It is not a surprise that Tesco, in coming to America, elected to use a small store format.
To start with, real estate difficulties bedevil larger formats. Wal-Mart battles for each supercenter in California, and local supermarket chains have the relationships with developers to be offered first those key corner shopping centers. In more mature markets, such as the inner ring suburbs of most major cities, there is so little available land that, without an acquisition, it could take decades for a new entrant to gain critical mass.
So, if Tesco wanted to move in the U.S., its choice was to build large rural stores and directly challenge Wal-Mart or smaller stores for which real estate was available. It elected the second path.
The other reason it is not a surprise: Tesco’s growth has been driven by small format stores.
This fact has not escaped the notice of Wal-Mart’s senior executives. Almost two years ago, Lee Scott, President and CEO of Wal-Mart, told the The Sunday Times of London that Wal-Mart needed to look at alternative formats:
“A lot of Tesco’s growth has come from the small convenience chain. Andy (Bond, the chief executive of Asda) and his team have got to look and see where the opportunity is for us with that kind of space,” he said.
“There are no limits, all we want to do is serve customers. We run multiple formats in different countries. In Mexico we are the second-largest restaurant operator,” he added.
Yet, in the U.S. at least, Wal-Mart has done very little with alternative formats. Even its Wal-Mart Neighborhood Markets concept has grown very slowly. The reason is three-fold: first, the Supercenter still has plenty of geography to expand into. Second, the Supercenter still provides the best return on investment. Third, a behemoth like Wal-Mart really has to build thousands of little stores to impact the top and bottom lines, so going smaller is not necessarily a real desire of management.
Yet, Tesco’s move into the U.S., which we have chronicled here, may have jumpstarted the process in Bentonville, if for no other reason than to be prepared in case Tesco’s concept turns out to be a success. A piece from The Sunday Times of London explains in an article echoed in the New York Post that Wal-Mart has charged David Wild with the task of responding to Tesco and developing a new, smaller format, more convenience-oriented store.
David Wild is now Wal-Mart’s Senior Vice President, New Business Development, but before he joined Wal-Mart Germany as chief merchandising officer, he spent 18 years with Tesco, including six as Tesco’s Chief Executive for Central Europe.
So David Wild knows Tesco and knows how it approaches markets outside its home base in the U.K. — he is thus a logical guy to develop a response to Tesco.
We wonder, though, if there is not more to this. Wal-Mart has also been struggling as Aldi, Save-a-Lot and other deep discounters have undercut Wal-Mart’s low price image. His Tesco experience may make him the perfect guy to plan a response to their initiative, but his Germany experience makes him the perfect guy to develop a response to Aldi and other discounters.
Perhaps Wal-Mart will try and kill two birds with one stone — developing a small, convenient format that is a deep discounter on fresh and prepared foods?
The New York Post ran an interesting piece entitled ‘Green’ Grocer Tesco’s Building Its Eco-Friendly Brand In U.S. The article makes two points that are important to be aware of as Tesco comes to America.
The first is a contrast in the way Tesco and Wal-Mart are approaching green initiatives:
Tesco, which plans to build 100 stores here by year end, is taking advantage of a growing environmental awareness among American shoppers to position itself as a truly “green” grocer, complete with eco-friendly stores, trans fat-free foods and a logo that makes ample use of the color green.
The strategy contrasts with the environmental approach championed by rival Wal-Mart, which is testing eco-stores in Texas and Colorado but whose biggest initiatives — those that go beyond the scope of any one retailer — are happening on the supply chain, out of sight of the average consumer.
New guidelines set by the world’s largest retailer require its 60,000 suppliers to reduce packaging, allowing more products to be crammed into fewer trucks at an estimated cost savings of $4 billion to the retailer and $7 billion to manufacturers.
“Where Wal-Mart has been most vocal has not been in the consumer space but in the business space, the place where you are likely to see real solutions proliferate,” said Jon Coifman, of the Natural Resource Defense Counsel. “Tesco, as a new entrant, is looking for a niche and so it makes sense for them to appeal directly to consumers.”
The second point is that Tesco is likely to be able to legitimately brag that it is “greener” than Wal-Mart, Safeway and other competitors — but that much of this is simply a consequence of its building everything new as opposed to being stuck with legacy structures:
Tesco has said it plans to spend $13 million to install solar panel roofing on a distribution center in California, potentially helping to placate environmental activists who are opposed to the project.
“Tesco is clearly a leader in this area,” said Craig Johnson, president of Customer Growth Partners. “What they are doing will put them at the forefront of being green in all senses of the word in the U.S.”
While other large U.S. food retailers have moved to cut energy consumption — Kroger by 20 percent and Food Lion by 27 percent — Tesco has one big advantage over its rivals in that it is starting from a clean slate, analysts said.
“It’s much less expensive when you have a green design baked in from the outset,” Johnson said.
One wonders if “greener than thou” is a sustainable competitive advantage for a retailer?
An advocacy group known as ActionAid has begun a campaign to get British supermarkets to change the way they deal with suppliers in developing countries. Here is how ActionAid explains its campaign:
We are calling for binding regulation and an independent watchdog to be put in place to ensure that supermarkets play fair in the developing countries where they do business.
At present there are few rules to stop supermarkets behaving in ways most of us would find unacceptable — demanding lower prices, faster delivery times, and greater flexibility from suppliers.
Imagine the audacity! A customer that would demand lower prices, faster delivery and greater flexibility from its vendors!
The gist of the report is that the supermarket chains in the U.K. don’t pay enough for imports — the report highlights bananas, cashew nuts and clothing — from developing countries. The report explains that to get and keep the orders, suppliers look to reduce costs including paying low wages and absorbing the costs of last minute order changes.
Although there is some talk about how much money the British supermarkets earn — although as we pointed out here, Tesco makes very little if its asset base is properly valued — the thrust of the report is that the real problem with supermarkets in the U.K. is that they don’t charge enough. The report claims that price wars in the U.K. compel retailers to push suppliers for lower prices. This in turn forces producers in developing countries to cut wages and turn women into casual workers as opposed to giving them a steady job. For example, this is the way ActionAid explains the situation on bananas:
The impacts of the price wars that characterize British banana retailing have been increased job insecurity, longer hours and less pay for Costa Rican plantation workers.
Price wars over Britain’s top-selling fruit are fuelled by supermarket demands for ever lower prices from suppliers whose hands are tied: most depend on one supermarket chain for more than two-thirds of their business. The price wars have catalysed the spread of a new model of employment throughout the banana industry, characterised by wages as low as 33p per hour and excessive working hours. Women have been squeezed out of permanent jobs into casual, piece rate work where they earn lower wages, sometimes so low that they are forced to stay in the fields during pesticide spraying.
“We are paying for the price wars between supermarkets in your country.” Costa Rican banana supplier to UK supermarkets.
More specifically they claim that a move by ASDA, Wal-Mart’s subsidiary in the U.K., to drop the retail price of bananas has been disastrous for workers who grow and harvest bananas:
“In the old days there were doctors, decent housing, the housing was well kept, they paid for the electricity in your housing and they paid for health care,” says Alberto, who works on a banana plantation supplying Del Monte, Asda’s exclusive supplier. “In harvesting jobs, there used to be teams of four or five; now we have to do the same work with three people. These are all things that happened in 1999 when they sacked everyone overnight and rehired them under different conditions. We paid the price. They’re always saying that the market is bad. It’s just another way of putting pressure on us. The market’s always bad for Del Monte.”
Asda Wal-Mart signed a deal with Del Monte in 2002 which made it Asda’s exclusive supplier, in return for what one industry insider described at the time as a ‘ridiculously low price’. At that time, the man from Del Monte was the only supplier able to say ‘yes’ to such a price. Why? Because three years earlier Del Monte had slashed the pay of its piece rate workers overnight by an estimated 40%. Hundreds of workers were fired and rehired the next day with worse pay and conditions, and with an increase in the number of piece rate, temporary and subcontracted jobs…
As well as cutting prices to its supplier, Asda also cut its net profit target margins from around 32% to 22%.These two factors allowed Asda to drop the retail price of bananas from £1.08 per kilo to 94p per kilo in mid 2002. It was a declaration of war: other supermarkets had little choice but to follow suit, and to worry afterwards about how they would absorb the reduction in costs. Morrisons led the next downward move to 85p, and Asda eventually retaliated with 66p.
Instead of lowering their own profit margins, Asda’s competitors passed the price cut straight on to suppliers; Tesco maintained its net target margin at 32%. Faced with the need to reduce costs, the ‘Del Monte model’ rapidly became standard across Costa Rica and the whole banana industry.
ActionAid’s partner Banana Link interviewed 171 banana workers from 16 plantations in Costa Rica in October 2006.It found that workers’ rights, pay and conditions have been the primary collateral damage in this ongoing price war.
Just as we pointed out here that you can’t look at things such as Fairtrade by only looking at places where you do good, you need to also look at the downside of your efforts, so one can’t read these types of reports without thinking through the consequences of what is actually being proposed.
First, these people would have supermarkets charge consumers more for items such as food and clothing. Obviously this, in and of itself, can cause hardship for many people.
Second, the money that is now going to be spent on higher prices for imported goods would no longer be available to be spent on other items — and perhaps the hardship caused to the producers and their employees of these items that will no longer be purchased will be worse than the benefit some employees receive from selling bananas at a better price. Whatever the specifics, the point is clear: You can’t look at the pros of giving more money to one party without considering the cons of taking it away from another.
Third, assuming that additional money at retail is even paid to suppliers or goes to farm laborers (a big assumption), how do we know that these now higher labor-priced countries won’t be overpriced and lose the business all together?
Every production site has pros and cons. Some are easier places to do business, with better infrastructure, less corruption, closer proximity to markets, more productive workers, etc. For some places the availability of inexpensive labor is their competitive advantage, and if you stop those countries from playing the cards they have, you don’t guarantee them prosperity, you guarantee them poverty. Nobody would build a factory in Africa to make clothes if the costs are the same as building one in the U.K.
Whatever price ASDA wants to sell bananas at is irrelevant. In the short run ASDA may or may not be able to buy bananas at a price below production cost. If the bananas are already planted and no one else wants bananas who is willing to pay more, as long as ASDA pays at least the marginal cost to pick, pack and ship the bananas, in the short term they may be available.
Even in the long term, allocating costs and profits is tricky in looking at a customer who buys many products in many divisions all across the world. Perhaps vendors will even sell below cost because ASDA is a large account, and they hope to gradually get the price up. Long term, if ASDA tries to buy bananas below the cost of production, nobody will invest in new banana trees and ASDA simply will not have bananas.
There is another possibility: A company such as Del Monte sells many products in many places to Wal-Mart. Perhaps selling ASDA bananas at a loss could be justified because they make it up on pineapples or other products. Or, perhaps, there is some advantage to working with ASDA if Del Monte wants to keep other business with Wal-Mart elsewhere.
What is humorous about this report is the breezy manner in which it assumes that, if not for retail pressure, major producers of many products would voluntarily pay workers more than necessary. If adequate workers can be attracted and retained at a pay rate of X, meaning, if a paycheck of X is good enough in the country where production is located, so that good workers prefer to work at that rate than any alternative they have, it takes a leap of the imagination to believe that these companies would voluntarily pay extra just because they could do so.
And, in fact, if you read this report’s story about Del Monte and ASDA, you note that Del Monte’s cost cutting action was taken in 1999 whereas Del Monte didn’t sign its deal with ASDA until 2002 — three years later!
Obviously, it was not ASDA’s pressure that forced Del Monte to lower wages. Del Monte revised the way it worked with workers in particular places to maintain the viability of producing in those places.
Authors of this report, much like advocates of Fairtrade initiatives, are frustrated by the conditions that exist in many areas of the world.
This is laudable as there is much suffering on this earth.
The error, though, is two-fold. First, they look for a “quick-fix” to a problem that, by its nature, requires long periods of time because development requires many steps that have to happen sequentially. In other words, you have to educate engineers before you can have a high-tech R&D industry.
Second, they look at individual industries, such as bananas, and try to create islands of the west in the midst of national misery. To the extent this can ever be accomplished, it inevitably leads to horrid corruption as getting one of these coveted jobs becomes a sinecure granted by politicians or organized crime.
We actually know a lot about development, and very little of it depends on virtuous British supermarkets paying more than they have to for goods or on virtuous British consumers volunteering to pay more than necessary for products.
In the post-war era, we saw the development of the Asian Tigers: South Korea, Taiwan, Hong Kong and Singapore. More recently, we have seen the rise of China to an industrial power — and none of this depended on British supermarket consumers paying more than necessary for goods.
Reports such as this are not merely useless, they are genuinely harmful because they switch the focus of development efforts from the developing country to consumers and businesses far away.
When British supermarkets press for better prices, faster delivery and more flexibility from suppliers in developing countries, they are really doing those suppliers a favor because they are teaching them what is necessary to compete in the modern world.
To coddle these suppliers and not tell them that their products and service must earn them a place in the supermarket’s offer and in the market basket of consumers would be to condemn them to an eternity as charity case. It would not be beneficent; it would be evil.
You can read the executive summary of the report here and the full report here.
The other day we happened to run two unrelated stories that came to be an interesting industry experiment.
We ran Taylor Farms And Dole Veg Paying Up For Food Safety, which dealt with the fact that Taylor Farms and Dole had both announced price increases tied to the costs of implanting food safety programs.
We also ran AgJOBS Gets ‘Pull’ From PMA While United And Others Provide The Push, which elaborated on an industry-wide effort to pass the AgJOBS legislation to ensure adequate harvesting labor.
The Taylor Farms/Dole piece had a link to letter Dole sent its suppliers regarding the price increase.
The AgJOBS piece had many links to ways individuals and companies could lobby legislators, help PMA or help United on this effort.
The one link to the Dole pricing memo received more than a hundred times the number of clicks on the AgJOBS piece.
What could this mean?
Well one possibility is as John McClung, President of the Texas Produce Association, mentioned in a letter he sent us on the issue of a possible PMA/United merger:
Finally, perhaps most important but also most difficult to characterize, the segments of the fresh fruit and vegetable industry simply don’t have the tradition and history of activist political involvement. Individuals in the industry don’t see the need to get their hands dirty in Washington — or their state capitals, for that matter. They don’t think they can play the game; they don’t know how and they don’t want to learn. They think if they approach their members of Congress on some issue, all that will happen is they’ll get donation solicitations for the rest of their lives. And, they think lobbying is what they pay United, the regionals, and recently maybe even PMA to do.
I’ve often said that lobbying for the industry is like being a proctologist: your clients know they have a problem and need your expertise, but they want you to get in fast, get out fast, tell them as little as possible about what you saw, and keep the bill to a minimum. The problem with all of this is that real political strength comes from the proverbial grass roots. The industry’s hired guns, including United’s staff, play a key role in educating Congress and the regulatory agencies, and — whether one approves or not — in making timely campaign contributions from the various Political Action Committees. But at the end of the day, the best lobbyist is good old what’s-his-name from the Congressperson’s home district.
So, perhaps produce people just don’t have a taste for lobbying and government relations.
Another possibility is that PMA’s argument isn’t strong enough to raise a lot of interest by the buy-side of the industry. After all, if there is a labor shortage in the harvesting of crops, the most likely result is not starvation, but an increase in produce imports.
Now this may raise some issues that need to be resolved in areas such as food security, but they are not really business interests of retailers, foodservice operators and wholesalers. It is hard to make a case that, long term, where fruit is harvested makes a big difference to Wal-Mart or Costco.
A third possibility is that many industry members who might have supported the AgJOBS bill have been alienated by overreaching. The bill is filled with provisions, such as changing the way wages are figured, that have nothing to do with increasing the availability of labor.
Fourth is the possibility that produce industry people who are not directly affected by the issue are more focused on national immigration issues. We’ve heard from several people who basically say cheap farm labor is a drug and damaging to the country. As one important buyer wrote us:
… we haven’t attributed the correct cost to our cheap labor. Thirty percent of California prison inmates are in the country illegally. There are 20 murders per year in Salinas, a city of 150,000 people. The city spends almost $1 million on a gang task force every year. These are social costs that are borne by all the citizens of the city and state, and aren’t accounted for in the cost of the produce.
Our own sense is that the bill, as written, is designed to meet grower desires almost exclusively — so it is a difficult bill to sell to those who have other concerns.
This obviously affects how legislators perceive the legislation, but it also affects how people at other produce sectors perceive the bill.
Perhaps this accounts for the relatively tepid enthusiasm we are sensing in the trade.
The United Farm Workers union once struck fear in the hearts of growers. Its grape boycott was legion, and its moves to lettuce and other crops were very aggressive.
It is no secret that the UFW is a pale shadow of its former self.
With the news that members of the UFW have voted overwhelmingly to decertify their old union at Excelsior Farming in Hanford, California, the number of California farm workers represented by the union falls to what, most likely, is less than 1% of the 450,000 estimated field workers in California.
How the mighty have fallen.