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Pundit’s Mailbag —
In Defense Of Wal-Mart

Jim Prevor’s Perishable Pundit, June 8, 2007

We have run a series of articles focused on Wal-Mart and its changing procurement practices:

First, we looked at the change from DC assignments to dollar-value assignments, plus looked at the growth of “opportunity buys” in our piece Wal-Mart Continues To Change Its Buying Practices.

Second, we spoke with Ron McCormick, Vice President/Director of Produce and Floral for Wal-Mart, who explained Wal-Mart’s reorganization of procurement, including distinguishing between strategic and tactical vendors. We entitled that article, Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization.

Third, we ran Wal-Mart’s Changing Treatment Of Suppliers, which was built around a letter sent from a supply-side member of the industry decrying how vendors on the fruit side of the business felt they were being treated.

Fourth, we addressed the many calls we had received from Wal-Mart vendors that differed in specifics, but all seemed to feel things had changed for vendors at Wal-Mart and in a negative way. We named this piece, Calls On Wal-Mart Point To More Vendor Negativity.

Fifth, we ran ‘Anyone But Wal-Mart’, which pointed out the enormous psychic switch as Wal-Mart, which once was the preferred customer, has suddenly being the one everyone wants to diversify away from.

Sixth, we asked if Wal-Mart’s thirst for lower prices on produce is symptomatic of a value-shift in Has Wal-Mart’s Desire To Buy Cheaper Changed Its Values?

Seventh, we looked at whether an increased use of “opportunity buys” at Wal-Mart meant a lessening of emphasis on other issues, such as the use of RPCs, RFID and food safety. This piece was entitled Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company

Eighth, and most recently, we looked at how an initiative to audit payments from Wal-Mart made to produce vendors was being handled in From The Frying Pan Into The Fire — Wal-Mart Finds Another Way To Alienate Suppliers.

This series brought a letter in defense of Wal-Mart:

Regarding Wal-Mart and their “Opportunity Buys”, this change in practice is the exact reaction to vendors taking advantage of the previous co-managed Wal-Mart business model.

I’m sure many vendors did a good job and did not take advantage of the system but many, many vendors took full advantage of the situation.

previously the vendor was supposed to keep an eye out for Wal-Mart and offer value in a cheap market by lowering prices in order to keep Wal-Mart competitive with a “special buy”. This also offered the vendor an opportunity to move more volume by lowering the price and allowing the customer to “Save Even More”, (win-win situation).

The vendor too often took too much advantage of a high contract price often negotiated based on top of the market in order to keep from losing money if the vendor had to supplement by buying from competitors on a tight market.

So, Wal-Mart ended up paying a seasonal high price and then did not get the opportunity to pay less when the market was cheap. This abuse of the win-win system was done by the vendors, not by Wal-Mart.

Wal-Mart tried to play fair, but the vendors took full advantage, and many of them got rich while doing so, a few even went public and their stock trades at higher numbers than Wal-Mart’s.

Wal-Mart tried to be fair to the vendor by trying very hard not to buy the special buys from anyone other than the actual vendors but inevitably the vendors killed the golden goose by not special-buying themselves to keep Wal-Mart competitive.

Instead the greed and thrill of making huge margins (sometimes 50-100%) by buying on the cheap spot market and billing a contracted high price to Wal-Mart was too great, and the vendors neglected their responsibility to keep Wal-Mart competitive.

This opened the door for other vendors to offer fair market prices to Wal-Mart and make the co-managed Wal-Mart vendor look like they were taking advantage of Wal-Mart’s desire to be fair.

The model was like a smaller version of the freedom of democracy. It was the best thing going but there were still too many people who took it for granted and could not resist taking advantage of the system to the detriment of the entity that allowed it to thrive in the first place.

In the end, I suspect the new system of “opportunity buys” is not the final version of how Wal-Mart will deal with vendors, but it is the pendulum swinging back and firing that shot across the vendor communities’ bow by letting them know it is not just Wal-Mart that should look out for the vendors, but the vendors should look out for Wal-Mart as well, and we should not forget that we all live in a competitive environment including the biggest retailer in the world.

The vendors have to compete for business and to perform at the highest levels, and Wal-Mart too must stay competitive or, as a public company, will have new management who will find a new way to compete.

Ken Kodish
AYCO FARMS

It is always a pleasure to be able to share this forum with an industry member who wants to stand up by name and be counted on an issue of great industry importance — the procurement system of the largest buyer in the trade.

It is, of course, easier to do that if one is speaking up in defense of a big buyer rather than suggesting changes in a large buyer’s procurement system.

Though we appreciate Ken’s letter, we would respectfully submit that his view of the responsibilities of a Wal-Mart vendor is, how shall we say, unique? Let us look at Ken’s two main arguments:

  1. Ken claims that contracts entered into between Wal-Mart and contracted vendors were “…often negotiated based on top of the market in order to keep from losing money if the vendor had to supplement by buying from competitors on a tight market.”

    Perhaps vendors would have liked to get prices in their Wal-Mart contracts that were so high that these vendors could still make money if they had to buy in product at the top of the market. However, vendors did not get to dictate contract prices to Wal-Mart. These were, and are, the subject of intense negotiation.

    Obviously Wal-Mart had many interests at stake in these negotiations. It wanted to both offer consumers the lowest price and maximize its profits and so desired to buy as inexpensively as possible. Although it generally took a long term and comprehensive view and didn’t believe that it would benefit if its core suppliers went broke, Wal-Mart also recognized that “costs” inherent in a procurement model involve not only the price on the item bought but issues such as reliability of supply thus avoiding out-of-stocks, consumer brand or variety preference, etc.

    So a contract was not put out for bid to simply see who would come up with the lowest price, but it really is unlikely that the negotiated contract price would be “top of the market”.

    A more realistic scenario is that an annual contract price would be higher than the lows of the market — when growers would normally lose big money — but also lower than the highs of the market — when growers would normally make big money.

    Our sense is that Wal-Mart did generally negotiate contracts in which the dollar paid was slightly higher than the market, but it was buying from mostly top brands and it was getting more than just product, including a commitment to keep Wal-Mart supplied even if product was short.

    Remember that the vast, vast, majority of Wal-Mart’s procured product was not purchased on the spot market. The enormous volume Wal-Mart required precluded this procurement option. Instead, the product was grown and packed in order to fulfill those contracts, so for most of the volume the negotiations really hinged on a grower getting paid enough to cover his bills.

    In any case Wal-Mart was and is a big boy and was perfectly capable of negotiating a contract price it thought was fair and it would be insulting to Wal-Mart and its executives to think they did anything less.

    To maintain that these contracts were typically at “top of the market” when the top of the market can commonly be double or triple the average of the market implies that for 15-plus years, Wal-Mart has been paying double or triple what Safeway, Kroger or Supervalu have been paying on average. Just a little knowledge about typical gross profits at retail indicates that this cannot possibly be true or Wal-Mart produce would have been hemorrhaging money for well over a decade — which is not true.
  2. Ken’s assessment of a vendors responsibility to Wal-Mart is that “…the vendor was supposed to keep an eye out for Wal-Mart and offer value in a cheap market by lowering prices in order to keep Wal-Mart competitive with a “special buy”.

    Here it is not completely certain what Ken means. If he means that during periods when markets are in surplus, vendors were supposed to sell their normal contracted volume at normal contracted prices to Wal-Mart and then give Wal-Mart an option, at market prices, on any surplus production they had, we don’t disagree and doubt any producers would disagree.

    But if he means that contracted vendors were supposed to voluntarily lower the contracted price for all volume they were selling to Wal-Mart, we would disagree. After all, what is the point of a contract if the responsibility of the vendor is to make sure Wal-Mart always has the lowest price?

    Obviously vendors cannot be indifferent to the success of their customers. However, a contracting program means that on some weeks Wal-Mart will be overpaying for produce and other weeks it will be underpaying.

    If a buyer needs to be “competitive” every day, it shouldn’t contract, it should only buy on the free market. The decision to contract means that buying every day at market price is not the top priority. It means that other things, such as assurance of supply, are more important than always buying at the market price

We appreciate Ken’s letter but we are old enough to remember when the system was set up and its form and function were clear:

  1. Wal-Mart would contract because it would need enormous volumes. Trying to buy those volumes on the spot market would drive up market prices anyway. Getting the cheapest price was less important than getting the brands it wanted — remember Wal-Mart had no equity with consumers on produce so wanted to piggyback on branded equity — and avoiding out of stocks.
  2. The contracted price would be in line with an average price for the market over the term of the contract but with a bias toward making sure suppliers could stay in business.
  3. Wal-Mart would attempt to contract for 80% of its weekly volume needs.
  4. When markets were cheap, Wal-Mart could buy additional product — then called “special buys” — and average down its costs and its price offer to consumers.
  5. If markets got dear, Wal-Mart would try to raise retails so that demand would fall and it would be able to live with the 80% of volume it had contracted for and not have to buy high priced product on the free market.

Now here is the key: The contracted vendors’ responsibility was not, as Ken seems to imply, to do all these things that were not mentioned in the contract. The contracted vendor’s responsibility was even harder: it was to fulfill the terms of the contract.

This meant not only having product, but having it in the forms required, such as RPCs, having it delivered within various metrics such as for out-of-stocks and rejections.

Only a minority of produce industry firms could handle being a direct Wal-Mart vendor. Most were just capable of shipping a commodity.

The current dispute over “Opportunity Buys” is really a discussion over what it is going to mean to have a contract with Wal-Mart.

Up until just recently, the Wal-Mart plan was to every week buy about 80% of their volume needs from contracted vendors at contracted prices.

All these articles we have run are basically vendors explaining that this expectation isn’t true any more.

Now, vendors are saying that if Wal-Mart contracted for 52 trailers of product, if the market price is below contract price, Wal-Mart is reserving the right to tell the vendor it doesn’t want a trailer this week. Then next week, when the market price is above the contract price, Wal-Mart is reserving the right to double up and ask for two trailers of product.

It is a free country. Wal-Mart can ask for anything it wants in its contracts. The question is this: Once the vendor community understands what Wal-Mart means by a contract price, on what terms will that community enter into contracts with Wal-Mart? And, in the end, will Wal-Mart be doing itself a favor by insisting on these terms?

We would hold that for a contract to be valuable in the fresh produce industry, it has to contain a price, a volume and a time period.

We would also say that the nature of business is such that costs go down substantially with steady business. So, at a minimum we would think a contract has to say when it wants the product — 10 trailers for week 10, 12 trailers for week 11, etc.

To drive costs out of the system, a contract ideally will provide steady volume certainly throughout a season and ideally throughout the year.

As far as Ken’s concern that suppliers have gotten rich off Wal-Mart, an important motivator for people to perform for a customer is that if they do so, they might be successful and even get rich.

Considering that the Walton family is the wealthiest family in the world, it is hard to argue that all these vendors got rich at the expense of Wal-Mart. It seems more plausible to contend that it is the combined efforts of everyone to serve the consumer that has allowed for the creation of so much wealth.

Our discussions here at the Pundit are really an effort to make sure that this wealth generation continues. What we are doing is helping vendors to bring to light issues they feel need to be dealt with, but which they don’t feel comfortable bringing up directly with Wal-Mart executives.

We appreciate Ken’s input and the opportunity his letter provided us to discuss this important issue.

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