with a large customer.

Sourcing in this case refers to C.H. Robinson’s produce division as opposed to transportation. The “large customer” is Wal-Mart.

In the conference call, C.H. Robinson CEO and Chairman of the Board, John Wiehoff, elaborated:

Sourcing — As discussed in our press release, our sourcing net revenues for the quarter, decreased by 4%. We discussed on past calls that our largest sourcing customer, Wal-Mart, has a very comprehensive global sourcing initiative in process that’s impacting our relationship. Their global sourcing re-alignment has resulted in lost business for us.

There is really not anything new for us to add to our past comments. We continue to work through the transition with them and look for new ways to grow with them. But we do expect to continue to experience declines in volume and net revenue until the transition is complete later this year.

There is some new and exciting growth in our sourcing division that is also driving new revenue for our transportation services, and we remain very positive about the longer term opportunities to create value with our sourcing services.

Being a public company offers enormous advantages. It gives a company access to capital; it can do acquisitions with stock and pay its employees with stock, etc.

It also sometimes requires companies to make disclosures they never would if they were private companies, as is this case with this press release. Just try to remember the last time a private company announced that its biggest customer was reducing purchases!

As it happens, the announcement was widely misinterpreted. CHR was careful to explain that its biggest customer, Wal-Mart, had a new procurement policy, and it was electing to buy more “direct” rather than through C.H. Robinson.

Editors and analysts who don’t really understand what is going on quickly assumed that buying “direct” is the same thing as buying “local” and so, very quickly you started seeing headlines claiming that CHR’s produce business was dropping because Wal-Mart was buying local.

In fact “local” and “direct” are not synonyms, and CHR’s drop in produce sales to Wal-Mart has very little to do with any local procurement.

First, once one gets past the propaganda and removes statistical aberrations, such as Salinas lettuce counting as local in California stores, Wal-Mart buys comparatively little locally grown produce.

Second, C.H. Robinson traditionally owned no farms or packing sheds — to use the parlance of transportation, it was not an asset-based vendor—so if the issue was simply geography and that Wal-Mart wanted to source more from certain places, C.H. Robinson would be well suited to supply Wal-Mart’s needs. If local is the priority, one would expect CHR’s sales to Wal-Mart to increase as it would be far more flexible than the big grower-shippers whose strength is their great land base.

The issue here is not local buying but a decision by Wal-Mart to value less the technology and services that surround a purchase of fresh produce. As a result, Wal-Mart is deeply focused on buying cheap. To put it another way, C.H. Robinson is selling less to Wal-Mart because C.H. Robinson doesn’t want to sell more produce at the price Wal-Mart wants to pay.

We dealt with this issue back in August, 2009, when Wal-Mart was beginning to roll out the new system with a pilot program procuring Washington apples. Some of the pieces we ran at that time include these:

SPECIAL EDITION — Wal-Mart’s Global Food Sourcing Initiative Closes The Peterson Era And Threatens Sustainability Of Agricultural Base

Flaws In Wal-Mart’s Produce-Procurement Thinking

Wal-Mart’s Blind And Costly Focus On FOB’s

Wal-Mart Produce Procurement ‘Set Up For Devastating End’

The long and short of it is that C.H. Robinson built a brilliant “front end” for produce procurement. It could deliver information and services to Wal-Mart that most other vendors could not approach.

For better or worse, Wal-Mart’s philosophy changed and that change in philosophy ultimately led to the departure of Bruce Peterson, who, back when Wal-Mart had only seven supercenters, partnered with many companies, including C.H. Robinson, to build what was arguably the most sophisticated produce supply and procurement operation on the planet.

This change in philosophy created a problem for many companies because Wal-Mart became fixated on getting the lowest price for everything it bought. This meant it was no longer as open as it once was to the argument that a given vendor, by virtue of its variety, its brand, its technology or its services, was providing a value that was worth paying more for.

Right now, with much of Mexico frozen over, we hear every day from friends who are cutting shipments to Wal-Mart first. These are often the same friends who, when hurricanes and freezes would hit a few years ago, were on the phones pleading with us to help them charter 747s filled with produce from other countries so they could seamlessly supply Wal-Mart and honor their obligations to keep their assigned DCs functioning.

That is, however, ancient history, and it is very difficult to prove that one would not have out-of-stocks, etc., if the procurement system is different.

Jim Lemke, who holds the title of Senior Vice President Sourcing at C.H. Robinson and built the system that helped build Wal-Mart, is a shrewd fellow, and there is no doubt that he has seen this day coming for a long time and has been managing with an eye on not merely enduring this shift but also triumphing in this new environment.

This is no stranger to our readers. Back in October of 2009 we ran a piece in Pundit sister publication, PRODUCE BUSINESS, on the occasion of C.H. Robinson’s acquisition of Rosemont Farms that was titled Advantage Shifts to Production:

C.H. Robinson is unusual in the industry, as it has shown an uncanny ability to remake itself to stay in sync with where the industry is moving. When this author was a young buck cutting his eyeteeth on the business in the Hunts Point Market, C.H. Robinson had an office down the hall. It functioned as a broker, and the primary difference between C.H. Robinson and any other broker was simply that it had many offices around the country.

Yet in the ensuing decades, the produce operations of C.H. Robinson were transformed as it developed technology enabling it to serve as the “front-end” of a Wal-Mart supply chain that would forever transform the way produce procurement was done. With the development of the Corporate Procurement and Distribution Services (CPDS) Division, it built a model in produce where it did not own production — not unlike the model it developed in transportation where it is a leading, non-asset-based transportation company.

Yet industries evolve and the acquisition of Rosemont Farms, following up on its acquisition of FoodSource in 2005, is a clear sign the model is about to shift.

The problem, though, is that purchasing companies is the easy part. Buying packers/shippers, much less produce growers, and earning a return on capital that will be appealing to the shareholders of C.H. Robinson is another matter entirely.

Selling the value of intellectual capital as CHR has been doing typically provides a very high return on invested capital. Buying a farm is a different kind of ball game.

So C.H. Robinson is doing what it can to continue to provide value to Wal-Mart and its other customers, with its branding program, its acquisition of FoodSource, Rosemont Farms explorations of new ways to integrate its logistics capabilities with its produce sourcing expertise.

And, with recent staff changes at Wal-Mart, executives at CHR surely hope they will have new opportunities to prove they can deliver value in ways other than simply offering the cheapest price.

Considering that when we launched PRODUCE BUSINESS 25 years ago, the produce division of C.H. Robinson was just a string of brokerage offices, Lemke’s achievements and those of C. H. Robinson are substantial.

Maybe the pendulum will swing back and retail executives at Wal-Mart and other places will find new value in C.H. Robinson’s intellectual property, or maybe the shoots planted in C.H. Robinson’s acquisitions will burgeon and grow.

One thing we can be certain of is that Wal-Mart’s desire to buy cheap is the mover here. This poses a problem for the industry as it reduces the incentive for investment in varieties, brands, growing techniques, services and technology that could lead to a more delightful consumer experience.

Because C.H. Robinson is a public company and Wal-Mart its largest produce customer, we have been given a little insight into how a sophisticated vendor is affected by Wal-Mart’s new procurement policy. We know many others are being impacted but have no obligation to issue press releases.

There is a real question as to whether buying cheap is really going to help Wal-Mart. There is a bigger question as to what the deleterious effects might be on the whole industry if industry firms reorganize to meet Wal-Mart’s new hierarchy of value.

As Wal-Mart grew, firms that became direct suppliers to Wal-Mart had to become much more than produce growers and packers. They had to start thinking about the supply chain and satisfying consumers. They became better companies. It will not be good for the industry if produce firms start to lose that competency.

C.H. Robinson is a giant with unique capabilities and it is likely to do just fine. The same cannot be said for the firms not issuing press releases.

Thinking about all this in the context of locally grown is a distortion and misunderstanding.

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