Jim Prevor's Perishable Pundit, August 13, 2009

	Print Article
	Send Article
	Respond
	Permalink
	Share Article

	del.icio.us
	Digg This
	Fark
	Furl
	Mr. Wong
	Mixx
	Newsvine
	Propeller
	Reddit
	Simpy
	Slashdot
	StumbleUpon
	Technorati
	MySpace
	Facebook
	Twitter

Eras don’t always end neatly with the calendar. So it is more explanatory to say that the 1950’s — an era often portrayed as placid and conforming— ended with an assassin’s bullet killing President John F. Kennedy on November 22, 1963. The tumultuous 1960’s really ended with the resignation of President Richard M. Nixon, as a result of the Watergate scandal, on August 8, 1974.

So it is that the era of Bruce Peterson at Wal-Mart ended not with his resignation but with this summer’s decision by Wal-Mart to proceed with something the company is calling the Global Food Sourcing Initiative.

The details are in flux, and executives at Wal-Mart responsible for implementing the program are uncertain of how it will play out. Indeed most executives at the company are completely in the dark about the initiative.

In fact, we first learned of the initiative from a Wal-Mart executive on the domestic side of the business who spoke to us out of concern for his own job based on information he was given by the vendor community.

The gist of the program is simple: A decision to completely reform the procurement of perishables worldwide starting in the United States and starting with produce and, specifically, with a pilot in Washington State on apples.

The motivation: An assessment done at the very highest levels of Wal-Mart that the company is leaving billions of dollars on the table by not procuring produce and other perishables at the cheapest possible price.

The ultimate plan is to set up an entity outside of the normal Wal-Mart structure to handle procurement. Much product will be purchased through an auction mechanism yet to be chosen. In order to maximize the pool of vendors available to sell Wal-Mart the goal is to, ultimately, eliminate all vendor-replenishment functions.

Much remains to be decided and, indeed, much will vary based on the nature of the product, the geography and its scale.

For the moment, the pilot program in the Washington State apple industry involves the addition of six shippers to the apple deal in order to encourage a biding war. There will be a new Washington State office for Wal-Mart to coordinate procurement.

Although, at first, there was hope among vendors that this was just a scheme to lower prices, as happened with tree fruit. It ultimately became clear that this goes well beyond Washington apples. This really is the end of all vestiges of the old Wal-Mart procurement system and the beginning of a new system with ominous implications for the entire industry.

The program is coordinated out of Wal-Mart’s Global Sourcing operation, now run by Pam Kohn who, previously, held Bruce Peterson’s old job as Senior Vice President, Perishables and General Merchandise Manager. The domestic team has been kept almost completely in the dark.

Pam is widely liked; she is known as personable and witty. Yet she comes across as something of an Ambassador or Senator of a particular sort: The type who always knows the right thing to say but is not, in fact, deeply involved in the issues and does not, in fact, have a deep understanding of the facts surrounding what she is doing. Many who know her have commented to us that they find it inconceivable that all this was her idea. More likely, these are directives coming from Jack Sinclair, Executive Vice President of Grocery Merchandise for Wal-Mart in the United States and Eduardo Castro-Wright, Vice Chairman of Wal-Mart Stores, Inc.

Executives at shippers who have worked with Wal-Mart to build the operation — many who started talking to Bruce Peterson when Sam Walton was still alive and the company had just a handful of supercenters — are not so much angry as in despair. Teams of people, who bled Wal-Mart blue and saw their role in life as helping Wal-Mart, have been taught a bitter lesson about the meaning of loyalty to big corporations. We’ve heard from more than one person, not owners, just employees who thought of themselves as working for Wal-Mart, whoever their particular employer was, that they will never allow themselves to think that way again.

The implications of all this for Wal-Mart are very bad because the premise they are working on, that lots of money is being left on the table because of insufficiently aggressive procurement, is simply wrong.

Of course, Wal-Mart can do its own replenishment if it sets its mind to it. It has lots of money, can hire the best experts and do what it wishes. But there are literally more than a thousand people working for vendors who work in replenishment for Wal-Mart.

Although Wal-Mart could hire a thousand people and do it alone, it won’t. So the most likely impact on Wal-Mart will be an enormous increase in out-of-stocks and incorrect items in incorrect places. This will result in lower sales and profits.

Beyond perishable replenishment, about which Wal-Mart seems to know little, in many products there simply will not be enough produce grown, unless Wal-Mart makes its auction system so long term that it is a defacto contract. It is not at all obvious that premium vendors are going to plant billions of dollars of produce on the hope that Wal-Mart will be there to buy the cantaloupes or the zucchini with no realistic alternative available for that volume of produce if they don’t win the auction.

This means that Wal-Mart will have to go into the free market — that tiny slice of the produce industry available after everyone fulfills their contracts and programs — and Wal-Mart will learn it can wind up paying ten times a contract price for produce. It also will learn that its preferences — say for product in an RPC — may just not be available at any price.

Wal-Mart will also learn what capabilities it needs. Every time there is a natural disaster, we get phone calls and we hook vendors up with producers and people who charter 747s around the world. Seamlessly without Wal-Mart even knowing it was happening, the vendor community kept produce flowing to Wal-Mart even under such severe circumstances. When this program is fully executed, Wal-Mart will have to handle this all by itself.

The very goal of expanding the pool of vendors runs counter to Wal-Mart’s other initiatives for GFSI and Sustainability.  Only a small number of high quality vendors will meet these standards, so expanding the pool of vendors will inevitably mean sacrificing Wal-Mart’s standards to obtain cheaper prices.

In addition Wal-Mart is fooling itself by starting the project with Washington State apples. This is a company that initially often put supercenters into areas where its own executives didn’t think they would work on the grounds that if Wal-Mart could make it there… as the song goes… they could make it anywhere. In produce, the journey from apples to zucchini is far and there are many products where vendors have felt compelled to build repacking facilities across the street from Wal-Mart DCs in order to check every box and deliver produce that always meets Wal-Mart’s metrics for out-of-stocks and rejections. Even if they throw enough resources at the problem to make it “work” in Washington State, that is not an indicator it will work with more difficult items.

In addition, Wal-Mart’s decision to implement this plan on top of its recent separation of buying functions from merchandising and marketing functions points to enormous problems ahead. The system Bruce Peterson designed called for Wal-Mart to contract for about 80% of its expected volume. If markets dropped below the contract price, it would average down. If markets zoomed, through intelligent merchandising and marketing, it would reduce demand so that sales on that item would be restrained and Wal-Mart would not have to go into the free market to buy produce. Without this integration between procurement, marketing and merchandising, Wal-Mart will wind up heavily promoting items on which it is losing money because of market shifts and under promoting items on which it could make a killing.

Bruce Peterson designed Wal-Mart’s system to meet its needs at a particular moment in time. Particularly, during a time of rapid growth he had completely legitimate fears that Wal-Mart might not be able to get enough produce or that the best labels would sell their produce to others. Remember, to this day, vendors in other departments, such as Boar’s Head in the deli, simply refuse to sell to Wal-Mart. With growth slower, certainly domestically, change is both inevitable and, in many cases, desirable. No one is saying that dedicated DC assignments and 80% contracting are written in stone. This initiative, though, shows a misunderstanding of the nature of perishables and fresh produce in particular.

Going beyond Wal-Mart and looking at the industry as a whole, this initiative poses a grievous challenge to everyone. Wal-Mart’s basic plan is to squeeze vendors dry and put the vendors into this kind of cut-throat competition that will inevitably lead to lower standards.

How, precisely are vendors to fund the Produce Traceability Initiative, enhanced food safety efforts or improved sustainability efforts — if they simultaneously are being told to make do with even thinner – or perhaps negative margins? This was becoming an issue even before this initiative and this just caps it.

Just the other day, we ran two pieces about Wal-Mart’s new sustainability index, titled Wal-Mart Must Include Adequate Return On Capital In Its Sustainability ‘Index’ Or It Will Do More Harm Than Good and Dangers And Broader Implications Of Wal-Mart’s Sustainability Index, and we pointed out that sustainability required a consideration of the economic silo and that Wal-Mart, by ignoring this responsibility, would lead companies to do things that impoverish the world.

So, here, even if Wal-Mart is right and through this new procurement scenario it manages to squeeze all the life from vendors and the produce industry and realize a savings, what would come next? Sure they might take advantage of some savings generated by throwing everyone in the pit to fight it out until Wal-Mart, like the emperors of ancient Rome, give a thumbs up or thumbs down on each vendor. But if returns are sub-par, nobody will plant new trees, nobody will plant new vines and the wonderful sales gains the industry… and Wal-Mart… could achieve from exciting new varieties will never happen.

And Wal-Mart’s commitment to sustainability will be seen to be a self-serving PR device.

We have long studied Wal-Mart. And Wal-Mart has long stood accused of hurting main street America. We have supported it in this battle because what harm it did to main street was compensated for by providing consumers with lower prices.

This initiative, however, can, at best, only provide lower prices in the very short term. Long term, consumers benefit from Wal-Mart’s support of farmers at a sustainable level, so the farmers can grow, sustain our land and introduce new items to encourage healthy eating.

Bruce Peterson built the world’s largest produce and perishable procurement operations in such a way that Wal-Mart could profit and farmers and ranchers could too. This sustained not only a strong supply base for Wal-Mart but a vibrant agricultural base for America and, increasingly, the world. Now, Bruce Peterson’s legacy is extinguished and a foreboding cloud of concern over what Wal-Mart is doing hovers over the state of Washington.