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Perishable Pundit
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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



Got Produce? The Rent-Dissipation Hypothesis And The Issue Of Cui Bono

As we have tried to think through the pros and cons of the industry launching a generic promotion program, we find ourselves continually frustrated by the kind of proposal that has been made and the process by which the industry is being asked to evaluate this matter.

First, we ran a piece titled, Got Produce? Generic Marketing Program Dialog Begins, But Is It Right To Use PBH Donor Funds To Lobby For A Mandatory Assessment? In this piece, we pointed out that donors who gave to the Produce for Better Health Foundation never intended for their money to be used in a lobbying campaign. Yet donor money has been seized to run websites, webinars, buy airplane tickets, hotels, divert staff effort, etc. This is just wrong, and we hope the activity will be stopped and the money refunded.

We also pointed out that the normal process by which ideas get vetted includes the painful but necessary step of reaching out and asking for support. If there are not 25 industry members willing to fund this campaign, then is there really enough support to even go through the process? The decision to simply take money from the Produce for Better Health Foundation may have short-circuited a useful go/no-go test.

Second, we ran a piece that we titled Got Produce? Both Sides Need To Be Heard, which pointed out that the credibility of the industry “dialog” was in question because the same people who were advocating for the program were also controlling the dialog. So in the presentations, webinars, etc., instead of being arranged as even-handed debates between intelligent, studied and articulate advocates for both sides, we have one-sided scripted presentations with a few questions at the end. Further, the advocates make no effort to communicate critiques of the plan, nor would they use their funds to make sure the critiques of the plan get presented and communicated.

Third, we published Got Produce? Is $30 Million Sufficient? We asked what evidence was presented that $30 million a year — the projected resources of this proposal — would actually be sufficient to increase demand. We pointed out that not enough research had been done to answer that question — though the examples the advocates gave all implied much larger amounts of money would be needed. Once again, we found a process problem as it was the advocates for the program that decided how much money is sufficient. We urged taking a step back and arranging for some real research done by neutral parties so that the industry could feel confident that the funds raised would be sufficient to achieve the desired goal.

Today we consider the ancient issue of Cui Bono, which loosely translated means “to whose benefit?”

Although the phrase is often connected to something untoward and is used in criminal investigations to discern who might have had motive to commit a crime, we use the phrase just in its plain meaning and look to think about who could profit from such an enterprise.

One of the reasons it will be hard to have a healthy dialog on this subject is that most industry institutions, the associations, the trade press, etc., will in fact benefit from a larger industry. This is true even if not one existing grower would realize a benefit.

It is also true that companies that have weak brands but compete against more prominent brands might see this in their interest. We have never asked, but it would not surprise us to see Taylor Farms, with its roots in foodservice and barely any consumer branding, to endorse this kind of plan, while we would expect Fresh Express/Chiquita, a much more prominent brand, to decline endorsement of the plan.

Basically, we would expect Fresh Express and its parent company Chiquita to want to spend their money promoting their own brands, while a competitor would prefer to divert that promotional expenditure to industry promotion.

Retailers always love industry-wide generic promotion because it comes with no strings attached. To get marketing dollars from Dole is possible, but Dole would want something in return, an end cap, an ad, a demo, something. Only industrywide generic promotion comes free and clear.

What about produce firms themselves? Would they all benefit? No, not at all.

Let us assume, for argument’s sake, that the generic promotion program is a success and successfully has driven up demand for all produce items. Will this result in higher profits for everyone?

In our first piece on this program, we pointed out that many farmers grow a set number of acres. The industry could double or triple consumption and the growers won’t get any more profit unless they get higher prices.

Now we pointed out that there is something of a contradiction at the heart of this program since it proclaims itself an effort to increase consumption, yet higher prices driven by higher demand would be inimical to that goal of higher consumption.

Another point, though, is that the industry would not experience the benefits of even a successful program in anything approaching an even-handed way. The reason is that higher prices created by more demand create a “supply response” in which the supply rises to take advantage of the higher price.

This is typically called the “rent-dissipation hypothesis,” and Professor Henry W. Kinnucan of the Ag Economics faculty at Auburn University describes the phenomenon clearly in a piece related to the supply response to catfish promotion:

A paradox of industry-sponsored advertising is that the very thing that causes it to be effective — elevation of market price — undermines its effectiveness in the long run. Producers in competitive industries respond to elevated prices by expanding output. Upon reaching the market, the expanded output places a downward pressure on price which, if sufficiently strong, may leave producers no better off with the advertising program than without it. The hypothesis that states profit from generic advertising may prove illusory without effective supply control is sometimes referred to as the “rent-dissipation hypothesis.”

The gist of the research is that everything depends on how quickly and cheaply production can increase. The Professor found that there was a profit to be realized for catfish growers mostly because increasing catfish production in the short term was difficult. In produce, there are many variables as the Professor explains:

With few production alternatives existing for catfish ponds and equipment, asset fixity operates as a natural deterrent to entry or expansion, causing a relatively inelastic supply response at the farm level. Furthermore, demand for catfish at the wholesale level is only slightly elastic and is probably inelastic at the farm level. This combination of elasticities, coupled with the magnitude of the demand shift as represented by the advertising elasticity, results in sufficient rents from increased advertising to more than offset incremental costs over any reasonable time horizon. Thus, the notion that producers are no better off with the promotion program than without it is not supported by our analysis.

Our findings are generalizable only to the extent that other industries have characteristics similar to those of the catfish industry. Asset fixity, which accounts for the sluggish supply response for catfish, may exist in other industries, especially those involving perennials such as almonds, raisins, walnuts, oranges, etc. This may not be the case for vegetables and some row crops, where inputs are less specialized and production lags are shorter. Then, too, farm-raised catfish is a relatively new product; this increases the likelihood that consumers will respond to catfish advertising. Clearly, the rent-dissipation hypothesis needs to be tested over a wider range of commodities before we can be confident that cooperative advertising ventures can indeed generate sustainable benefits for producers in the face of uncontrolled supply response in competitive markets.

What all this means is that if prices rise due to increased demand, we would expect squash production and imports to very quickly depress the market — so the industry might be larger, but not necessarily more profitable. If the supply response is robust, prices could even drop.

On the other hand, growers of certain tree crops, say pears, which have a long growth period, might have many years of higher demand and thus higher prices before additional trees are planted and grow to maturity.

One reason some regional commodity promotion groups, particularly those representing certain tree crops, can be more successful is that if their advertising works, an increase in demand for that commodity will almost certainly result in higher prices and thus a higher return for growers. So for example, if the California Avocado Commission increases the demand for, specifically, California avocados, it is very difficult to dramatically increase production of California avocadoes. The land is not available, the water is not available, the labor is not available. The consequence will be higher prices and higher returns for the California avocado growers.

In contrast, a national campaign that increases demand for avocados can be easily supplied by avocados from Mexico, Peru, Chile and other producers, so the campaign may not raise prices or profits. Producers of row crops tend to respond very quickly to higher prices with higher production so would be expected to experience the benefit of higher prices for a very short period.

In addition the internationalization of the industry has made it more difficult for growers to profit from these types of expenditures. If prices rise in the US so that returns are more attractive for selling in the US market, we can expect product to be diverted to the US rather than foreign markets until the prices equalize.

Now one would think that the proposal presented has a careful study of the rent-dissipation hypothesis on each covered commodity so that everyone can see where they and their commodity would stand. In fact, the whole issue is ignored, just glossed over.

Once again, this speaks to process. The proposal on the table is to spend 150 million industry dollars over the next five years. Yet the research that went into the proposal is less than most companies would accept to justify a new warehouse.

There is a lot of work that needs to be done before the industry can possibly make an informed decision. The advocates of this proposal are making a mistake in trying to ram it through before all the homework is done. They will wind up losing votes they could have gotten if all the ducks were in a row.




How Do Kroger, Safeway, Tesco And Bashas’ Stack Up Against Three Of
Wal-Mart’s Store Concepts?

For many years now, Pundit sister publication, PRODUCE BUSINESS, has been conducting a Wal-Mart Pricing Report. Each iteration of the report focuses on a different city and analyzes the produce pricing of the local Wal-Mart Supercenter versus other nearby retailers.

The May 2009 issue included the 19th chapter of this study and was focused on seven separate store concepts in the Phoenix, Arizona, market, specifically:

Wal-Mart Supercenter

Wal-Mart Neighborhood Market

Wal-Mart’s Marketside Concept

Tesco’s Fresh & Easy Concept

Bashas’, a local independent operator

Kroger’s Fry’s banner

Safeway

These reports are always intriguing and a good reason in and of themselves to subscribe to PRODUCE BUSINESS, which you can do right here.

This Phoenix report, though, offered several insights of great significance for the broader industry. So we thought we would highlight some of these key points for Pundit readers:

1. The Extraordinary Dominance of Wal-Mart on Price
We have studied Wal-Mart extensively, and the fact that Wal-Mart Supercenters price advantageously against supermarket competitors is nothing new. Wal-Mart has never lost a pricing study to a full range supermarket operator since the study began in 2002.

What is interesting though is that in Phoenix, the three Wal-Mart concepts we looked at — Wal-Mart Supercenter, Wal-Mart Neighborhood Market and even the small-store concept called Marketside that minimizes its identification with Wal-Mart — came in, respectively as Number 1, 2 and 3 as the three lowest priced concepts in the area.

Now, as we explain below, there are some qualifications to this related to use of store coupons and loyalty card discounts. But if you are a regular Joe walking in off the street, you will get a better price at the highest priced Wal-Mart concept than any of the other concepts we studied.

2. Wal-Mart has Decoupled Pricing at Neighborhood Markets from the Supercenter
For years, Wal-Mart’s Neighborhood Market concept has grown very slowly. This is because although the concept has always been profitable, it has always been less profitable — provided a lower return on investment — than the supercenter. Now there has long been a debate internally as to whether that fact should be determinative as to future growth prospects for the concept.

One side has held that it is a simple matter: the more Neighborhood Market stores Wal-Mart has, the lower Wal-Mart’s total return would look to Wall Street — thus better to not build many.

In contrast, other Wal-Mart executives have thought the best approach was to think of the Supercenters and the Neighborhood Markets as a team. Consumers might drive out to the big Supercenter for stock-ups but use a local Neighborhood Market for more frequent shopping. In a financial sense, these executives viewed the two concepts as partners thinking that the right approach was to average the ROIs of the two concepts to get an acceptable level of ROI while, also, taking just enough additional market share that it might discourage a competitor from entering the market.

It was the notion that Neighborhood Markets had to hold their own on ROI that won the battle within Wal-Mart. Since their ROI didn’t equal Supercenters, growth was slowed.

One reason the ROI was lower than Supercenters is that a rule had been established that pricing would be identical in both Wal-Mart Supercenters and Neighborhood Markets. Without a Supercenter’s scale, it was hard to earn the same ROI.

Now, however, our study shows — and our conversations with Wal-Mart executives confirm — that Wal-Mart has dropped the requirement that Supercenters and Neighborhood Market stores price identically.

This is a big change. In the past, differences between the Supercenters and Neighborhood Market were very tiny — the results of pricing errors or the occasional markdown done by a manager. Now we find in Phoenix that the Neighborhood Market concept is pricing 6.59% over the Supercenter. It is still a very competitive price point, beats everyone else in the market, yet that almost 7% higher price point might be enough to bring the ROI on Neighborhood Market expansion in line with the ROI on Supercenter expansion. If so, we can expect to see many more Wal-Mart Neighborhood Markets built, and soon.

3. Many Chains are Prepared to Disregard Shoppers Who Don’t Get loyalty Cards
If you just walk in off the street without a loyalty card, Bashas’ is 29.93% more expensive than the Wal-Mart Supercenter, Kroger’s Fry’s banner comes in at 27.20% over Wal-Mart and Safeway fully 36.54% over Wal-Mart. If you have a card, Bashas’ is 17.94% over Wal-Mart, Kroger only 12.65% over Wal-Mart and Safeway 24.04% over Wal-Mart.

The motivation for this approach is unclear. Perhaps these stores figure that consumers not willing to get a loyalty card are not price-sensitive. Or maybe they just want to drive people into the program so they can collect data and either sell it or use it to promote effectively.

We wonder if it is smart. Maybe a lot of people don’t like to have records kept of everything they buy. Maybe people walk in, see the high prices and get turned off. Maybe people remember the prices posted on the signs and mentally use that as the comparison basis with Wal-Mart. We don’t know, but it seems that the decision has been made by many chains to not worry about pricing even within range of Wal-Mart, except for those consumers who have loyalty cards.

4. Tesco May be Failing Because it is Too Expensive
On our main test, which is what a consumer would pay if he walked through the door without coupons, loyalty cards, etc., Tesco’s Fresh & Easy concept is more expensive than every concept in the market save Safeway. Fresh & Easy comes in 31.68% over the Wal-Mart Supercenter’s prices. If we consider loyalty card prices, Tesco’s Fresh & Easy, which, like Wal-Mart, does not offer a loyalty card program, is actually the highest price concept of the seven banners we studied.

We’ve spilled a lot of ink and burned a lot of electrons to study Tesco’s Journey to America as Fresh & Easy, and there has been a lot of analysis as to particular reasons for the failure of the concept to catch on.

Maybe a simple explanation would be more helpful: If a consumer does not have a special coupon, Fresh & Easy is likely to be seen as very expensive.

Perhaps Fresh & Easy needs to maintain these high prices because its couponing strategy — currently $10 off a $50 purchase is the main offer — would be too expensive without this extra margin. Still, this would mean that Fresh & Easy has gotten itself between a rock and a hard place. It can’t shut off the coupons, because consumers stop coming, but if it keeps the coupons it needs high margins which means that consumers who walk in without coupons find themselves paying more than they could almost anywhere else. This leads to even greater dependence on couponing.

Remember that, to the consumer, Fresh & Easy’s couponing is somewhat offset by it’s unwillingness to accept manufacturer’s coupons.

We would suggest that Fresh & Easy needs to build a reputation for aggressive pricing without any coupons. That means biting the bullet and repricing to be competitive. There is really no reason why Fresh & Easy shouldn’t at least be equal to Wal-Mart’s small-footprint Marketside concept, and there was a time when Fresh & Easy executives used to speak of Whole Foods quality at Wal-Mart prices.

In any case, we can talk all day about color schemes, the “warmth” or lack thereof regarding the concept, the locations, the assortment, etc… if the price point is going to be 31.68% over the Wal-Mart Supercenter, as our study indicates, that explains an awful lot about why Tesco is failing in America.

Wal-Mart selected Phoenix as the first test of its Marketside concept because key Wal-Mart executives believe that Phoenix, with its large elderly population and Latino ethnic tilt, is what America is going to look like. If this is true, one has to say that it seems as if the future will belong to Wal-Mart.

You can read the complete PRODUCE BUSINESS article with charts right here.




Vendors Beware As Wal-Mart
Alters Course On Procurement

We’ve long tried to understand Wal-Mart, and recently the collapse of Ballantine Produce has led to a reassessment of the impact Wal-Mart may be having on the supply base:

  1. Did Wal-Mart Have A Role In Ballantine’s Fall?
  2. Pundit’s Mailbag — Mike Stuart Of FFVA Speaks Out On Ballantine And Buyer/Seller Relations
  3. Another Sea Change At Wal-Mart
  4. Pundit’s Mailbag — Response To Ballantine’s Fall: ‘Just Say No’
  5. Special Buys, Wal-Mart And The Meaning Of Loyalty
  6. Pundit’s Mailbag — Wal-Mart’s Nature
  7. Wal-Mart’s Current Behavior
  8. Pundit’s Mailbag — Fruit Patch Speaks Out

As Wal-Mart came to develop its produce procurement system, it was a brave band of brothers in the early years, vendors willing to experiment and improvise, that made it happen. Now that system is in flux and many fear for the supply base… and for Wal-Mart. This old-timer who wrote to us recently accepts the critique of Wal-Mart but also warns the supply base that they can’t change the customers; they can only change themselves:

As usual, more good stuff in today’s “Pundit”. Having been involved with Wal-Mart for many years, I thought I might offer a few additional comments:

1. The author of the letter you printed, in your piece Wal-Mart’s Current Behavior, was exactly correct. Wal-Mart doesn’t understand a couple of things: they don’t understand how fragmented the produce industry is. They think buying tomatoes is the same thing as buying TV’s from Visio or apparel from Starter. And it isn’t.

The author correctly identified the hundreds, if not thousands, of support people in the supplier network that enable Wal-Mart to do what it does.

Many much smaller retailers have discovered how difficult it can be just to buy sweet corn for a summer promotion or sweet potatoes for Thanksgiving, with all of the regionality and fragmentation in this industry.

On more than one occasion, Wal-Mart has tried to hit up shippers for problems that resulted from Wal-Mart’s own replenishment staff. Shippers both smart and courageous have told them to go pound sand, but doubtless there are many other suppliers, less courageous and often less knowledgeable about how retailers think, that are getting hammered for that type of thing and are afraid to fight back.

And now everyone in the supply chain should get scared, because it will get WORSE! Remember that Wal-Mart is going through a food “transformation” (read: reorganization). The “buyer” will now be further removed from replenishment, pricing and product location. You think things are “interesting” now? Hold on to your horses!

2. It is just tragic how Wal-Mart is approaching contracts. What is the point of a “contract” with a 50-case minimum? That’s just ridiculous. Here was the way Bruce Peterson explained his plan when he set up Wal-Mart’s produce contracting practices. A process you wrote about earlier.

Wal-Mart tried hard to contract about 80% of its projected weekly needs. When product got tight, Wal-Mart would raise the retail price to slow movement down to the 80%. In other words, Wal-Mart would contract for enough product that through price adjustments it could reduce demand sufficiently that, barring acts of God and non-performance by a vendor, it never would have to pay above contract price.

If the market got sloppy, Wal-Mart still bought the 80% of anticipated volume it had contracted for, but would also buy in additional product at a reduced price, averaged the 2 costs, lowered the retail accordingly, and blew the product out.

This was a win-win-win for everyone. The supplier still had a significant amount of his product being sold at the higher contract cost, Wal-Mart took huge volumes off the market, which kept the market from totally tanking, and Wal-Mart was able to increase sales, while the customer got a great in-store experience.

To be truthful, this concept was not always easy to execute perfectly, especially as volume grew. The whole key to the plan was to keep inventories really tight. AND THAT’S WHY THE REPLENISHMENT NETWORK WAS SO IMPORTANT!

Wal-Mart was actually a supplier’s dream. This giant retailer could “turn on a dime” as it had no ad lids! Wal-Mart also paid its bills and you could cash the check! And, crucially, Wal-Mart never negotiated a contract that was below the cost of production.

Now again, truth be told, Wal-Mart was made up of human beings, often operating under great pressure and, surprise, surprise, it was NEVER perfect at this. But the concept was clear; it was communicated to both Wal-Mart staff and vendors. So many were so proud to be part of this project that, I have to say, seeing it all now, it really breaks my heart to see what they are doing. For the sake of Wal-Mart and its vendors I hope it works, but it is hard to see how in can.

3. My last comment (for now!) is in regard to something you wrote today. You pointed out that there was a time “…when Wal-Mart CEOs believed, as they once did, that Wal-Mart needs its vendors more than the vendors need Wal-Mart.”

It was Wal-Mart CEO Lee Scott who said that at a supplier summit. I heard him with my own ears, and, even if they don’t believe it anymore in Bentonville, it has never been truer.

Wal-Mart is very large now, perhaps 25% of the retail food business. What would happen if suppliers just chose to stop selling Wal-Mart? Suppose they did something really radical, say…. for instance…. like NOT SELLING PRODUCT BELOW COSTS!

In fact there is a lesson here in dealing with all large retailers — Kroger, Safeway, SuperValu, Costco, many more. Many shippers have and have had in the past all kinds of deals including rebate arrangement with many retailers that were and are fob-MINUS! That really makes very little sense.

You have been focused on Ballantine and Wal-Mart and, it is certainly true, as your letter from Mike Stuart of the Florida Fruit and Vegetable Association pointed out, that the pressure from retailers is immense.

Still, pressure is not exactly the same as coercion and in that sense blaming Wal-Mart — or any other retailer — is just half the story. Take the case of Ballantine (and others) — What kind of business model is it to sell product below cost? And here’s the problem for the industry: all it takes is for 1 grower to do that, and here’s what you’ll hear from the buyer: “Why should I pay you “X”, when I can buy the product for “Y” ( X-minus) from so and so?”

This starts a chain reaction. Frankly, many top executives, including those at Ballantine, took and take the position that “ I’m a fighter and will hang in as long as it takes.” It’s a “last man standing” mentality, that you’ve written about before, that just kills the entire industry.

Now some grower/shippers have become large enough and diverse enough that they can “take the hit” for a season in order to gain market share. And then couple all of that with the “market mentality” of individual growers, and you see a train wreck. But again, go back to my original statement. What would happen if large, quality grower/shippers would just say no to Wal-Mart and retailers in general, enough is enough. You want quality, in volume, at reasonable costs, with account resources? Well this is what it will cost!

Go back to the concept that Wal-Mart is 25% of the retail market. WHERE WILL THEY GET THE PRODUCT?

Honestly, if I had to identify Bruce’s biggest fear during all his time at Wal-Mart, it was that a quality supplier would opt to leave. What would happen, for instance, if Chiquita, Dole, and Del Monte quit selling Wal-Mart bananas? Where do you get 2 ships of bananas from every week?

Oh, you can get bananas, but they will be low quality.

Grower/shippers are content to get “bent over” by Wal-Mart and other big retailers until more and more of them go broke, consolidate, or otherwise disappear.

Bruce Peterson has been giving speeches to grower groups all over the country and he explains it clearly: The problem with today’s grower/shippers is that they want to apply business models that were effective in the 70’s, 80’s, and 90’s to today’s business climate. And as someone pointed out in different circumstances, “ someone moved the cheese”.

I think it’s fair and reasonable to point out what Wal-Mart and other large retailers are doing. But at some point, suppliers need to quit “whining” and begin to rethink their “go to market” strategies. This includes what they grow, how much they grow, who their customers are, and what they are willing (and can afford) to do. If you listen to Bruce, though, he doesn’t believe this will happen strategically or intellectually. Instead the winnowing out will be, in his term, DARWINIAN!

We appreciate the letter and suppose we can wish for a better outcome but, truth be told, when has there ever been a great commercial battle that has been decided on a basis that was otherwise than Darwinian?

And it is always the one weak competitor that ruins the market for everyone else.

We suspect that exhortations to producers to have a stiffer spine are not likely to prove productive.

Some producers have refused to sign contracts that they thought were losers. But, mostly, this has been with row crops where the growers could lose less money by not planting than by signing one-sided contracts.

When it comes to fruit on the trees, so much money has been sunk, there is at least the possibility of increasing cash flow or reducing losses by selling even at a price that doesn’t cover all expenses.

And, of course, there is a whole other issue, which is that many vendors have assumed the contracts would be used fairly and not manipulated so that they become one-sided documents. Often the price in the contract is fine. It is the way Wal-Mart decides not to buy under the contract when markets are weak and demand every box they can demand when prices are strong that is the problem.

Yet this is nothing new either.

When the Pundit was cutting his eye teeth in the business, he was sent by the Pundit Poppa down to Puerto Rico to study under the tutelage of one of the Pundit uncles, Sydney Prevor, who had long run the firm’s Puerto Rican affairs.

We imported many items, potatoes prominent among them, and we would sell them to small wholesalers who had slots at the Mercado.

One customer was a little bigger than the rest and he could order, in advance, a full trailer. In exchange for doing so, he wanted a discount. So each week we gave him an offer, he accepted it and we had a contract for the week.

Yet, a youthful Pundit learned about contracting from this customer. For it turned out that when the ship would arrive, if the market price was below the contract price, our customer would speedily come to get his trailer of potatoes and, in fact, would always have a story as to why he needed a few pallets extra at the same price this week.

Yet when the contract price was above the market, he never came for his potatoes. We would call him and there was always a reason why he needed it cheaper this week.

In time Uncle Sydney advised our customer that a contract with him was no contract at all and told him we would no longer give him a price in advance and he was welcome to buy at market from us every week.

Little did we understand that the mighty Wal-Mart in its behavior would come to mirror our Puerto Rican potato customer.

Now we could refuse to contract when the contract was a sham because our business did not depend on this one guy. When Bruce Peterson was running produce for Wal-Mart, he had a rule that Wal-Mart should never account for more than 25% of any supplier’s business. He developed that rule because Wal-Mart had a policy that Wal-Mart should never account for 30% of anyone’s business. So the 25% kept vendors from getting too close to the limit.

It is fair to say that every single vendor Bruce Peterson ever did business with heard him give this message: “Never put yourself in a position that you can’t walk away from Wal-Mart — or, for that matter, any other customer.”

This was advice both wise and sincere — and also mostly ignored. This is not because vendors were foolish; it was because of the realities of the situation.

First, if you got typed as one of the companies “helping Wal-Mart,” it wasn’t as if Kroger and Safeway were going to beat down the doors to buy from you. Sure if they needed you they used you but, the good steady business went to their own teams — vendors who were strongly encouraged not to work with Wal-Mart.

Second, even giant produce companies are tiny compared to the big CPG companies such as Procter & Gamble. Wal-Mart was growing so quickly that few had the capacity — both financial and managerial capacity — to grow at four times the rate of Wal-Mart and thus keep their Wal-Mart business both growing at Wal-Mart’s rate of expansion and keep the Wal-Mart business at a steady 25% of business. Most had their hands full keeping up with Wal-Mart.

Third, as Wal-Mart grew, it was grabbing market share which left it very difficult to pick up market share from the non-Wal-Mart segment of the industry. Now, if Wal-Mart’s market share is about 25%, it would be mathematically impossible for Wal-Mart’s vendors to stay at 25% unless every producer in the country was a Wal-Mart vendor or unless the vendors have lots of unrelated businesses.

So most vendors decided to take their chances. This was and is very dangerous. Fleming doesn’t exist anymore because it took too much business from K-Mart. Yet for most produce companies it was a risk worth taking and, in fact, worked out very well for many.

It seems that the bottom line is this: Wal-Mart is changing the way it approaches vendor relations. This is not a shock, we have written about it for years. Many of the changes are objectionable to the vendor community but it is a free country and Wal-Mart is allowed to make its own vendor policies.

So Wal-Mart vendors have to be mindful that they now live in a much more adversarial world than they entered into years ago when first dealing with Wal-Mart. Bruce Peterson sincerely believed that a vibrant vendor community was in Wal-Mart’s interest. His successors don’t seem to think about that subject at all. So vendors need to beware and not rely on goodwill to make a contract work.

We would encourage Wal-Mart not to press too hard. As we have written before Wal-Mart has interests in ensuring food safety, traceability, sustainability and other supply chain matters. If it squeezes the profit out of the system, there won’t be the capital available to ensure Wal-Mart’s interests in these matters are fulfilled.

We also suspect, as we mentioned here that government will not just stand aside and let Wal-Mart capture 50% of the food retailing business in America. At some point, the government will move to split up Wal-Mart, and Wal-Mart will wish it had many passionate allies all across the country, people like farmers who could testify as to how important Wal-Mart is to the prosperity of the farm economy.

But if all the farmers went broke or live on a shoe string — who will be there to speak on Wal-Mart’s behalf?




‘All Clear’ Signal
Still Not Given On Sprouts

Our study of the salmonella outbreak on Alfalfa Sprouts brought a letter from a producer, both proud of his industry and frustrated with the lack of an “all clear” clarion announcement from the FDA:

As a sprout grower, I am not against the FDA sending out a nationwide advisory to “Not Eat Alfalfa Sprouts” when consumers have become ill from eating them.

I believe that whenever there is an outbreak, everyone involved in the seed supply chain and growing business should cooperate with the Food Officials, State and Federal to the fullest, helping to get to the bottom of the problem.

While the search for a source was ongoing, we were happy to have provided to our customers facts and figures showing that we do follow the FDA 1999 Growing Guidelines to a tee and are using the latest testing methods possible.

What I am a little disgruntled with is that although the FDA discovered the seed lot numbers, country of origin, the supplier and the growers using it some time ago, and the FDA has acknowledged that it has no information that any lots of seed other than the particular lots implicated are involved in this salmonellosis outbreak, and the marketer of the implicated seed has done a Market Withdrawal, the business has been severely damaged because FDA won’t issue an “all clear” press release.

We now know that not all, but only some, alfalfa sprouts were involved; the ones that were involved in states such as Michigan did a recall.

My congratulations to all in the industry, from the smallest foodservice and retail distributors, to the very largest in the nation.

As soon as we, as an industry, were alerted to the situation, without hesitation, everyone was in full agreement to discontinue the sale of alfalfa sprouts until the source of the problem was discovered. This shows that protecting the consumer is our number one priority.

It took about 4 days to find the seed source and locate who had it, and few more days to release a letter clearing the seed not involved.

Many thanks to the “Pundit” for showing just “How Professional You Are” in times like this, and for your patience during this time.

Alfalfa sprouts are one of the great sources for vitamins, and it would be a shame for consumers to forgo such a healthy product.

We are awaiting another “Press Release” from the FDA with an “all clear” so that all the consumers who want healthy, safe sprouts to eat can buy them at every local store.

— Maurie Thomas
General Manager
Caldwell and Sons, Inc
Maywood, CA

We appreciate Maurie Thomas’s letter and understand his pride as the industry has moved quickly to help the FDA identify a source for the outbreak. We also understand his frustration as the FDA, even after finding the source, does not seem inclined to ever give an “all clear” to sprouts.

On the FDA’s page regarding this outbreak, this is the message still being given:

The US Food and Drug Administration and the Centers for Disease Control and Prevention (CDC) recommend that consumers not eat raw alfalfa sprouts, including sprout blends containing alfalfa sprouts, until further notice because of a risk of Salmonella serotype Saintpaul contamination. As soon as the source of the contamination is identified, FDA will work with the alfalfa sprout industry to help identify which alfalfa sprouts are not connected with this contamination. Other types of sprouts have not been implicated at this time.

This implies that the source has not been identified.

Yet, if one digs into the new Q&A (updated within the last 24 hours) on the FDA web site, one gets this info:

Should I stop eating alfalfa sprouts?

FDA has no evidence that alfalfa seeds from other seed lots, or sprouts grown from them, are involved in this salmonellosis outbreak. However, if you plan to buy alfalfa seeds or buy or eat products that contain raw or lightly cooked alfalfa sprouts, including sprout blends, ask your retailer to verify that the product did not originally come from a seed lot beginning with the numbers “032.” If your retailer says that the product originated from a seed lot starting with “032,” avoid it.

If your retailer cannot verify the source of the alfalfa seeds, alfalfa sprouts, or sprout blends containing alfalfa sprouts, FDA recommends that you avoid them, at this time.

An important note: Consumers should ask their retailers about the seed lot number, rather than looking for the numbers on packages themselves. Numbers found on packages in stores do not reflect the seed lots from which the product was grown. Therefore, the absence of a number starting with “032” on a package of alfalfa sprouts sold at the retail level is not a reliable indicator that the sprouts are not associated with the implicated seeds.

The FDA and CDC recommend that people who are especially vulnerable to infection — very young children, elderly people, and people with diseases that weaken the immune system or who are taking medications for an over-active immune system (like some medications for rheumatoid arthritis) — always avoid raw and lightly cooked sprouts of any kind and any products that contain them.

What this basically says is that although the FDA has no reason to think any other sprouts are involved in this matter, it is always skeptical about the food safety of sprouts, so much so that vulnerable people should never eat sprouts.

The cause of the skepticism? Past outbreaks as the Q &A explains:

Have other outbreaks occurred from sprouts?

Yes. Since 1996, there have been 30 reported outbreaks of foodborne illness for which contaminated sprouts were implicated as the cause. These outbreaks resulted in about 1,800 cases of illness caused by the bacterial pathogens Salmonella species and E. coli O157.

In 1999 FDA issued guidance for the sprout industry on how to reduce the risk that their products will become a vehicle for transmitting harmful bacteria and making people sick. The experience over the past decade has shown that the risk of sprouts being contaminated with Salmonella and other bacteria can be lowered if the industry follows these recommendations consistently and properly.

Following release of the sprout guidance, the number of outbreaks associated with the consumption of sprouts, and the number of illnesses in an outbreak, appeared to decline. There were no reported outbreaks associated with sprouts in 2005, 2006, or 2007. In late 2008, however, there was one Salmonella outbreak associated with sprouts.

This current outbreak is one of two outbreaks in 2009 tied to raw sprouts. The other outbreak was associated with another bacterium, Listeria monocytogenes.

If it makes Mr. Thomas feel any better, he is in good company. Back in the fall of 2006 during the spinach crisis the FDA never actually said that spinach was “safe” — all the industry could get, as we mentioned here, was a commitment that spinach was “as safe as it has ever been.”

The bottom line is that all these products that are consumed raw make the FDA nervous. How can it be otherwise? The FDA has a zero-tolerance policy on pathogens, and it knows that even with a cooking kill step, consumers still get sick from hamburger and other foods.

In the case of sprouts, the fact that it is such a small and fragmented industry means that many sprouters fly under the radar and are not commonly inspected. Retailers don’t bother, the FDA doesn’t have the staff and so, even today, the FDA is not 100% sure all those little guys have returned their seed and are now following FDA recommended procedures.

In the absence of such confidence, we suspect that Mr. Thomas should not hold his breath waiting for some kind of “all clear” signal.

We thank both Maurie Thomas and Caldwell Fresh Foods for helping the industry to think through such an important issue.

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