Delhaize Advises Vendors Of Plan To Consolidate Procurement:
Is This A Win Or A Loss For Delhaize…And For The Broader Industry?
Jim Prevor’s Perishable Pundit, February 15, 2011
Delhaize, the Belgium-based retailer whose American division includes the Food Lion, Hannaford, Bloom, Sweetbay, Bottom Dollar, Harveys and Reid’s banners, has announced to its suppliers a significant reorganization.
Delhaize America sent out a lengthy e-mail to its vendors detailing loads of personnel changes.
The key point for the produce industry is that the company is consolidating produce procurement in Salisbury, North Carolina, and ending procurement functions in Scarborough, Maine, which had handled produce procurement for Hannaford.
Meat and Seafood are also going to be consolidated in Salisbury, while Deli and Bakery will be consolidated in Maine.
These types of changes always have an impact on individuals. Jim Corby gets his position bumped up a notch as he will be Vice President of Produce for the whole organization.
John Mercer, who had been VP of Retail Services at Food Lion, is now VP of Produce for Food Lion. Steve Williams, formerly Director of Produce and Floral for Sweetbay will direct produce merchandising for Sweetbay.
Michael Purvis, who had been Director of Produce at Harveys, will be based in Nashville, Georgia, and be the new Harveys/Reid’s Director of Produce.
Will Wedge, who had been Director of Produce at Hannaford, is now a Hannaford/Bloom director whose title is “Banner Merchandising—Fresh.”
We, of course, wish all these individuals and the many others who will be impacted by the change well. Typically these changes cause a lot of personal distress as, even if people aren’t fired, someone working up in Maine who loves fresh produce now winds up working with paper towels.
These types of transitions depend crucially on the caliber of leadership. Delhaize is fortunate to have a well respected team and could have chosen any of several people for the top produce position.
Now that Corby has been given the nod, though, the industry should count its blessings. These transitions are tough, and it will be easier because a man of Jim Corby’s talents is at the helm.
Jim is a real thoughtful person on industry issues, and if you can get him into a situation where he is comfortable, he has real ideas on the issues confronting the industry and willingness to work to make the trade better.
He is a reasonably low key guy and will doubtless manage through whatever difficulties internal or external might present themselves.
Corporate isn’t going to allow anyone to speak too much right now but we asked Jim Corby if he had any thoughts on the transition. He sent over a few words:
We appreciate Jim sharing with the industry what he can. Doubtless there are pros and cons to everything, and executives very high up at Delhaize decided this is the path to walk. They surely have good reasons for deciding this way. All this being true, we are still left to ask two questions:
Is the consolidation of procurement good for Delhaize?
Is the consolidation of procurement good for the broader industry?
As we said top executives at Delhaize think this approach is good for the company, but these top executives — at any retailer — are rarely produce experts and viewed through that prism, we are less certain.
Now we should add a caveat: The e-mail sent to vendors doesn’t say very much. It gives no dates when all this will happen, and although it acknowledges that procurement is being centralized, it gives no information as to what form that takes. Jim Corby didn’t elaborate in his note either.
Theoretically you could close an office and still maintain separate buyers for Hannaford and separate spec sheets for the products being purchased for that division.
Typically, however, supermarkets consolidate to reduce costs by having fewer buyers and to “leverage” their size against suppliers to get better prices.
There are real issues with this concept because it is not clear that either cutting procurement staff costs or getting cheaper prices is actually the key to success in fresh produce.
It is interesting to note that in announcing the changes, the e-mail explained how this consolidation was laid out:
The locations chosen were based on proximity to crucial functions such as replenishment, logistics and value-based procurement and the logical groupings of categories to most effectively utilize the existing teams and other resources.
Of course, the notable concern missing from that sentence is the word “consumer,” and the impact of consolidation is to move the buyer further from the consumer.
Now, obviously, this is not determinative. Jim Corby’s procurement team in North Carolina will have plenty of people up in Maine to give feedback and make recommendations. Presumably if they start buying the wrong stuff, the Maine team will scream and it will all get fixed.
In fact, insiders tell us that Delhaize is looking at dividing its staff into two groups: On one hand a group of category buyers who are responsible for “seed to distribution center” and on the other hand “directors” who will be responsible for “distribution center to fork.” The directors will be on the front lines working to make sure the consumers get what they want. We hope it will all work out.
Still, it places buyers one more step from the consumer, allows a little more “noise” to interfere with the best decision.
A bigger problem is that very often consolidation is done specifically for the purpose of saving money through uniformity. Years ago when A&P acquired Waldbaum’s, they had an insurrection on their hands when it turned out that the Long Island Jewish consumer at the heart of the Waldbaum’s clientele didn’t want the same sizes, varieties and products as the A&P consumer. The company actually had to bring back Waldbaum’s staffers to save the chain.
Safeway, when it bought various chains, including Genuardi’s on the East Coast, learned the hard way that Genuardi’s was valued as the anti-Acme and that its clientele didn’t care about the desire of Safeway executives to buy private label goods efficiently. They didn’t want Safeway’s pasta sauce.
More recently, when Supervalu bought most of Albertsons, including Shaw’s/Star Market, it consolidated produce, and Hannaford, with a local team, ate Shaw’s lunch leaving Supervalu to try and backtrack a bit.
We’ve critiqued Tesco for hiring too many Brits to work at Fresh & Easy. The problem is not geography… with technology today, one can do things from anywhere and get people from anywhere. The problem is that foreigners are not as intuitively in sync with the natives. That applies from London to Los Angeles but also from North Carolina to Maine.
We wonder if a chain as diverse as the Delhaize operations wouldn’t do better to decentralize further and let each banner function on its own. Get closer to the consumer and delight them. That strikes us as a better strategy than trying to lower procurement costs.
What about procurement costs? Taking the issue on its own terms, is Delhaize America likely to save money on produce through centralized procurement? Will the weight of its buying power assure better attention from vendors?
We would argue that the most likely answer to both questions is no.
Larger buyers do not generally pay less for produce; they typically pay more. Partly this is because larger buyers tend to be restricted in which vendors they can buy from. They need such massive quantities that only a few vendors can meet the needs.
But also because deals come about when vendors have some product they are stuck with. If a vendor sells all over the country and still has two trailers left, if he gives a deal to a supermarket chain up in Maine, he may do so without disrupting his national pricing structure. The vendor can’t do that with a giant buyer.
What about service? Won’t being a mega giant buyer assure that vendors will take care of the company first? Absolutely not. Right now, with Mexican product so short, you can see it happening. Lots of vendors are diverting product to Schnucks or Wegmans and shorting the big giants.
Sounds counterintuitive, but remember this: When product is so short, the vendor simply can’t protect Wal-Mart or another big buyer. If Wal-Mart needs a million cases and the vendor only has a total of 200,000, no matter what the vendor does, Wal-Mart will be unhappy.
On the other hand, by taking care of some smaller guys, the vendor can get on the “we owe him one” list of Mike O’Brien at Schnucks or Dave Corsi at Wegmans — so product flows that way. Incentives are not always what they seem to be on the surface.
In fact, the problem for a company like Delhaize is that when it completes its consolidation, Delhaize will likely wind up the fifth-most important customer at the big shippers. On its own, a chain such as Hannaford could use a mid-size shipper and be that shipper’s Number One customer. That is a big difference.
What most supermarket CEOs don’t really get is that produce is very different from packaged goods. When a retailer orders Heinz Ketchup, it always gets the identical product. When one orders green beans, regardless of specification, there is a range of product that can be delivered.
So the issue in designing a produce procurement program, completely aside from getting close to the consumer, is how does one manage to get the best product at the best price and to be treated best when things are tight? We can’t help but suspect that the way to do this is to deconsolidate and try to avoid being the Number Five customer.
CEOs at retail companies are infatuated with consolidation. They see scale as the way to compete with Wal-Mart. That is one way. If Safeway, for example, had decided to simply close all the Dominick’s, Randalls and Genuardi’s and re-banner them as Safeway’s or, even better, buy loser chains in the market rather than successful ones and re-banner those, it might have worked. Certainly one of Wal-Mart’s strengths is that all its stores are Wal-Marts.
But there is very little in common between Hannaford and Food Lion or Bloom and Sweetbay. If Delhaize is going to keep these banners, the company would probably do better by accentuating the differences between them. We alluded to some of these issues in a piece we titled A Walk Through Publix Greenwise Market: Is What Is Sold What Has Been Promised? Lessons For Retailers Thinking Of Launching Specialized Concepts, in which we analyzed how a banner can suffer if not given liberty to be all it can be.
There are many smart people at Delhaize and, presumably, they have it all figured out how consolidating will benefit Delhaize. But though we think Jim Corby will do a great job, we are not as certain that the job he has been given to do is really the right one to maximize the success of the produce operation.
This has always been true of consolidation efforts but is, perhaps, more true now than ever as we are in the age in which retailers are always preaching the virtues of locally grown. In the past let us imagine that Hannaford was the main customer for a regional producer, say a Vermont apple grower or a small greenhouse operation up in New England. These producers are not large enough to supply any more product than they currently do.
Think about how this plays against a landscape of consolidation. The crew in Salisbury will have two choices: It can continue to buy from these vendors just for Hannaford. But if it does so, the consolidation of procurement achieves no gain. It takes just as long to speak to the vendors, the prices will be the same, etc. In fact, the temptation is to go the other route and go to a big Washington state apple grower or big greenhouse operator and say, "We will give you all our business if you give us a better price.” That is what leveraging one’s buying power is.
This may or may not be a good idea but it does seem like it would be better if the decision is made based on consumer desires rather than a need to show a return on a consolidation effort. Jim Corby is smart and will doubtless try and avoid this dynamic, but these things sometimes take on a life of their own.
Of course, Delhaize has an obligation to act in the interests of its shareholders. Still, for the rest of us, it is worth looking at a broader, industry-wide picture. When it comes to the question of whether such consolidation is good for the industry, it may be inevitable, but it is also true that we think the answer is almost certainly no.
First, the very idea of consolidating to press prices down is likely to remove margin from the industry. But margin is the only thing that can motivate future investment, so lower margins means lower investment, which means a more attenuated future for the industry.
Second, large companies tend to have their own competencies and, as we alluded to in our recent piece, “Buying Direct Is Not The Same As Buying Local – C.H. Robinson, Wal-Mart And The Perils Of Public Disclosure,” large companies tend to become focused on strictly buying produce cheap. This is leading to a draining of sophistication from the vendor community — a kind of going backwards to pre-Wal-Mart days. A less sophisticated industry is not going to be stronger.
Third, traditionally the leadership of the industry has been drawn from these regional chains. Will Wedge is currently Second Vice President at The New England Produce Council and Chairperson for the 11th Annual New England Produce Expo, and many of the Chairmen of PMA have come from regional chains, including PMA’s current chairman, Mike O’Brien of Schnucks, three years ago, Dave Corsi at Wegmans, and going back in history, one thinks of names such as Dick Spezzano from Vons and Bob DiPiazza from Dominick’s, etc.
As chains get larger, the top produce executives tend to become less committed to produce. In other words, whatever you might think of Pam Kohn at Wal-Mart—and she is in many ways the most influential person in the fresh produce industry—she is not a lifer in fresh produce. She doesn’t imagine that her next job is at a strawberry shipper. So her motivation to go through the chairs to become Chairman of PMA or United is not great. And there is a real danger that people who are not lifers will be inclined to do things that boost earnings for a year or two and then collapse on someone else’s watch.
Retailers who contribute a legacy to the produce trade tend to be those who, while educating growers and shippers about consumers, also recognize that a successful produce industry means an industry where growers and shippers make returns that justify re-investment and motivate growth. The trade is in good shape with Corby at the helm, but the dynamics of larger organizations that tend to value non-produce-specific skills such as forecasting, budgeting, spreadsheets, etc. over produce-specific knowledge does, over time, lead one to think that future generations of high-ranking produce executives will feel more affinity for retailing than for produce.
We, of course, wish Delhaize the best in its efforts and wish corporate and industry leaders such as Jim Corby and Will Wedge personal success.
We hope they manage to make this change a big success for Delhaize, for its consumers and for the industry.