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Pundit’s Mailbag — Retailers Should Pay For What They Say They Want

Jim Prevor’s Perishable Pundit, May 21, 2009

Pundit’s Mailbag — Mike Stuart Of FFVA Speaks Out On Ballantine And Buyer/Seller Relations brought several letters including this one from one of FFVA’s members:

Over the past 5-8 years I have watched as retail prices at store level have inched their way up and producers have inched prices down.

At present we are being asked for prices that were used 10 years ago and yet the store price will be 50 cents more per pound. 99 cents per pound used to be a regular price on squash, eggplant, tomatoes, beans, pepper and that was giving their customers a value. Now they would rather buy one load at 40 cents per pound and retail it for $1.99.

What this has done is to create market space that allowed smaller discounters such as Aldi to come into markets and price product at fair prices which return good profits. It is wrong for a retailer to want a low price and not pass that value on to their customer, which in turn might bring more customers into their stores and lead to the consumption of more fruits and vegetables.

Agriculture is the last efficient manufacturer left in America, and we are working hard at giving that away also.

— Tom O’Brien
President
C&D Fruit and Vegetable
Bradenton, Florida

We appreciate Tom’s earnestness and understand the frustration he feels. We would probably pull back before calling any retailer’s pricing “wrong” in an ethical sense. Pricing is a business strategy, and if one retailer wants to be very cheap on meat — and thus charge high margins on produce — we can hardly say he is “unethical” compared to a retailer who wants to discount produce and earn big margins on meat. It is also important to remember that the FOB cost of the produce is generally only a fraction of the retailer’s costs. There is freight, warehousing, redistribution, labor, rent, energy, insurance, payroll, taxes, the ad man and a lot of other things. Although the FOB may have stayed flat, these other costs have not.

We do, however, think that Tom’s comments on Aldi are telling. The chain is now up to over 1,000 stores in America and, as best as we can see, Wal-Mart has no strategy for dealing with this deep-discount concept.

This is exceedingly odd being that Wal-Mart failed in Germany in no small part because it could never establish a reputation as the low price leader because of Aldi and similar stores.

So a failure to effectively compete with Aldi is putting at risk the crown jewel of the Wal-Mart Empire, its reputation as the low price leader.

When we have spoken to Aldi executives, they have denied ever buying lower quality produce in order to offer low prices. Aside from trying to keep operating costs low, they argue that it is their flexibility that enables them to buy better. So, they might buy a size, for example, that is dictated by where the crop is peaking that year rather than some pre-determined specification.

Of course, this is retailing as a win-win-win. The grower wins as he gets help moving the sizes he is heavy with; the retailer wins as it can buy produce at a good price and thus make a profit even while offering his consumer good value, and the consumers win by getting quality product at a value price.

The problem is with retail as a win-lose-lose. If the retailer abandons its own specifications, as we explained Tesco had done with its Nature’s Choice program, then the retailer wins by getting a cheap price, but the growers/packers lose as they invested to win a customer they didn’t get or can get only by accepting no return on their investment. Finally the consumers lose because, included in the basket of values the consumers think they get by buying Tesco produce are those that are inclusive to the Nature’s Choice standard — food safety, traceability and sustainability — so not following the program means that, in effect, the consumers are getting less than they were paying for.

The issue is not that retailers should always pay more, per se; the issue is that retailers should pay for what they say they want. If Wal-Mart wants to require Global Food Safety Initiative certification, or conformance to the Produce Traceability Initiative or companies deeply dedicated to sustainability — bully for Wal-Mart — but it has to take out of the competitive pool companies that don’t meet these standards so that those who have invested to do so are not forced to compete with producers in the soft underbelly of the produce trade.

Many thanks to Tom O’Brien and C & D Fruit and Vegetable for helping the industry to reflect on such important topics.

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