Just Say No: The New Dynamic Of Producer/Buyer Relations
Jim Prevor’s Perishable Pundit, February 22, 2008
Events as far away as London and Salinas are pointing to a new development across a range of buyers.
Buyers have so pressed their advantage that, increasingly, producers are just saying “What is the point?”
After years of living with the fact that they would lose money on individual items as a way of selling other items at a profit… after years of scheming to get their foot in the door with a loss in the expectation of better years to come… after years of thinking they had no choice… now producers are recognizing that they can’t sell at a loss and make it up on volume. And if they have to walk away from business, big business especially, then that is what they have to do.
Of course, it is easier for some than others. International companies marketing products that can be sold around the world can walk away from a particular product line or particular client and still stay in business. So the Fresh Produce Journal in London announced news in January that Del Monte walked away from the ASDA banana business:
Del Monte is re-evaluating its position in the UK after “walking away” from Asda’s banana business.
UK md Peter Miller told FPJ: “We decided that it was no longer the right proposition for us to continue supplying Asda with bananas.
“We walked away from the Asda tender because we didn’t like the money, but we still have 80 per cent of their pineapple business, a significant and developing share of their melon business and a massive proportion of their fresh-cut fruit business.”
Asda has extricated itself from the global supply deal its parent company Wal-Mart had on bananas with Del Monte, and is now sourcing from Fyffes, Chiquita and International Produce.
Recent events, both in London and Salinas, indicate that the movement is growing well beyond the banana giants and includes buyers well beyond big retailers.
As Tanimura & Antle recently decided to no longer sell to processors, press reports played it as if Tanimura & Antle — after a quarter century of selling processors — suddenly decided to discriminate against them.
A more accurate explanation of what transpired is that Tanimura & Antle decided to charge what it feels its product is worth or, at least, what it needs to produce it.
You can be sure if any processor with good credit wants to give Tanimura & Antle a contract to grow product at a price Tanimura & Antle finds appealing, the deal won’t take long to do.
One of things evident since the food safety initiatives of the post-spinach crisis era is that the growers who sell to the processors consider themselves to be price-takers, not price-makers.
We received many letters pointing out the increased costs of food safety standards. In a piece entitled, Pundit’s Mailbag — Trapping Stations And Food Safety Costs, we ran this letter:
Let me point out just one increased cost out to you: “Trapping Stations.”
Some processors are requiring trapping stations every 50 ft. for rodents. I grow 7,500 acres of vegetables. This would equal approximately 16,000 stations. So, 16,000 stations X $30 = $480,000. This isn’t a one-time cost. Now the stations need to be monitored 2X/week, and logged. I ask you, Mr. Pundit, how many people do you think that will take? I’m pretty sure that will be more than one person!
In summation, “trapping stations” alone would increase my costs by $100/acre, representing a $.015/pound increase on items like spinach and spring mix. A minimum of $.125/carton on other items. I am not even mentioning any other costs at this point!
— Jack Vessey
Vice President/Marketing Director
Vessey & Company
The sub-text of all these letters was that the processors were not going to pay any more even though these costs were all now being thrown on the growers.
Of course, pricing is ultimately a matter of supply and demand, and buyers can easily miscalculate their long term interests.
In business it often pays to not maximize your short-term profit. On the selling side, if you raise your prices too high, you create a margin magnet to bring in competitors and you give them space to undercut your position, while maintaining profitability. If you price leaner, there is no wiggle room for a competitor to move in, leaving you to dominate your space. Most potential competitors will decide they have prettier fish to fry.
Put another way, if you use your market but don’t abuse your market, you can often gain dominant share, make reasonable profits and sustain a business. If you abuse a market, someone else is bound to note those sky high profits and move in to undercut you. These new competitors could be larger, better capitalized, and you could well lose everything.
The same principle applies on the buy side. If you are a dominant buyer and use your ability to provide consistent high volume orders, you can gain access to a guaranteed supply of product from the best producers at a reasonable price.
If, as a buyer, you push too hard, you wind up losing the best growers, those who have other options — people such as Tanimura & Antle. If a whole category is competing to drive all profit out of the supply sector, then the best growers, who have other options, will give up on the business — as Tanimura & Antle just did.
Now as a matter of business, this rush to squeeze every cent of profit from the supply base is questionable. In the end, the outcome is predictable. Resources — land, labor, capital — that had been dedicated to supplying this sector will find other uses. Once gone, the remaining producers will find their hand eventually strengthened and will wind up raising prices. The buyers will find that once resources have shifted in other directions, they come back slowly, if at all.
There are also industry-wide concerns in this dynamic — such as food safety.
The industry still has an ingrained cultural problem regarding food safety. It is a problem I call “no points for extra credit.” The problem is that while the reality of food safety is a continuum, you can always be more cautious, have bigger barriers, more traps, more testing, etc.
Few buyers purchase in this way. If they do anything at all, they set up a minimum standard. Perhaps they will require a particular certification.
Yet this can be problematic. When Costco had a bit of a problem with carrots up in Canada, it was interesting to learn that Costco was buying Mexican carrots processed by a relatively small player. We saw this as somewhat troubling:
With all the talk about problems in food safety, one wonders if food safety is really the top priority in procurement. If you go to the Grimmway Farms web site, it says this about food safety:
Grimmway Farms knows that it’s important for you and your family to be confident in the safety of the produce you consume. Our safety standards are among the highest in the industry. Awarded Shield #002 for participation and acceptance in the USDA Qualified Through Verification (QTV) program.
Third party auditors include USDA, AIB, Siliker Labs, Scientific Certification Systems, Davis Fresh Technologies and many of our customers have excellent in-house audit programs as well.
Food Safety Standards and Guidelines: Guide to Minimize Microbial Food Safety Hazards for Fresh Fruits and Vegetables — October 1998. Food and Drug Administration 21 CFR Part 110.
Good Agricultural Practices include monthly self-audits, quarterly third party program audits, and an annual intensive 3 day third party audit. Each field is audited prior to harvest. All new contracted growers must complete a self-audit as part of the contract. Audit reports may be reviewed by an additional third party.
Mock recalls are completed and documented often, with one of five most probable scenarios.
A new isolated Pathogen Laboratory for environmental testing provides us with results in 24 to 48 hours.
Perhaps the Mexican grower of these carrots had all these certifications. Perhaps not. Now anyone could have a problem and, in fact, we have no information that anyone has done anything wrong.
Still, it is hard to believe that Costco, which is the company pushing everyone in Salinas to test everything day and night, selected this roundabout pattern of having Mexican carrots, packed in Los Angeles and then distributed in Canada because it made the determination this was the route most likely to enhance food safety.
Now, we translate the news that Tanimura & Antle is withdrawing from the business of selling to processing to mean that processors are not willing to pay enough to entice Tanimura & Antle into growing for them, which brings up this question: Is every processor persuaded that every grower they will buy from equals or exceeds the food safety standards Tanimura & Antle adheres to?
In light of Tanimura & Antle’s scale and access to technology and expertise, this seems unlikely.
In which case, it would be fair to say that a pricing issue could be impacting on food safety.
Of course, the issues go beyond food safety and beyond processors. When we were reviewing the many changes that Wal-Mart was making in its procurement efforts, we received calls from several producers who said they had wound up in a game of brinkmanship with Wal-Mart. They explained that they refused to sign the contracts presented to them and almost wound up not being Wal-Mart vendors any more.
That sounds like a disaster and in fact the uncertainty of future options with Wal-Mart is one reason why Tesco’s Journey to America was so welcomed by America’s suppliers when it was first announced.
Yet Tesco may well disappoint US producers.
Certainly the company seems to be disappointing producers in Britain.
Sir Terry Leahy, the CEO of Tesco, had a skiing accident and so couldn’t speak before the National Farmers Union as scheduled. Instead Tesco sent someone named Lucy Neville-Rolfe, who has a fascinating background:
Tesco’s Company Secretary and Director of Group Corporate Affairs, Lucy Neville-Rolfe, is a fascinating example of ‘revolving doors’ between industry and government. At Tesco, her responsibilities include government, EU and competition issues, investor relations, communications, community affairs and corporate affairs policy for the international business in 10 countries. She reports directly to Terry Leahy.
Neville-Rolfe’s external appointments include business lobby groups, NGOs and government committees such as the CBI Europe Committee, UNICE Task Force on Enlargement and the boards of EuroCommerce and the British Retail Consortium. She also sits on a ‘work and enterprise’ panel for The Work Foundation and is on the advisory committee for the Economic and Social Research Council ‘Cultures of Consumption’ project.
Another advisory role is sitting on the President’s committee of London First, which Tesco also sponsors. She has been appointed to the Foreign and Commonwealth Office Management Board, as well as to the Deputy Prime Ministers’ Local Government funding committee, which is looking into better ways of funding council services, further crossing the line between influencing the government and being the government.
Neville-Rolfe joined Tesco from the Cabinet Office in 1997. She was formerly Director of the Cabinet Office Deregulation Unit under Michael Heseltine and later with Lord Chris Haskins who transformed it under New Labour. With Haskins, she wrote ‘Is there a future for European Farming?’ (2002) for the Foreign Policy Centre (see ‘Relations with Suppliers and Farmers’ section).
From 1992 to 1994, she was a member of the Prime Minister’s Policy Unit where her responsibilities included home and legal affairs and public sector reform. From 1973 to 1992 she worked at the Ministry of Agriculture, Fisheries and Food on EU and countryside issues and was Private Secretary to the late Rt Hon John Silkin MP. From 1991 to 1992, she was non-executive director of construction firm, J. Laing Plc.
Covering both bases (Labour and Tory) she spoke at the Conservative Party conference in 2003.
Neville-Rolfe’s husband, Sir Richard Packer, was Permanent Secretary at the Ministry of Agriculture, Fisheries and Food (now incorporated into DEFRA) from 1993 to 2000. He was mainly concerned with European Union polices on agriculture.
You can download the paper she wrote with Chris Haskins right here.
In any case, she appeared before the National Farmer’s Union conference and the Fresh Produce Journal covered it this way:
Neville-Rolfe stuns farmers with Tesco perspective
Tesco’s Lucy Neville-Rolfe did her best to alienate every sector of the NFU membership in turn during her presentation at the union’s annual conference, but saved some of her more palatable words for fresh produce.
Speaking in place of injured chief executive Sir Terry Leahy, executive director Neville-Rolfe rampaged through dairy, meat and poultry, drawing varying degrees of disbelief and anger with her perspective on her company’s positive contribution to each sector.
When she moved onto fresh produce, the word which caused similar consternation was “affordable”. She said: “We have made our fruit and vegetables more affordable. Our value range now covers 90 lines — many of them staple produce that [NFU members] grow for us. Sales of fresh produce have risen by over 10 per cent in the last year alone. We are also doing more to market fresh produce, such as aisles dedicated to seasonal fruit and vegetables — peas, strawberries, asparagus.”
She said Tesco has helped British farmers extend their seasons through local sourcing initiatives, and that the UK’s number one is creating serious opportunity for domestic farmers. “This year we expect to sell £400 million of local products in the UK. By 2011, we plan to sell £1 billion worth,” she said.
When questioned after the presentation about returns to growers, Neville-Rolfe said: “There are areas of fruit and vegetables from which you can make a fair, reasonable return, and consumers want more of them.” Without actually airing the obvious intimation — that there are also areas where growers cannot expect to make a fair, decent return, she added. “Affordability helps British growers of lines such as parsnips and Swedes, by making them more available to the poorer families, and that has enabled us to grow the market by encouraging consumers to buy more and be more healthy.”
She also said that Tesco, which has been openly telling some fresh produce suppliers that it wants to announce a £3bn profit in March and asking for their help to achieve that through discounts, is suffering the same economic and fuel problems as its suppliers. But her take on the consequences of that was not what the audience wanted to hear either. “The difficulty when you add costs into a competitive market is that some of those will be passed onto the consumer and others will be passed back to the primary producer,” she said, adding with no hint of irony that at Tesco the six per cent of sales that represents profits is a “relatively small margin” and that farming returns “come and go”.
“That’s why we have to work together and look at the opportunities,” she said. “We want our suppliers to do well.”
The disconnect between Lucy Neville-Rolfe and her audience of farmers is that she was focused on the idea that Tesco was doing a great thing for farmers because it bought and sold so much product.
The growers were basically saying that this is of no help if you require we sell to you at a loss.
The UK is a highly concentrated market. Del Monte can decide to sell bananas in some other country, but a UK grower of cabbage has much more limited options.
Tanimura & Antle is a large organization with many options, but a smaller grower may not be able to simply decide not to sell a whole class of trade.
The easy plea here would be to the buyers. To point out that all their corporate pronouncements on sustainability need to start with a consciousness of whether they are paying adequately to sustain the land and the supply base. And we make that plea.
But it is every bit as important for growers to not enter into contracts that they know are losers and not grow more than they have a high expectation they can sell profitably.
It is one thing for a shipper to take a hit for a buyer this week and make it up next; it is another thing entirely to do business that is unsustainable.
We can fault buyers for pushing for this, but we also have to fault producers who allow themselves to be so used. As Del Monte did with ASDA on bananas and Tanimura & Antle has done to processors, sometimes a producer just has to say no.