It was back in January of 2007 that we published a piece entitled, Fresh Express Gives $2 Million: But Its Food Safety System May Be a Bigger Gift. In that piece we featured an announcement from Fresh Express:
Fresh Express, the No. 1 producer of value-added salads in North America and an industry leader in food safety, today announced that it will provide up to $2 million to fund rigorous and multidisciplinary research to help the fresh-cut produce industry prevent contamination by the deadly Escherichia coli 0157:H7 pathogen, which has caused numerous outbreaks over the past decade, including the recent occurrence related to fresh spinach. Although no Fresh Express product has ever been shown to have caused an outbreak of food-borne illness, the company is funding — and, in a unique move, will share this research publicly — in recognition of the benefits it may achieve for both the industry and consumers alike.
The funding of the research was important, and pledging to make the results publically available was generous. Yet in some ways, the most intriguing facet of the announcement was a unique public/private independent scientific advisory panel:
An independent scientific advisory panel comprised of six nationally recognized food safety experts from both federal and state food safety-related agencies and academia has been meeting on a nonpaid, voluntary basis since May 2006 to develop the most productive research priorities related to the source, mode of action and life cycle of E. coli 0157:H7 and the pathogenic contamination of lettuce and leafy greens. The panel is chaired by Dr. Michael T. Osterholm, Ph.D., M.P.H. and director of the Center for Infectious Disease Research and Policy, University of Minnesota. In addition, the panel consists of Dr. Jeff Farrar, California Department of Health Services; Dr. Bob Buchanan, U.S. Food and Drug Administration; Dr. Robert Tauxe, U.S. Centers for Disease Control and Prevention; Dr. Bob Gravani, Cornell University; and Dr. Craig Hedberg, University of Minnesota.
By April 2007, we were able to publish Fresh Express Research Grant Is Allocated To Scientists, and Dr. Osterholm expressed his enthusiasm:
“The quality of the proposals was extraordinary,” said Dr. Michael T. Osterholm, Ph.D., M.P.H., director of the University of Minnesota Center for Infectious Disease Research & Policy and the voluntary chairman of the Fresh Express Blue Ribbon Scientific Advisory Panel. “We were all extremely impressed by the innovative approaches and new directions being applied to E. coli O157:H7 research to better understand and ultimately minimize the threat of this pathogen in fresh produce.”
Now we have received word that the results are in, and that Fresh Express is going to host a conference to reveal the findings:
On September 11, 2008, Fresh Express will host a ground-breaking event, and one that fulfills the Fresh Express commitment made broadly to share the findings of its comprehensive research initiative into the contamination of leafy greens by the E. coli 0157:H7 pathogen.
On this date, the findings of the nine E. coli 0157:H7 research projects, funded by Fresh Express at a total cost of $2 million, will be reported for the first time ever. These findings promise to bring important new insights to prevention and mitigation strategies.
Please see the attached agenda which outlines presenters. Among these are members of the Fresh Express Scientific Advisory Panel, chaired by Dr. Michael Osterholm, who guided the research priorities and funding decisions. Members include Dr. Jeff Farrar, California HHS; Dr. Robert Tauxe, CDC; Dr. Robert Buchanan, FDA; Dr. Robert Gravani, Cornell University; Dr. Craig Hedberg, University of Minnesota
Who Will Attend? We are already receiving registrations from a broad range of attendees including regulators and legislators from local state and federal levels and their staffs; growers, harvesters, packers, cooler, and shippers, value-added and commodity produce manufacturers and suppliers; food safety researchers and academic experts; fresh produce senior executives, buyers and QA/technical expert from leading retail and foodservice companies; key industry representatives and trade associations, media and consumer gatekeepers, among others.
Who want to spread the word that the Conference is open to all who wish to attend, space permitting. We have made accommodations with our Conference facility, the Monterey Plaza Hotel and Spa in Monterey California, for the largest meeting rooms available, and will be able to accommodate a large number of Conference participants.
Anyone interested in attending the day-long conference may contact Donna Watkins at 512-848-1698, or email email@example.com, to receive a Registration Form and Conference Agenda.
In addition, special keynote speakers will be announced shortly.
While Fresh Express hopes to accommodate everyone who wishes to attend, space is limited and advanced registrations are requested. Day of registrations will be accommodated only if space permits.
All of the research done for the seminar grew out of the priorities the Scientific Advisory Panel identified:
RESEARCH PRIORITY AREAS
Five research priorities were identified for funding by the voluntary Fresh Express Scientific Advisory Panel. Each research project was expected to address one or more of these priorities.
Of the 65 proposals received, nine research projects were selected independently by the Fresh Express Scientific Advisory Panel, totaling $2 million dollars. The research priorities are:
- Determine the potential for the internalization of Escherichia coli O157:H7 into lettuce and/or tissue spinach during the growth of plants and their subsequent harvesting, cooling, processing and transport/distribution. This work should include the consideration of factors affecting internalization as a function of plant varieties, plant age, growing conditions, plant variety, growing season, method of harvest, etc;
- Identify new mitigation strategies and technologies or significant improvements in existing technologies for improved intervention to reduce the levels/frequency of E. coli O157:H7 and other enteric pathogens both on and in fresh leafy green produce;
- Conduct field studies to identify sources and vectors/vehicles for E. coli O157:H7 in the environment and factors that affect the degree and extent of contamination into the produce (particularly lettuce and spinach) field or processing locations. These studies should consider some or all of the following factors on the risk of contamination of ground-grown leafy green produce: the impact of production field flooding, water source (well, irrigation source) and method of water distribution (furrow, sprinkler or drip irrigation), the role of wild animals present in the fields and the presence of cattle and other agricultural animals in locations near production fields;
- Determine the ability of E. coli 0157:H7 to multiply in the presence of normal background flora during transportation from harvest field to the cooler, while at the cooler, and during transportation either as finished packaged salads or cored product in a low oxygen, high carbon dioxide atmosphere, or in open 20 pound returnable plastic totes in temperature regimes commonly used, as well as, temperatures considered abusive; and
- Determine the ability of E. coli O157:H7 and other enteric pathogens to survive composting processes, including those for “green compost” and leafy green field waste and potential for multiplication of the surviving pathogens in composted materials in the fields under optimal conditions.
The agenda for this conference involves both research presentations and an opportunity to discuss and analyze the meaning and implication of the research:
With this much intellectual firepower all in one place, this event will be unique. We asked Pundit Investigator and Special Projects Editor Mira Slott to find out more:
Science & Quality
Q: Fresh Express has been known for implementing the highest food safety standards. In what ways will the research findings alter Fresh Express’s food safety program?
A: We can’t answer your questions because we have to wait with everyone else for the results. We don’t know what the findings are, but we’re dying to know. When we decided to commit $2 million toward the research a couple of years ago, we wanted the entire process to be completely transparent and independent of Fresh Express.
Q: How was that accomplished?
A: Dr. Michael Osterholm convened his committee of three regulators and two academics. We told them the five areas of focus but didn’t want Fresh Express fingerprints on how the research was conducted and who got money.
The one requirement was to complete it in one year and present results to everyone at the same time — the whole industry, the regulators, legislators, and all interested parties — in an open meeting. We intentionally kept the cost for participation minimal, just $100 to cover meals and other basic expenses. This is all about trying to get the story told.
Q: Does Fresh Express intend to follow the recommendations put forth by the independent team of experts if they are more rigorous and stringent than the program currently in place?
A: What we will have to do is reassess our program once we hear the research results. Then we can answer how we will change or alter our food safety program.
Q: What are the key pieces of information you hope to glean from this research? Are you anticipating any big surprises or discoveries?
A: We do, given the mix of researchers from across the country from various institutions. We are expecting interesting results on how to attack problems, better understanding the risk of internationalization of E. coli 0157:H7 into the tissue of plants, and mitigation strategies, and a big one for us — what is the role of properly composted material? Can it still have a chance of spreading E. coli 0157?
Q: I thought Fresh Express didn’t use composted material in its production. Is this a widely done practice in the industry?
A: We don’t use it now; we’ve been afraid to. I’d say it is commonly used.
Q: What is the government role in this project?
A: Certainly the panel that Dr. Osterholm selected included high level executives from CDC, FDA and California HHS. We think these papers will give government officials things to think about in how to go about regulatory activities.
Q: Are you anticipating the recommendations coming out of this research will influence regulatory actions?
A: This research has been done on a time-sensitive schedule. It will suggest a lot of new work that will need to be done. Since the research results will be public, many in the industry and academia will surely be interested in funding and conducting follow-up research.
Q: When did Fresh Express initiate this research into contamination of leafy greens by the E. coli 0125:H7 pathogen? Wasn’t it prior to the spinach E. coli crisis? If so, the timing showed excellent foresight. [Editor’s note: Fresh Express has a work group that looks to the horizon for innovative solutions. The idea for this comprehensive research approach was originally generated as part of a work group discussion involving Dr. Osterholm and Jim Lugg].
A: We knew long before the crisis came that we had no sound science related to contamination of leafy greens by E. coli 0157:H7, and we needed to get our money on the table to fix that. In early 2006, we started the process. For any company like ours that is public, getting $2 million out of the corporate treasury takes time. The Fresh Express Scientific Advisory Panel was formed in March 06, but back in January 06, we were working on getting money.
Then we began moving with the panel to finalize priorities and the spinach outbreak occurred. By December of 2006, we already had a request for a proposal draft, but we waited till January 07 because we didn’t want it to get caught up during holiday time. Then the panel reviewed all of the proposals; 70 some proposals in all. The request for proposal followed normal university research project protocol; it was disseminated widely through all academia channels and a press release went out to generate interest and spread the word on the research project.
Q: How was the grant money distributed?
A: The scientific advisory panel chose the proposals. At the very outset of this, these five areas to be researched were set. Obviously, we conveyed our issues of concern and discussed them with Dr. Osterholm and he agreed those were the major areas of research that should be pursued.
We never saw any of the proposals until the nine were chosen. Hopefully, after the September 11 conference when all this information becomes public, it will help the regulatory community to think differently; to look to research institutions to help figure out these outbreaks.
Q: Do you believe FDA’s outbreak investigations were hampered without having this spectrum of expertise?
A: We had the same frustration as others in the industry with FDA’s Salmonella Saintpaul investigation. We know so little about what goes on behind scenes; we only see what they release publicly.
I suspect the regulatory community will look at these research results and they will discuss what could be included in regulations and standards-setting bodies. They’ll compare metrics in the Leafy Greens Marketing Agreement with what we find from this research. I expect when you look at the cost of outbreaks, any additional expenses that come about because of this research, it’s all worth it.
Q: Why did Fresh Express choose to pursue this separate food safety research venture, as opposed to working through industry organizations or investing in The Center for Produce Safety encompassing a wider scope?
A: We’ve been asked that question many times — $2 million is a large sum of money. Why didn’t we put it into the Center for Produce Safety? We were passionate for getting something done quickly. If we went through organizations, the process would have gotten bogged down, so we stepped out and did it with our own money. We didn’t see a good opportunity to go a different route at that point. We debated long and hard because we like to be good team players with the industry. This is such a serious issue… we didn’t want to wait.
Q: Do you get concerned that there will be a perception out there that the research is biased because Fresh Express is sponsoring the conference?
A: Our major message is that the conference is open to the public for $100. We don’t want any possibility of a perception that Fresh Express had a unique advantage in this research work. Everyone will have an opportunity to speak to panel members and be a part of the investigation into food safety solutions.
We hope to avoid any appearance of conflict of interest. We are hosting this thing, but as far as influencing any of these projects, we had none. We don’t know the findings. Fresh Express will find out at the exact same time as everyone else on September 11.
Q: Tell us more about the conference format. Will there be an opportunity for attendee feedback and brainstorming based on the findings?
A: The way the conference is laid out, not only will all panel members be attending, each principle investigator will present their own project. In the afternoon, we will wrap up and have a forward-looking dialogue. At the close of the session, this is also a time for networking. [Editor’s note: For those interested in attending, space is limited, so please contact Donna Watkins at 512.848.1698 or email Donna@StratagentCorp.com].
Q: At the close of the conference, what happens next? Could this research approach be expanded and duplicated in other commodities?
A: Do we expect the results will influence our food safety regulations, yes, and yes, we do anticipate making changes to our food safety program. We are passionate about having the newest mitigations, and potentially new technologies could be born out of the findings. I really think this research venture is the first of its kind; these nine projects are a nationwide effort; this model will spawn a lot more research. .
Q: The large, drawn-out Salmonella Saintpaul outbreak and investigation has shaken consumer confidence to the bone and many industry executives believe it will be difficult to fully restore it. Do you still experience residual damage from the spinach E. coli crisis after all this time? Of course, Fresh Express wasn’t even part of the problem, but the nationwide ban spared no one…
A: It’s still lingering. Customers are still concerned about food safety in spinach. Their fears have rubbed off on the packaged salad business, and I don’t think we’re out of the woods with this problem.
There’s an interesting dynamic going on, there are some organizations, such as Community Alliance for Family Farmers (CAFF) comes to mind and Wild Farm Alliance (WFA), fueling the problem. They are continuing to put out newsletters talking about E. coli… this particular association feels this way or that way.
It’s still being discussed quite widely and unfortunately that has a bearing with the consumer at the shelf. We’re still trying to figure out how to get back into the consumer’s heart and mind to understand the safety of product on the shelf. It’s frustrating, to say the least. We’ve made progress but we’re not back to where we were prior to the outbreak. The announcement from the FDA ‘do not eat fresh spinach’ was painted with a broad brush. We’re not critical of FDA’s desire to protect consumers. We would have liked a narrower announcement and a faster resolution.
| Dr. Michael Osterholm|
University of Minnesota
Center for Infectious Disease
Research & Policy
Panel Chair, Scientific Advisory Panel
Q: How important is this research?
A: It represents the collective experience and wisdom of the review group in terms of what we believe to be important issues for leafy greens. This is highly targeted research.
We’re exploring a combination of areas that have been under-researched or not researched at all, and that may have been critical in recent outbreaks. The key thing… well there are several important things that have come out of this; the first is that one industry party is stepping up to the plate even when they were not involved in an outbreak. I’ve seen many times where a company puts resources up mea culpa after being part of an outbreak. At Fresh Express we discussed the real need for this research; it’s critical for the safety of leafy greens, and the company put up the money.
None of us on the review group got a penny; we even ran administration as a freebee. We donated all of our time to this, coming together with actual priorities then developing an RFP, then reviewing over 60 proposals submitted and very extensive reviews on those with multiple people, and several telephone meetings prioritizing proposals with specific issues identified and the ability of the group to do the work. Then there was the interactive process with groups to negotiate the final contracts. The money provided from Fresh Express was only divvied out with our authority. And all this work by the advisory panel was done without taking a penny.
Critical to the process, quarterly reports were made to keep up with what was going on. This conference on September 11 is a culmination. It is not enough to fund research. You need to present it and have time for discussion, to understand and put into context what the results mean. That’s what makes this special.
I have to give great credit to the other people in the group; those five people and myself came together and not one of us got a penny. Here are government agents willing to say this is industry, we may need to regulate, but we also understand the critical role of research, and they openly put their time into coming up with solutions.
It’s a very unique model. I’m not aware of any other like this. We’re in times where we have to do these things for the health and safety of the public. Far too often government grant programs or industry-based programs are laborious, taking years to work through the process. We turned these research projects around in weeks; Jeff Farrar in California was remarkable.
Q: Did this expedited research process allow for meaningful results? Will the conference generate groundbreaking solutions?
A: We’ve been following the quarterly reports but a lot of this work is coming to conclusion now; this isn’t meant to be a surprise. It takes time to present this substantial body of research. Often it takes years to hit scientific literature. Therefore, it would be premature to say groundbreaking, but it is clear we have important results here.
When turning information around this quickly, none of us have had a chance to review late-stage results that would occur, and in many cases those are the most meaningful. We’re getting these results almost in real time. They are not massaged for two years for manuscript preparation. We short-circuited the system a lot to make the research possible, the results credible, and the information dissemination wide.
Q: What else would you say to people considering whether to attend?
A: Come to the meeting. All of us are very proud of the model; it can be a really important example of how to move research forward in the future. This research should challenge the rest of the industry to do what Fresh Express has done. This model will work beyond the Fresh Express experience if done properly. The process itself is important. It shows a collaborative industry, government academia partnership and the ability to turnaround important research quickly.
September 11th is not a day of celebration in America. Nor is it one that brings enhanced safety to mind, but with this conference, perhaps there may be a bit of a change… at least for the produce industry.
Science takes time. There is a reason things get peer-reviewed and a reason scientists try to duplicate each other’s findings. This effort has been an important one to try and push progress ahead on some of the key issues we face regarding E. coli and leafy greens, but no scientific inquiry should be judged by its immediate impact. Many times the best research just points the way to better questions.
Fresh Express deserves much credit for funding and organizing this effort. The panel members, Michael Osterholm, Jeff Farrar, Dr. Bob Buchanan, Robert Tauxe, Bob Gravani, and Craig Hedberg deserve many thanks for working pro bono publico in this important effort.
Yet no one company can… or should… carry the burden of the trade’s food safety research. That is why the industry founded The Center for Produce Safety.
Hopefully the results of the Fresh Express-funded research will provide some useful ideas for reassessing the metrics used for the California Leafy Greens Marketing Agreement. Perhaps more important… hopefully this research will provide many clues to help make future research more productive.
Funding that research will be the responsibility of the whole industry, and the Center for Produce Safety is the most likely conduit.
Many thanks to Jim Lugg and Mike Osterholm for filling us in on this exciting conference. You can download a registration form here.
What with all the hearings and such, the news passed relatively unnoticed. On one day NewStar announced a recall of fresh cilantro from Mexico due to a risk for salmonella; then the next day NewStar announced that it was “unrecalling” as the whole thing was due to a lab error.
The whole incident was reminiscent of a situation Church Bros./True Leaf Farms experienced in July, 2007 which we chronicled here.
Church Bros/True Leaf also had a recall that turned out to be prompted by a lab error.
Yet there was one significant difference in the NewStar situation. In this case, it was not just any lab, but the lab the FDA used that committed the error, and the NewStar recall was prompted by the FDA saying NewStar should recall.
The event itself is insignificant. It was a small item, already in restricted use because of the Salmonella Saintpaul investigation and was rectified relatively quickly — although a one day recall of a large brand or item could cost many millions.
What is important about this small matter is that it reminds us that the FDA is just a group of people and they rely on other people and institutions. They have no special immunity against error.
This error was caught, but how many are never caught? How many are caught and some lab worker decides “let sleeping dogs lie” and tells no one?
Errors don’t only occur at labs, of course. There have been occasions we know of in which personnel from FDA field offices have marched into facilities and demanded recalls — only to be overruled by the FDA in Washington DC after private companies retained their own epidemiologist to study the data.
In other words, errors occur in epidemiology as well as in laboratories. Indeed epidemiology is, by its nature, a series of judgment calls and requires the most exacting effort. Doing epidemiology related to bulk fresh produce is especially difficult and, in all likelihood, such science, executed against tough time pressure in the case of suspected outbreaks, is going to be questionable fairly frequently.
This propensity for error points to a really useful function that the trade associations can serve in the event of an FDA attempt to have a produce company instigate a recall.
The purpose of trade associations is to enable the industry to do collectively what companies cannot do individually and in the event the FDA comes to visit a produce company that organization needs two things:
1. A world-class lawyer accustomed to dealing with the FDA.
2. A top epidemiologist expert in outbreaks on fresh produce, whose opinions would demand respect by experts in public health.
There are very few produce companies that have pre-existing relationships of these types.
In the publishing arena, one of the national trade associations contracts with an attorney who is expert in dealing with the US Postal Service. As a benefit of membership, all the members of that association receive free consultation with this expert postal counsel.
Yes, beyond initial consultations one might have to pay an additional fee, but that is not the point. The point is that if the postal service challenges some magazine’s filings, a tiny magazine has, by virtue of its membership in an association, instant access to world-class resources.
Produce associations should provide this same benefit to the companies of the produce industry. Basically the association would identify a top firm in FDA law and a top epidemiologist and enter into a retainer agreement with them.
The association would use the law firm and epidemiologist as it requires and the deal would be that association members, as a benefit of membership, get free consultations with the law firm if they have questions on FDA law. In the event of an outbreak or recall, the member could request the epidemiologist to be available for a free consultation. For an extra fee the lawyer and/or epidemiologist could be hired to represent the produce firm if it desires to hire one or the other.
This would mean that as soon as the FDA walks into produce companies, instead of not knowing how to proceed or what to do, the produce firms would have the tools at hand to immediately arrange for competent legal representation with the FDA and to have the epidemiology looked at by an expert.
Right now only a few firms have such capabilities. Fresh Express, for example, has long retained Dr. Michael T. Osterholm, whose distinguished career would give him credibility in any discussion with a public health authority.
We don’t think the few large firms with these capabilities would object to the relatively small expenditures such association retainer agreements would involve. It benefits no one in the industry to have recalls announced that are not justified by the epidemiology.
The associations want to make a difference, so here is an opportunity to really do so.
One can’t discuss the issue of mistakes by public health authorities without addressing the Saintpaul Salmonella outbreak and the implication of tomatoes.
To date CDC has not released sufficient epidemiological information for an outsider to judge definitively the reasonableness of its initial implication of tomatoes.
CDC has stuck to its story that the initial data implicated tomatoes — pointing to a distinction in survey results in which about 50% of the general population reported eating tomatoes whereas 80% of the sick people reported the same. That statistic though begs many questions.
The first is the make up of the questionnaires. No epidemiologist is better than the raw data he is given to work with. We have been told, but have been unable to confirm, that the questionnaires given to the initial group of 18 sick people asked an initial question regarding beef that inquired whether it had been eaten in a restaurant or at home. After that, we are told, the questionnaire neglected to ask, at all, about restaurant consumption. Is this true? If so, it would indicate flawed data and thus the resulting epidemiology would be flawed.
The second issue is that the story comparing tomato consumption among the healthy and the sick is sort of epidemiology on the crassest level. The question is what more sophisticated relationships did the epidemiologists at CDC explore before implicating tomatoes? For example, press reports indicate that upon taking a second look at the data, the CDC noticed that although there existed this 80%-50% discrepancy in reported tomato consumption, a closer look at where people ate revealed an oddity — it turned out that people who had eaten tomatoes in fast food restaurants or in Italian restaurants rarely fell ill, whereas those who ate in Mexican restaurants frequently fell ill.
If this is true, it would mean that the initial epidemiology was simply sloppy and incomplete.
Fast food being exonerated could imply that the aligned supply chains of the fast food companies worked and protected them from any problem. Italian restaurants, with a few exceptions, such as Darden’s Olive Garden chain, are often independents and would buy through the same supply chains as Mexican restaurants — so if Italian restaurants are exonerated it is highly unlikely to be tomatoes.
So we don’t know precisely what happened but it certainly seems likely that CDC jumped ahead of itself and acted either on shoddy data — such as the survey without a restaurant option — or as a result of a crass epidemiological theory that failed to consider subtleties such as the possibility of different cuisine types providing additional evidence.
In either case, it seems likely that had the data collection been done properly or the epidemiology done with sophistication, CDC would not have implicated tomatoes.
Ray Donovan was Ronald Reagan’s Secretary of Labor and was indicted on a criminal charge related to the Genovese crime family. After he was acquitted, he turned to the press and famously asked, “Which office do I go to to get my reputation back?”
To some extent, the tomato growers are asking the same question. With strong evidence that tomatoes were not the likely source of the outbreak, how do they get the CDC to acknowledge an error?
Perhaps the pleas of the tomato growers will not be sufficient to prompt action, but on this issue all those concerned with the respect that public health authorities are held in should speak loudly.
Respect for the authority of public health officials depends on a faith in their competency and honesty. This situation, with a confusing and complicated scenario of first implicating tomatoes with all kinds of caveats and then jalapenos and then Serrano peppers, have made consumers question the competency of our public health authorities.
Now once competency is in question, the next question is obvious:
“Is the CDC refusing to exonerate tomatoes — or even just state that had the epidemiology been correct it never would have implicated tomatoes — because it may make the CDC look bad?”
This question strikes straight at the issue of whether the CDC and broader public health authorities are being straightforward and transparent with the American people.
To reassure the American people about its competency and honesty — and to learn as much as possible from the situation — the CDC ought to ask the National Academy of Science to appoint an independent working group of outside epidemiologists to review the way this outbreak was conducted.
The group should look at questions such as the reliability of state data, review the questionnaires used, reanalyze the epidemiology and come out with a report addressing whether the surveys were proper, whether the epidemiology was sophisticated and, of course, whether tomatoes were properly implicated.
Mistakes can be and will be made at every level of the food safety system. If the authorities are willing to be subjected to independent scrutiny, they will grow in esteem. If they are perceived as looking to protect their own reputations and avoid independent inquiry, they will increasingly lack credibility.
Public heath authorities that lack credibility are a public health concern in their own right.
The New York Times ran a piece, Supermarket Chains Narrow Their Sights, about the locally grown movement. Written by Marion Burros, the piece quotes a number of people active in the industry, such as Brian Nicholson of Red Jacket Orchards , Geneva, NY, Will Wedge at Hannaford, Dave Corsi at Wegmans, Tim Cullen at King Kullen and Matt Seeley at Nunes Company.
The piece portrays chains such as Hannaford, Wegmans and King Kullen as being big local advocates and points to A&P as a laggard, requiring the personal intervention of United States senator to push the chain to sell more local produce.
It is all pretty upbeat with what appear to be basically logistical issues to be solved for local to really boom. Yet the piece pulls back at the hard questions.
For one thing, nobody ever defines local in the article. We know that definitions vary wildly with, for example, Wal-Mart considering anything grown in the same state as local and Whole Foods allowing anything that can reach its facility in seven hours of driving as local. Many companies keep numbers so that “national” buys, say from a Salinas processor, are classified as “local” for all the chain’s stores in California. Without a clarification on the definition, all the numbers are just meaningless.
The numbers that are given in the article are also not really put in any perspective. The piece quotes both Wegmans and Hannaford as claiming a nice round 20% increase in “local” over last year — but what percentage of store sales this might be is not articulated. Equally Wal-Mart’s claim that it will buy $400 million in locally grown produce is highlighted — and Wal-Mart has a nice website dedicated to locally grown — but someone might want to mention that with 2,500 supercenters and Neighborhood Markets, that is only about $440 a day per store.
Despite all the talk about consumers preferring local, our feedback from vendors is that those retailers willing to pay premiums to get local product are few and far between — indicating the real driver for this is not consumer demand but a cost-reduction effort on the part of retailers.
The shocking thing about the story… in these days when the Salmonella Saintpaul investigation is still under investigation… is that the story didn’t confront the double standard on food safety.
Dave Corsi was a co-founder of the Buyer-led Food Safety Initiative and was a leader in pressing for approval of the California Leafy Greens Marketing Agreement, even making a pledge to restrict purchases to signatories of the agreement. As a board member of PMA, he has vigorously supported funding important food safety initiatives, such as the Center for Produce safety. It would be difficult to find a retail produce executive more publically associated with food safety.
Yet here he is quoted explaining that this imposition of centralized standards is allowed to fall by the wayside in pursuit of the chain’s locally grown initiative:
Mr. Corsi said that in order to buy from local farms, the chain had to stop acting like a chain. “We don’t control these relationships centrally — the produce manager in each store does this directly,” he said. “We only guide the stores.”
It seems unlikely that these produce managers are in a position to insist on the same rigorous standards that Wegmans demands of its California producers.
Yet E. Coli 0157:H7, Salmonella and other pathogens are equal-opportunity bad guys — they can be found on small farms and large. Yes, usually small growers sell such a small quantity they slip through the detection systems, such as PulseNet, but we have no basis for thinking locally grown produce is safer. And because these growers are typically not audited and don’t typically do the water, soil and other tests large growers do, there is some reason to think them less safe.
We don’t mean to pick on Dave… locally grown is a competitive tool for retailers across the country Wegmans just happens to be better at it than most. Yet it strikes us that on this issue, we may learn how serious anyone is about food safety in fresh produce.
For the industry, operating in a mostly self-regulated environment, a decision not to require uniform standards, audits, etc., is a clear communication that food safety is not the top priority and other things are more important.
Those who advocate regulation won’t escape this question either. As soon as regulation looks as if it might become mandatory, we can count on local growers, small organic farmers, etc., to declare the regulations onerous and request an exemption. Congress is unlikely to resist thousands of small growers from Congressional districts across the country.
So most likely we will continue, regulated or not, with a two-tier system under which large growers are expected to do all kinds of things for food safety and the same requirements are ignored for small producers.
Now here is the kicker: The more rigorous — and more expensive — a system is imposed on large producers, the less competitive they will be with small producers. So the “unregulated” sector of the trade will grow, while the “regulated” sector shrinks. The minor increase in food safety caused by more rigorous standards in the regulated sector will likely be offset by an expanded unregulated sector, thus negating any improvement in food safety.
More people will get sick than ever, but because there will be many small local incidents of foodborne illness — in most cases with too few people getting stool samples to even identify the outbreak — the CDC and FDA will not take note, the national media will ignore the subject, and we will all feel better because there are fewer known outbreaks.
It might be a perfect solution — except for those people getting sick. Shouldn’t someone… the industry, the regulators, someone… care about those people?
Whole Foods announced its earnings and held a conference call in which, among other things, it announced some major changes — such as suspending dividends:
While we are still producing strong cash flow, the challenging economic environment appears to be negatively impacting our sales and bottom line. This, combined with our commitment to maintaining financial flexibility and investing prudently in our long-term growth, has led us to announce the following proactive strategy:
We are lowering our expected new store openings in fiscal year 2009 to 15 from our prior range of 25 to 30. While we were ready to execute on the acceleration in our store openings, we now wish to take a more conservative approach to our growth and business strategy over the short term.
We have cut all discretionary capital expenditure budgets not related to new stores by 50 percent. We believe our existing store base is in very good shape based on our philosophy of continual investment and do not expect this decision to have any negative consequences over the short term in terms of our customers’ in-store shopping experience.
We are focused on the right size store for each market and, since announcing in Q3 of 2007 our intent to decrease the size of several leases in development, we have downsized eight leases by an average of 9,000 square feet each. Throughout our history, we have continued to push the envelope on store size. When we opened our enormously successful 80,000 square foot store in Austin, it had a ripple effect on store size and format throughout the company. With hindsight, reflection, and some data points in front of us, we see that the really large stores are very powerful in limited markets and circumstances, and that smaller stores can also produce great returns for us. We believe that a store size of 35,000 to 50,000 square feet is more appropriate in most circumstances to maximize return on investment and EVA, and we expect the majority of our stores to fall within that range going forward. We are also actively working to drive down the average development cost per square foot.
G&A was 3.3 percent of sales in Q3, reflecting certain cost containment measures that have already been implemented. For fiscal year 2009, we expect G&A to return to our historical levels of approximately 3.2 percent of sales.
We are also announcing the suspension of our cash dividend. At this time, we no longer have excess cash available to distribute to our shareholders, as that cash is needed to fund our growth going forward.
We believe that through these decisions, which we have not undertaken lightly, our company will emerge stronger and better positioned to realize our growth potential and fulfill our long-term mission and core values.
Perhaps… but the reaction on Wall Street and in the media to its announcements was not positive. Here is how Business Week played the news:
Whole Foods’ Big Markdown
Shares of the U.S. natural foods leader plunge after it posts a 31% profit drop, as economic troubles hit the organic grocery market
Investors tossed aside Whole Foods’ (WFMI) shares like they were wilted arugula on Aug. 6 after the company reported rotten third-quarter results.
What is the key problem? Business Week summarizes it in this way:
AMID SLOWDOWN, HIGH-QUALITY IMAGE HURTS
For years, the Austin (Tex.)-based company has fed off the popularization of organic foods, seeking to cater to “customers aspiring to a healthier lifestyle” with organic vegetables, high-quality meats, and gourmet cheeses. The company, which runs 271 stores in the U.S., Canada, and Britain, booked $6.6 billion in 2007 revenue.
But as inflation and growing unemployment have taken a bite out of consumers’ purchasing power, some are shunning the store’s high-quality image in search of cheaper alternatives. After the temporary boost in May from government stimulus checks, inflation-adjusted disposable income for U.S. consumers dropped 2.6% in June. As a result, according to a recent 70-person survey from equity research firm ThinkPanmure, 19% of organic food shoppers said they were purchasing less natural and organic food than they did in the past, because of difficulities such as falling home prices, lower job security, and commodity inflation.
“I had thought that once you start buying natural organic, you don’t go back,” says Susanne Price, vice-president for research at ThinkPanmure. “But the fact that 19% were willing to shift backwards was surprising.” Price says that a wider survey range would probably bring about an even greater percentage of those willing to trade down for groceries.
There are some specific problems. The UK operation is hemorrhaging money, having lost 18 million dollars in the last twelve months — although the company sees these as start up losses similar to what it once experienced in Canada — now a profitable operation. It 80,000 square foot superstores are turning out to not be optimal for profits — so future growth is mostly expected to be stores between 35,000 and 50,000 SF
More broadly in a time of tight capital markets the company has simply been spending more cash than it was taking in — thus the slowdown in capital investments and elimination of the dividend. Here is how the company described the situation this quarter:
During the quarter, the Company produced approximately $110 million in cash flow from operations and received approximately $2 million in proceeds from the exercise of stock options. Capital expenditures were approximately $125 million, of which approximately $110 million related to new stores and approximately $8 million related to Wild Oats stores.
In addition, the Company paid approximately $28 million in cash dividends to shareholders. At the end of the quarter, the Company had total debt of approximately $840 million, including $106 million drawn on its credit line. The Company increased its credit line to $350 million during the third quarter and currently has $123 million available on the facility.
With $110 million in cashflow and capital expenditures and dividends of $153 million, the negative cashflow was $41 million or, in other words, with $123 million on its line of credit, in three more quarters such as this one, the company would have been out of cash.
In these credit markets, slowing capital expenditures and cutting the dividend is the only prudent course of action.
Yet one wonders what the future holds for Whole Foods. Its growth has brought it far beyond that core audience of deeply committed aficionados, so many of its customers are now likely to find alternatives if times turn tough.
Even those deeply committed to organic have many opportunities at every supermarket — Wal-Mart, Costco, Target etc. — than they have in the past.
Also Whole Food’s emphasis on its Whole Body spa products line places it deeply into the discretionary consumer spending area and away from the core food business.
Whole Foods has been trying hard to get away from its “Whole Paycheck” image, but this is a difficult game for Whole Foods.
Its core appeal is to consumers who believe that cheap food isn’t really cheap — that it imposes costs on the environment or that we pay in poor nutrition or lapses in food safety or taste. The more Whole Foods attempts to promote economic value — the more its core customers will think it has sold out.
It may put Whole Foods between a rock and a hard place.
One possible answer: Tesco. Tesco has coveted Whole Foods for a long time, but its pricey stock has made an acquisition prohibitive. But with a stock price down from $53.65 less than a year ago to a trade as low as $18.26 after its earnings were announced, the price is starting to make sense.
Besides they have complementary problems. As Whole Foods drains cash in the UK, Tesco hemorrhages money from its Fresh & Easy division in the US. Yet together both the UK and the American division would be profitable.
Perhaps the Fresh & Easy stores could be rebranded: Whole Foods Petite.
Of course, there is another retailer whose CEO is focused on things organic, sustainable and the other values Whole Foods stands for. The name: that would be Wal-Mart.
That acquisition would be tougher to get approved by anti-trust authorities. In fact, Whole Foods finally got its Wild Oats acquisition approved by arguing that there was no separate category of “natural foods supermarkets.” As such Whole foods and Wild Oats were just tiny players in a big food business. Wal-Mart would have to argue the opposite — that “natural food supermarkets” are a different market in which it does not currently compete.
Far fetched? Perhaps. But stranger things have happened.
What is clear is this: with Whole Foods putting the breaks on growth, organic producers will have to rethink their own growth plans.
With an industry focus on how to get public health authorities to acknowledge that their original position — that tomatoes were the vector for the outbreak of salmonella Saintpaul — was unjustified, we thought this quote from Colin Powell was apropos:
“Avoid having your ego so close to your position that when your position falls, your ego goes with it.”
U.S. General, National Security Advisor,
Chairman of the Joint Chiefs of Staff,
Secretary of State (retired)
# 3 of “Colin Powell’s Rules” Parade Magazine — Interview with Colin Powell, August 13th, 1989
Reprinted in My American Journey
By Colin Powell, 1995
U.S. General, National Security Advisor, Chairman of the Joint Chiefs of Staff, Secretary of State
A hat tip to Steve Travis, Director of Sales and Business Development for Hartmann Foods, a Snoqualmie, Washington-headquartered distributor and importer of fruits and asparagus, for sending in this timely quote.
Perishable Thoughts is a regular section of the Perishable Pundit. If you have a favorite quote that you would like to share with the industry, please send it on. You can do so right here.