Got Produce? Retailers Beginning To Look At The Fine Print Of The ‘Generic’ Proposal
Jim Prevor’s Perishable Pundit, June 23, 2009
Following our piece, Got Produce? Schnuck’s Mike O’Brien Tries To Add “Balance”, we received a number of calls from retailers anxious to discuss the proposed generic promotion board.
In general, and not very surprisingly, most produce executives at retail were for the board.
We say not surprisingly because, in general, everyone would like to see their industry promoted. It is only the paying for it that is the problem.
If someone proposed a generic promotion to get businesspeople to read industry web sites and makers of computers or internet access companies were going to pay for it, we here at the Pundit would quickly and enthusiastically support such a measure.
If you asked us to pay for it, we would have to study hard before we could endorse the program.
Equally for a produce executive working for a food retailer, a tool designed to boost consumption that someone else will be assessed for has real upside and no downside.
This being said, most retail produce executives are serious business people and they don’t want industry funds wasted. So they are sympathetic to the idea that a real serious business case needs to be made that this will provide a positive ROI for the industry and, specifically, those who have to pay for it.
When we have had the opportunity to go through the proposal with retail executives most guffaw a bit at the line that attempts to explain the effectiveness of industry promotion of this sort. The proposal puts it this way:
”The economic evidence is overwhelmingly in favor of generic promotion. Most ranged from 0.8 to 80 in benefit-cost rations.”
Of course, saying that something will have a benefit somewhere between 0.8% and 80% is just the same thing as saying one hasn’t the foggiest idea of what the benefit might be, much less whether the benefit would provide a superior return to alternative investments.
These VPs of Produce and Senior VPs of Perishables, most at public companies, all have had to request funding for initiatives, sometimes at the Board of Directors level. In these high level business dealings, few indeed would have put their reputations on the line for a project with such an amorphous ROI.
So most retail executives, whatever their personal inclinations, respect the demands of the supply base, which is going to have to write the check, for an effective business case to be made before approving funding.
Beyond that there are two other facets of this proposal that retail executives are just coming to understand and, as they do so, these retailers will find the proposal problematic:
Exemption for Sales Direct to the Consumer
Farmer’s markets, farm stands, box schemes, community-supported agriculture, Internet sales, etc. — anytime a first handler sells direct to the consumer, that sale will be exempt from an assessment.
This is a growing area and one that supermarkets compete directly against. It is already a battle. In some cases, farmer’s markets charge rents wildly less than market value or what supermarkets pay; payment of taxes is sometimes honored more in the breech than the observance; and the vendors often sneak in products, as we mentioned here, that are not really grown by the vendor.
Yet this proposal chooses to give these operations a competitive cost advantage by imposing a “tax” on the product that supermarkets, warehouse clubs, supercenters and other venues sell, but exempting the product sold by their competitors direct to consumers.
We can all understand the logistics of this. It would be hard, and quite possibly expensive, to collect these assessments from direct-to-consumer operations. Yet it still boils down to burdening the supply chain that supplies supermarkets and related industries with costs their competitors won’t have to pay. That is not going to go over well with retailers.
Imposing Differential Taxes On Higher Priced Produce
Despite a reputation for tough bargaining, most major chains pay top-of-the-market for fresh produce. In fact, they are in deep battle with independents, often ethnic stores buying off the wholesale markets, who often manage to sell produce for a third of what big chains do.
Produce is a funny item… if you insist on the best, restrict your supply chain to food safety-certified vendors, those with advanced traceability systems, those committed to sustainability, you can pay a significantly higher price than if you are just willing to buy some decent produce.
The reason almost all commodity-specific promotion boards assess by the pound or the carton is that it is perceived as unjust to the growers for the best grower to have to pay a higher fee just because he grows better stuff or invests in the product and services that bring a premium.
Now, however, as retailers come to study the generic promotion program proposal and see that first handlers will be “taxed” based on sales instead of by the pound or box, they will realize that it is one more burden on the supply chain of mainstream retailers.
Often with union workforces, a heavy regulatory burden, reputational concerns, a less flexible and more constrained supply chain, chain retailers are already having a battle with independents and ethnic stores in many parts of the country. Chain retailers just won’t like that their supply chain has to pay the cost of one more initiative while the supply chain of their competitors gets off cheap.