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Perishable Pundit
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Memo To Supermarket CEOs: Don’t Kill The Goose That Lays The Golden Egg... Overpricing All Produce Items To Support Cheap Banana Prices Is A Disaster Waiting To Happen

The produce industry is facing a serious threat — at the hands of top supermarket executives. CEOs are demanding that produce directors and VPs lower banana prices as a signal of overall price competitiveness for the store, but then expect the same directors and VPs to make up the margin on other produce items, this is resulting in other items being overpriced, thus hurting volumes and new product innovation.

Bananas are by far the Number One selling produce item, and it is not uncommon for bananas to account for 1% of total store sales.

Other categories, such as berries or tomatoes, may often rank higher than bananas in produce but that is because these categories include many different items. So the berry category includes strawberries, blueberries, blackberries, raspberries and sometimes organic versions of these items, plus some specialty berries. These often have many SKUs representing many different package sizes.

Though some firms sell red bananas and others specialty and organic bananas, they are typically such minor items that the standard Cavendish bananas stand as a one-item category.

There was a time in which bananas were also the profit powerhouse of the department, producing generous gross margins to go along with high sales.

Although produce directors would, of course, sometime put bananas on ad, they were mindful that it was difficult to make up margin lost by advertising a high volume item with increased sales or profits on low volume items. Yet, with the growth of Wal-Mart, deep discounters such as Aldi and Save-a-Lot and the general intensity of competition, top supermarket executives see banana prices as a key signal to consumers regarding the price competitiveness of the overall banner.

They may be right. We’ve made the same point many times, including when a recent visit to Wal-Mart Express led us to an Aldi undercutting Wal-Mart prices on bananas. You can see that article here.

There is absolutely nothing wrong with a retailer deciding it wishes to offer low prices on particular items. Even utilizing bananas as a loss leader is not immoral.

However, if the purpose of offering low price on a particular item is not to maximize produce department profitability but, rather, to attract consumers to the whole store, then the store has to subsidize the loss of margin on bananas out of a whole store marketing budget.

Now some CEOs think that the banana companies can be ordered to accept lower prices, and typically businesses try to accommodate the needs of their customers. Yet, rest assured, though one can get contractual changes, in the end those changes have to be paid for, and the retailer will wind up paying on some product, at some time, in some way.

Everyone — from the First Lady to the retail produce executives and their superiors — would like to see higher produce sales. One important factor that stands in the way of produce reaching its sales potential is that top supermarket executives — in their quest to one-up the competition — are demanding that their produce executives both give away bananas at ridiculously low prices and, somehow, make up the margin within the department.

This means that the rest of the items in produce are priced too high as they have to make up this margin. This weighs disproportionately on new and innovative products and burdens all the rest of the department.

Other categories have been severely damaged by this dynamic. Competition in “wet salads” in the deli, for example, led to intense pressure to sell potato salad, macaroni salad and coleslaw with no margin or negative margins. Since pot, mac and slaw are the big volume-drivers in the department, this created the pressure for very high mark-ups on specialty salads that account for just a small portion of the category.

Whether in wet salads or produce, this dynamic always leads to a reduction in innovation as new low-volume products often are forced to struggle with excessively high-margin requirements. It also serves to distort sales in the department as high prices for everything from berries to tomatoes to potatoes depress sales. It also opens the door for competitors from Walgreens to farmer’s markets to not be so out of line on prices on these non-banana items.

Supermarket CEOs should act to make sure that their overall store promotional needs are paid for by the overall store promotional budget and that, in the desire to be cheap on bananas, the stores don’t kill the rest of the department.

Of course, it should be noted that there is a paucity of data supporting the notion that giving away produce is an effective means of enhancing a store’s price image. A cheap price on Coke or Tide clearly tells consumers that they are getting a bargain. A cheap price on bananas might raise the issue of whether the bananas are not really the best.




A Local Dilemma: What’s A Farmer To Do When Supermarkets Come Knocking?

A hat tip to John Vena, President of John Vena Inc. and board member of the Philadelphia Wholesale Produce Market, for sending along a piece about locally grown produce in the Philadelphia area: Picking Markets: Some Local Farmers Discover Hidden Costs of Selling Wholesale:

You're a produce farmer near Philadelphia. You don't have Nebraska-size land, so instead of making money on high volume, you grow enough tomatoes, sweet corn, or apples to sell at your own farm store, or to swap with other local farmers who, like you, also run a retail shop.

Then supermarkets come to your door. The same ones that, for years, had stopped buying local produce because they simply stocked whatever their distributors sent from faraway warehouses. Now, they say, their customers want local. They offer to buy your crops in bulk and sell them with a "local" label, alongside the rest.

Easy money, you might think. A way, even, to unload extra produce at peak harvest that otherwise might have gone rotten. But what may seem like an alluring opportunity is, in reality, a double-edged sword, say some growers with farm stands popular in their communities, who have come to realize that they are paying a hidden price for even modest deals with deep-pocketed supermarkets.

One Chester County farmer, Pete Flynn, eliminated his wholesale business entirely this year. His own produce was selling at a nearby Wegmans, under his farm's name, but at prices below what he was charging in his own little store.

The well-heeled customers driving into his Westtown Township farm market in Land Rovers and BMWs asked time and again: "Why should I buy here when I see your stuff a few miles away for less?"

Flynn, who works 200 acres for his Pete's Produce Farm, sized up supermarket deals this way: "They're really good for the local farmers who don't retail in their market."

His business is not the only one wrestling with the costs and benefits of the growing interest in local produce among supermarket chains.

Linvilla Orchards in Delaware County has business relationships with a few supermarkets, but it is wary of the industry's penchant for "loss-leading," in which markets sell certain highly marketable items at prices lower than what they pay wholesale. They take a loss on apples but make up for it by attracting customers who'll buy other stuff, too, once they come through the door.

"That's not great," said Ron Ferber, senior manager of the 110-acre Linvilla farm and retail store in Media, which is wholesaling more this year to Giant supermarkets.

Loss-leading is always in the back of a farmer's mind: "It's certainly a strong consideration. . . . We're not excited about that," Ferber said.

The issue is simple: Farmers who can only grow a limited crop can maximize their income by selling direct to the consumer. This is what farmers’ markets, farm stands, CSA’s, U-Picks, etc., are all about.

For large farms, even large local farms, such efforts are typically inconsequential; they also may not even be particularly profitable. They are very profitable if one doesn’t count the cost of farm family labor — but larger farms can absorb all the labor a family can make available. If one has to go out and hire people to manage and staff these operations, their profitability quickly diminishes.

This article doesn’t articulate it, but it is really addressing the next notch up from small local farms that can sell all they can at a farm stand. After all, since a supermarket is likely to pay less than a consumer, the only farmers that would be interested in selling to supermarkets would be those that were capable of producing more than they can sell direct.

How can a small farm grow beyond its direct-to-consumer sales?

Not surprisingly this article points out a potential growing pain in expanding production — those new supermarket customers operate in competition with the farmer’s own retail operations.

It is not an easily solved problem.  The grower could ask the supermarket not to market the product in the particular stores near the farm stand – but that is inimical to the idea of local and probably the area where the supermarket most wants to market the product.

The farm could sell to supermarkets under a different label, but it is not clear that would make much difference as the local trade would surely know who the producer is.

Dave Corsi, Vice President of Produce and Floral for Wegmans, is quoted in the article as saying that the whole thing is really a non-issue:

Flynn still needs to be able to charge premium prices for his corn, tomatoes, zucchini, squash, and beans, because 90 percent of his income comes from retail sales at his own store.

When he first began supplying Wegmans in nearby Downingtown about six years ago, business was strong all around. Even with the competition, his farm stand's business was holding up well.

But sales fell 20 percent between 2008 and 2009 and have been flat ever since, thanks to the poor economy. It's more important than ever to keep retail margins healthy. That means saying no to supermarkets.

"We were approached by Giant," Flynn said, "and we were approached by Whole Foods" — just last spring, an offer he declined, knowing the chain would be opening a store in nearby Glen Eagle.

For several decades, Wegmans has made an effort to stock fresh-picked produce because it's a customer draw and helps support farmers in the communities where it has stores. Despite its sometimes-aggressive pricing, the Rochester, N.Y., chain has not run into trouble keeping up a steady supply, said Dave Corsi, vice president of produce and floral.

"We've been operating this program for over 25 years," Corsi said, "and we've had over 500 growers partnering with us for a long period of time now, and we haven't found it challenging for too many growers."

At Linvilla Orchards, one thing that makes supermarket wholesaling attractive is that it provides a ready market for higher-than-expected yields — and on balance, that seems to be more of a good thing than a bad one.

We tend to side with Dave on this one. Farmers with extra crop — crop beyond what they can sell direct to consumers — still need an outlet. What else will they do with this produce?

They could sell it to a terminal market such as where John Vena works and figure it will be mostly sold to urban retailers far from the rural area of the farmstead. They could work with independent restaurants and get white tablecloth chefs to specify their product. But, if the volume starts to get large, the product has to find a home and that will mean selling through  supermarkets whether the supermarkets buy directly or through wholesalers. 

In the end, the answer probably has to be that something in the experience of the farm stand, has to make people love it enough to not worry about the prices. When one shops at a farm stand one can meet the farmer or his family. One can see the produce growing and being harvested. One can watch and smell as the produce is being turned into cornbread and ice cream. One shops under pictures of great-grandpa hoeing the fields and the kids climb on an old tractor. The farmer’s niece samples the melon that she knows is just perfect. None of this is in a local supermarket.

One suspects that those farm stand growers who are hearing from their customers that the product is the same down the street just aren’t doing all they can to make the farm stand experience truly special.




Cornell Professors To Present At The New York Produce Show And Conference: New Ways of Thinking About Local: Can The East Coast Develop A Broccoli Industry?

At The New York Produce Show and Conference, one of the goals is to encourage greater interaction between the great centers of learning in the region and the produce industry. Our primary tool for doing this is a program by which we both bring students to the event so they can learn and gain exposure to our industry and we also invite professors to present their latest research at the event. All too often this research stays buried in academic journals, so we are thrilled to bring to the attention of the trade the people who can actually give life to the research by applying it in business.

Last year our partner institutions were Cornell University, Rutgers University and St. Joseph’s University. All three quickly signed up again to participate this year, and we will soon be announcing some additions to our program for 2011. Here are profiles of the four presentations that were given last year under this program:

A New Hypothesis On Local: To Boost Sales, Sell It Through Supermarkets… Cornell’s Miguel Gómez Previews His Upcoming Talk At The New York Produce Show And Conference

Research On Asian And Hispanic Produce Marketing On The East Coast Identifies A Profitable Opportunity… Rutger’s Professor Ramu Govindasamy To Speak Out At The New York Produce Show And Conference…

‘Local’ Preferences Versus Organic – Dr. John Santon of St. Joseph To Unveil New Research At New York Produce Show And Conference

Cornell’s Brad Rickard To Unveil Generic Produce Promotion Research Done By Cornell And Arizona State University At New York Produce Show And Conference

Personally one of the great joys of putting together the program is the opportunity to engage with brilliant minds doing important work. Among the most intriguing intelligences out there is that of Miguel I. Gómez from Cornell, so we were so pleased to learn that he had an important project to present this year and was going to introduce us and all the attendees at The New York Produce Show and Conference to his colleague, Thomas Bjorkman who is Associate Professor of Vegetable Physiology, Department of Horticultural Sciences at Cornell University.

The project this dynamic duo is working on regards the development of an East Coast broccoli industry that the researchers believe might be able to account for as much as 10% of US production.

The interest in such a project is obvious: retail and foodservice buyers might become aware of a new procurement option that could help them respond to consumer interest in local foods. Growers might find an opportunity to diversify their business with an additional crop, and East Coast fresh-cut processors might be able to reduce freight costs, while wholesalers might identify a new roster of growers in need of representation on major terminal markets. West Coast producers and processors may want to seize an opportunity to reduce freight costs to certain customers.

Beyond broccoli, the prospect of a new industry infrastructure suggests the possibility of other products also being grown on the East Coast or even changing the distribution patterns for West Coast or imported produce.

We also think that Professors Gómez and Bjorkman have posed an intellectual challenge that will cause many to rethink what sustainability and local actually means.

The most vocal advocates for local mean a whole bunch of things when they say that word: they are talking small scale, bio-diverse; they want consumers to eat what is in season; they want stores to sell what is grown nearby… and only what is grown nearby.

This project is, intentionally or not, challenging all that. It is suggesting that sustainability must be approached from a different angle. It suggests that telling consumers to only eat root vegetables imposes an unacceptable cost. So it seeks ways to be mindful of issues such as carbon footprints and food miles while retaining a diversity of supply at all times of the year.

We want to hear the whole presentation at The New York Produce Show and Conference, but we want to know more right now. We asked Pundit Investigator and Special Projects Manager Mira Slott to find out more.

 

Miguel I. Gómez
Assistant Professor
Charles H. Dyson School of
Applied Economics and Management

Cornell University
Ithaca, New York

Q: After your intriguing talk at last year’s inaugural New York Produce Show and Conference, attendees are looking forward to learning about your latest research with project director Thomas Bjorkman at the upcoming show in November. Could you give our readers a preview?

A: This is a new project I’m working on as a principal investigator. The objective is to examine the possibilities of developing an eastern broccoli industry. Part of the specialty crop initiative, Eastern Broccoli Project, is a five-year program supported by a USDA grant. It involves multidisciplinary groups including plant breeders, economic extension specialists and private companies. We will have just completed our first year of work at the time of the presentation, where we will share what we have learned as well as our future strategies and possible opportunities for those interested.

Q: Why broccoli?

A: All plant materials traditionally developed for the market come from seeds that adapt much better to conditions of the west coast. There is a ton of material that adapts quite well to the east coast but has never been tested or brought to market. Cornell has a very strong program of breeding in broccoli. We got together three years ago with universities on the east coast with several USDA labs, researching genetic breeding and the economics of broccoli, and that is how the project came about.

Q: California certainly has a well-entrenched and successful production and distribution system in place. How are the economics, logistics and infrastructural components being assessed?

 A: The goal is not to replace California production but to offer a second alternative of supply. Our objectives are quite modest. After five years of work, we hope about 5 percent to 10 percent of broccoli production will be on the east coast. We see some pockets of broccoli mostly in the state of Maine, also South Carolina, northern Florida and even in New York.

From an economic point of view, if you’re a buyer of east coast broccoli, you need supply all year round. One of the biggest logistics challenges is offering consistent east coast supply.

You have to start in Florida in the winter and move north to Maine. What is the necessary infrastructure, what are the quantities that make sense when looking at economies of scale? We’re not talking about local farmers. This is not a local foods project of developing an isolated program for a single region; this has to be integrated throughout the east coast for year-round flow.  Part of the project is identifying regions where clusters of growers can see a good business opportunity. The project is unfolding in different phases.

Q: Could you outline those phases for perspective?

A: The first part in the strategy is the material item identification, the germplasm, genetic material of broccoli that are good conduits to develop inbred lines for seeds appropriate for the east coast.  We have high humidity so we need material for more humid conditions. Thomas Bjorkman, the project director, is the plant breeder and he’ll give a better explanation. [Editor’s note: see his interview below].

Phase two is breeding inbred lines to develop hybrid seeds. The plan is to develop the breeding program. We have been doing a lot of trials in the last year, testing university materials and collaborating with the private sector to identify possible candidates that can become seeds later.

A third component is regional trials, selecting genetic material to develop seeds and plant them to see how they perform. This will help determine the best materials for commercial use. There are five sites where these trials are taking place: Charleston, South Carolina; Carol County, Virginia; Waynesville, North Carolina; Geneva, New York, and Monmouth, Maine.

In my economic component, the goal is to develop crop budgets for different regions, identify cost of production pre- and post-harvest within different regions. One for New York, Maine, South Carolina, Virginia and North Carolina. It’s still early in the process.

We’re also comparing cost of production with California. It is important for packers and shippers when deciding to invest in the east coast.

Q: When will these cost analyses be available? What are you discovering so far?

A: These crop budgets will be ready by the end of the year. We can see that the cost of production is a little bit higher on the east coast than the west coast, but this is very early. These cost differentials can be adjusted by transportation costs with east coast growers closer to customers. It makes a good proposition, but only if you have enough volume. In order for this to be competitive, you need huge harvests so post-harvest costs are lower from cooling and packing to shipping, transportation and distribution.

Q: Do those involved in the project have a vested interest in whether this project succeeds or fails? 

A: As researchers, we’re not promoting an agenda. We just want to provide information to the produce industry so that they can make better decisions. This project could impact many people from packers and shippers in California to farmers on the east coast. Will this help us or not? The broccoli growers on the east coast say they already have a market. It’s a sensitive project.

It’s difficult to convince growers already thriving in Maine it’s good for them because more broccoli in the region opens more opportunity in the region. There’s a case that a strong east coast broccoli infrastructure provides greater marketing options for the industry as a whole. They will have better seed available to increase their productivity.

We’re testing commercial material to see how it adapts, better or worse on the east coast, and also screening for commercial seed that is best for the east coast. For now, we’re doing everything on experimental plots in greenhouses and labs. But next year, our plan is to do trials with growers.

Q: Are you networking with east coast growers to prepare for these trials? If a grower is interested, would they be able to participate?

A: Another part is the extension component, working with growers in the region that may be interested in growing broccoli. The idea is these extension specialists have developed relationships with many growers and that will allow us to do trials in field.

Growers in North Carolina that have traditionally grown tobacco are looking for alternative crops. In fact, some are doing tomatoes, and it seems like broccoli will be a perfect crop rotation for tomatoes. This would be a very good option for these growers. These are the types of network clusters we are reaching out to that could potentially have commercial interest in growing broccoli.

At the same time, one of our objectives is to show the economics to these big packers/shippers. The growers are not able to invest in infrastructure by themselves, and they need distribution specialists and a network with customers.

We are very excited and optimistic about this project but really want to understand if economically it makes sense to have an east coast broccoli industry. In this case, what we want to do is really understand the economics of regional systems.

Q: Did you have a hypothesis going into this project?

A: I do have a hypothesis. It’s analogous to if you have a lot of money and it’s financially sound to diversify investments. Putting all your eggs in one basket is risky.

We see a very large concentration of broccoli coming from California, three counties in the country; just diversifying places to grow products economically makes sense, to diversify your supplies of products.

If there’s a drought in California, or another bad situation and the broccoli harvest is affected, it will drive prices crazy if 90 percent comes from this region. An eastern broccoli market is a means to spread risk in your production, as long as it’s economically viable. We don’t want to support systems that are not economically efficient.

Q: In the end, doesn’t that require getting enough people on board and invested to create a seamless supply chain?

A: In this project, we are aiming to work with major retailers in the region. We want to approach the main retailers that might like to promote east coast product. We are looking at the whole system -- growing, packing distribution, and retailing.

This is a five-year project. Our numbers could be very different as the project unfolds. This will be a big check on reality. Commercial trials with farmers will be a critical point in our research. At the end of the day, if the growers don’t like it, they won’t move forward. 

This is part of the 2008 Farm Bill that allows research for the specialty crop sector. This has never happened in the past. Most funding went to commodity crops. The industry is responding. We keep in touch with an advisory council of farmers, packers, shippers and retailers observing what we’re doing.

Q: If produce industry executives are interested in joining the project, how can they become involved?

A: Thomas Bjorkman is the gatekeeper. We have a web page with a link where those interested can register and become a part of this.  

I’m working on the economic component and am excited at the opportunity to interact with our target audience at the upcoming New York Produce Show and Conference. We want to tell our audience what we are doing and bridge new opportunities to help the industry.

Mira contacted Thomas Bjorkman to learn more…

Thomas Bjorkman
Project Director, Eastern Broccoli Project
Associate Professor of Vegetable Physiology
Department of Horticultural Sciences
Cornell University, Geneva, New York

Q: What triggered the Eastern Broccoli Project?

A: How we got into this is kind of fun. As a plant physiologist, I saw aberrant development of broccoli, a perspective I started exploring 20 years ago, really trying to understand why the plant doesn’t develop properly in certain environments and looking at practical application. A colleague here -- Phillip Griffiths, associate professor of vegetable breeding in the Department of Horticultural Sciences — was working on developing better heads for production in New York. And another colleague — Mark Farnham, research geneticist, USDA-ARS-US Vegetable Laboratory, in Charleston, South Carolina — was also breeding for this quality. We talked about how to do selection, not just picking products that escape but ones with genetics to provide better form. Our hope was to get money to support progress in these efforts.

In the last Farm Bill, the produce industry got behind the specialty crop research initiative. Now there was a new funding pool to do this industry specific research and broaden our project goals. What would it take to build an east coast broccoli market? We needed to put together a top-notch, trans-disciplinary team.

Q:  The scope of the project took quite a leap. Wouldn’t that involve buy-in from the entire supply and distribution chain as well as retail?

A: Our first reaction was that the project was too complex and we couldn’t do it. We got a planning grant to help figure this out. It became clear that success would require a year-round supply of broccoli coming from the east coast. If not, the project would not be viable. It has to be big; $100 million a year, and involve major growers, shippers, and retailers, high volume and high quality. Fall short of that and you fail.  The simplistic way I look at it: If supply stops, customers go to somebody else.

The California growers are very, very good and have established this reputation; you find a shipper and they will deliver every week.

Q: How do you go about developing a competitive east coast alternative? Are the breeding options and conditions feasible to maintain year-round supply?

A: We looked at whether you could you do this going up and down the east coast. The answer was yes. Geography is varied enough to hit every window, if you can develop product that can handle warm and humid nights.

Even if we develop the genetics with the public breeders, we need companies to sell to the growers.  If they could get the genetics from public programs and have a customer base, they were prepared to invest in new varieties. The seed companies think they can make money on this working with the growers. And distributors find it convenient and profitable to distribute to existing customers. With current demand for locally grown, it could be quite solid for eastern retailers if the quality is there.

The other piece that creates opportunity here is the very high fuel cost. Covering that fuel cost is a major challenge when shipping product across the country. 

Q: So, a confluence of factors creates ideal timing to pursue this project?

A: It was a combination of federal funding, interest in locally grown, the potential to make up for high transportation costs, and the breakthrough with the breeding for weather conditions.

We have broccoli breeding lines that produce commercial quality heads even in the most severe conditions, but they need to be put into commercial varieties. We’re counting on the vegetable seed companies to develop these.

Q: Are the major players on board?

A: Bejo, Seminis, Syngenta, Johnny’s… These are heavy hitters. Because of the way federal funding is structured, private companies need to contribute an equal amount of money to the project. These companies have contributed substantial monies and have committed to the federal government to develop these varieties. We’re in the process, one year into the project looking at public breeders’ material.

Q: Could this lead to development of other commodities on the east coast? What challenges do east coast growers face in taking on new varieties and integrating product into their existing infrastructure? 

A: I think it will actually make a big difference. If we pull it off, other commodities could follow. New York green beans, sweet corn, cabbage...Those markets are well set up, and the varieties and distribution work pretty well. Broccoli is similar to sweet corn with a short shelf life, where cutting transportation is beneficial.  Cabbage production is similar to broccoli, but post-handling and distribution are very different. The different vegetables have different requirements, so knowing which future vegetables will benefit from the infrastructures and learning about customer relationships that get established from the broccoli product will give us an advantage.

This project has been about creating business for various people in the system. If it turns out well, there will be opportunities to piggyback off broccoli project.

Q: With the economic uncertainty and push to cut federal spending, are you concerned your project might become a victim?

A: We are actually set, even with what is going on with the economy. The specialty crop alliance made this a mandatory program. The money we were awarded will not be taken back even though it goes five years. Knowing the funding will be there makes a big difference because everyone has to be on board. If there is no assurance of future distribution, the investment wouldn’t matter.

Q: What feedback are you receiving from the distribution side?

A: There are many different models of distribution. Some grower/shippers are interested in expanding their season so they want to contract production in other parts of the East Coast.

Another doing year-round cabbage delivery to customers on the East Coast could easily add a product like broccoli to their line that has similar properties.

West Coast grower/shippers are establishing Mexican production for their eastern markets. Why wouldn’t they take advantage of East Coast broccoli production to expand their reach? If they can set up in Mexico with all the challenges there, why couldn’t they set up in New York? It could be contract production or from the perspective of distribution if they already have distribution in place.

Q: Are East Coast broccoli growers with established niches embracing this project?

A: Some current broccoli growers are nervous about the competition, but some see it as an opportunity as a way to capitalize on a robust market. New varieties can help them produce better. We’re interested in every broccoli producer on the east coast becoming successful.  It will always be necessary to adapt to changes in the market, even though change makes people anxious.

Q: As you share more details about this far-reaching project at The New York Produce Show and Conference this November, what message do you want attendees to take away with them?

A: The main thing we want to achieve is for people attending the produce show to think about whether there is an opportunity for them and what that opportunity looks like. The nice thing about being at a public university is I’m not making any money on this project. I want to see the industry do better. I’m expecting the companies to compete hard against each other because that’s what they do. But in some situations by working together we can help everybody to prosper. 

Particularly, we need enough growers to promote the post-harvest infrastructure that it takes. If growers have the opportunity to have three or four distributors interested, that’s great.

We can provide the support to help people become as technically good as they can be. Then it comes down to execution, how well do you grow the crop? How well do you treat your customers.

Q: Have you connected with East Coast retailers? Are there particular chains or regional pockets that are jumpstarting the process or offer the most potential?

A: Wegmans has been on board from the beginning, and we have been in touch with regional retailers like Hannaford, already getting broccoli from Maine. It works.

We’ve started with regional markets so they’re not in head-to-head competition with each other. Maine is up and running. Western New York has a lot of promise. It’s highly productive and has great growing conditions with a lot of vegetable production here. Cabbage is pretty mature in terms of volume, where with broccoli there’s still growth.

We’re looking at medium-elevation areas in Virginia, which seem to work quite well. Interesting opportunities exist in the mountains of North Carolina’s Asheville area. We think they could be harvesting in the southeast when virtually no one else is.

For early spring and late fall, you have a lot of central areas to South Carolina down into Georgia and then the coastal areas from North Carolina down to Florida. Already producers there seem to be figuring it out.

In terms of post-harvest handling and distribution, having specific areas of production will make it a lot easier for the supermarket, for the wholesale crown-cut market. The new varieties will also be useful for farmers’ markets or to sell to the smaller grocery store in town. For smaller growers interested in diversity of products, that’s a completely different market. We’re not ignoring the small growers. They’ll benefit from the flow of broccoli year-round.

Q: How are you phasing in the project? Are you doing pilot testing?

A: We have regional trials, so this year, we looked at the best of what’s currently available. Next year, we’ll have experimental materials from public and private breeding lines, candidates for developing into commercial varieties. When you release the breeding line and name, it as a variety, so it may take a while after that until there is enough seed and growing acceptance of that. So we’re looking at breeding lines for the next couple of years, and breeders will be looking fervently at developing those into varieties.

The seed companies are probably three years away from producing varieties — a very ambitious timeline — and we expect they will release better varieties on years to follow.

We’re trying to develop a grower base, having growers start to hone their skills at raising broccoli and figure out the best infrastructure for different scales of production, getting growers and retailers talking to each other to have a sense of how to handle things. We’re laying the ground work to insure good production recommendations.

People will have a different set of skills to begin with; a sweet corn grower will need to learn how to grow and pick broccoli, where someone else has a lot of production experience but because of different cooling and handling requirements, will have to change things in the packing shed. The project is complex with many components but we have a solid support system.

The specialty crops research initiative started with the 2008 Farm Bill, and the Specialty Crop Alliance got behind that. United Fresh was one of the leaders in organizing that alliance. They did excellent work making projects like this and others like this possible.

The grant we got from USDA is a little over $3 million over five years, and 28 people are involved in one way or another. That money goes a long way. We also have some financial support from universities, and a substantial commitment of funds from the industry, from retailers and distributors and farmers. The universities involved include: University of Maine, Virginia Tech, North Carolina State, Clemson University in South Carolina, Oregon State, Cornell and the USDA.

We have many backers that want this project to succeed.

It is a fascinating project and may well point to the evolution of a marketing-driven, commercially viable interpretation of Local. Clearly, expecting people in Boston to become “locavores” and eat only food grown 50 miles from downtown is unrealistic. But the idea of setting up an east coast supply chain allowing for year-round availability is intriguing – although its viability is uncertain.

The Achilles heel of this project and others that have been proposed over the years is that they typically hinge on gas prices. In other words, they are projects that, even if successful, will have higher production costs than they do in California. The expectation is that by having cheaper transportation, this higher production cost can be neutralized.

The problem is that the price for gas and diesel fluctuate. With recent advances in technology allowing for massive fracking and enormous reserves of natural gas having been discovered all around the world, including in the Marcellus Shale Formation, we may be entering an age in which energy costs go down.

The world is littered with projects, including synthetic fuel efforts funded by the federal government under President Jimmy Carter that made perfect sense under some particular projection on oil prices, but those efforts failed miserably when those prices did not pan out.

In 2011 dollars, oil was $111.43 in December of 1979. By 1999 – 20 years later – the price of oil, again in 2011 dollars, wasn’t even $20. These types of fluctuations in oil prices are a big challenge when seeking investment in these types of projects. Can the economics pan out if oil prices decline between 2011 and 2031 as they did between 1979 and 1999?

We are all in favor of regional efforts such as this, but the way to make them a success is to bring in world class experts. That means coming up with a plan that makes it worthwhile for the big West Coast grower/shippers to grow broccoli on the East Coast and for the big West Coast cut vegetable processors to build East Coast processing plants.

These are the kinds of people with the knowledge, experience and contacts to make the efforts very successful. These are also smart business people; they know that defending legacy investments is futile if there really are better alternatives, so a refusal to get involved would probably mean they didn’t see the economics as panning out.

Another possible opportunity for this project is to do some export business. A few years ago, there was a broccoli shortage in Europe and retailers there sent buyers all over California looking for broccoli, but they wanted EuropeGAP-certified product and that was scarce indeed.

One wonders how broccoli growers in California do feel about this effort. They were told that it was a great triumph for the produce industry to get these funds in the Farm Bill, yet it seems that the funds are being used in service of a kind of industrial policy to alter the industry — perhaps not in their favor.

One also wonders if this model of government funding works at all. One model of economic development is to have really smart people such as Professor Gómez and Professor Bjorkman theorize about what kind of industry structure might work and then try to see if it can be developed. Typically, though, in America, we expect that those closest to the industry are likely to identify new opportunities, and their willingness to invest their own capital in the project is an important sign of its viability.

One would suppose that defenders of these kinds of efforts would say that the large scale required for their success requires this kind of planning, often supported by government funds, but those familiar with the history of organizations, such as Federal Express, know that scale is not an insurmountable obstacle for today’s capitalists.

C.H. Robinson now owns Rosemont Farms, Dole has a fresh-cut plant in North Carolina. Giants such as Six-L’s know about producing and marketing up and down the East Coast. These companies all have resources and capabilities. It seems odd that there would be a really profitable opportunity but nobody acting to take advantage of the opportunity.

Yet, it just might work. Sometimes putting the issue on the surface is itself a service, and because the effort is a joint one, focusing on new seed and new marketing structures, it is just possible that the researchers found a small market failure where the seed folks didn’t think it worth investing in development because there was no market and the marketers didn’t think it worth investing in an industry infrastructure because there was no quality product.

This could be a revolution in the industry if it develops as hoped and other products start to piggyback on the infrastructure. Once trucks are rolling to retailers, it becomes possible to put other items on the same trucks. It is not a coincidence that specialty firms such as Frieda’s and Melissa’s are located in California, not in North Carolina. But that could change.

Which is why we are really intrigued to hear Professor Gómez and Professor Bjorkman present at The New York Produce Show and Conference. For East Coast retailers, wholesalers and growers, it is a specific opportunity but for the whole industry, it is raising possibly transformational questions about what we will grow, where and how it will be marketed. Forewarned is forearmed, so we look forward to hearing the whole story in New York.

Remember, you can register for The New York Produce Show and Conference here.

Book a hotel room here.

Get travel discounts here.

Remember that in addition to top notch education sessions such as this one presented by Professors Gómez and Bjorkman of Cornell University, the New York Produce Show and Conference features a trade show, general session including the Perishable Pundit “Thought Leaders” Panel, chef demos, tours of retail, wholesale, foodservice operations and a terrific spouse/companion program, including High-Tea at the Plaza Hotel. Plus, new this year will be special conferences devoted to Global Trade and Foodservice.

Here is a little brochure.

And please check out the website here




Pundit’s Mailbag — A Kroger Exec Urges Pundit to “Get Real” In Analyzing Costco Decision To Decline Government Funds For Electric Charging Stations

Our piece, A Hat Tip To Costco… Lack of Usage Prompts Costco To Forgo Electric Car Chargers And It Helps Taxpayers By Resisting The Lure Of Free Government Money, got the goat of a very important person in the world of specialty cheese:

Prevor, get real would you?

If you had any real concern about “the Lure of Free Government Money,” then you would have a serious investigation about subsidies to our agriculture industry and large food processors, as opposed to this cheap shot at the EV cars. This is a non-story. Period. As it was clearly stated in your article, the charging stations were out of date and not used due to the EV cars being pulled off the market by GM. (If you would really like to learn about this you should see the film “Who Killed the Electric Car?”).Your overly condescending tone to the green movement reveals your short-sightedness. Twenty years ago, organically grown produce was considered a joke by the big supermarket chains; now it is everywhere. As I said before, get real.

If a “pundit” is a “learned person,” it is not showing from this kind of writing.  

—Tim Smith
Category Manager Specialty Cheese
The Kroger Company
Cincinnati, Ohio

Tim is a highly respected authority in the world of cheese, the Treasurer of The American Cheese Society and an intriguing personality. So we appreciate Tim taking the time to write, though we confess that we think ourselves unfairly maligned.

First, we have been quite consistent regarding agricultural subsidies. For example, back when the farm bill was being considered, we pointed out that it was distasteful for the produce industry to be endorsing a giant farm bill because the industry had managed to get some small sums of money for industry initiatives in the bill. You can read that piece here. More recently in Pundit sister publication, PRODUCE BUSINESS, we pointed out that we could all be winners if the lobbyists lost a bit. You can read that piece here. For the record, we would not give one penny in “subsidies to our agriculture industry and large food processors.”

Second, we are opposed neither to electric cars nor to charging stations. We did question whether chargers weren’t more sensibly deployed in employee slots as employees are at the store long enough to really benefit, and the predictable availability of such charging stations for employees might actually motivate purchases of electric vehicles. We will say that we wouldn’t give subsidies to electric cars because it is not a useful function for the government to pick and choose the technologies that will “win” in the future.

Third, the hat tip to Costco was because, having decided that it had no need for charging stations — utilizing its own judgment, not that of the Pundit — it elected not to install them even when taxpayer money was made available. One may disagree with Costco’s lack of enthusiasm for charging stations, but not taking taxpayer money to do something that Costco executives think would be wasteful is laudible.

We also point out that the saga of the electric car has been going on since before Henry Ford, yet electric vehicles have never been a mainstream success. We would also note that Chris Paine, the director of the film Tim mentions, just unveiled at the Tribeca Film Festival his latest documentary, Revenge of the Electric Car, which chronicles its comeback. You can see the trailer for this new movie at the end of this article.

We have no objections to organically grown produce and, in fact, believe that if consumers want it, it should be made available to them. Though whether organic produce is “green” or not strikes us a legitimate question to explore. After all, if organic generally produces lower yields, then more land will have to be devoted to agriculture to produce the same amount of food. If this thirst for land leads to, say, deforesting the Amazon, it is not obvious to us that this is beneficial for the environment.

Of course, on the substance of this matter — whether consumers will value charging stations at retail stores — there is no need for Tim and the Pundit to disagree. This is a commercial choice and the surest way to get Costco to install charging stations is for there to be evidence that consumers are selecting to shop at say, Kroger, because it has charging stations.

Obviously, however, Tim’s enthusiasm being noted, Kroger executives are a little hesitant about the draw here as well.

Smith’s Food and Drugs, a Kroger division, has opened one single charger in a gas station unit. You can read about it here.

Kroger’s Fred Meyer Division will be installing chargers in six Portland, Oregon, and six Seattle, Washington area stores. You can read about it here. This project was made possible by a $114.8 million stimulus grant.

The Kroger Company, though, is a pretty substantial organization. If its executives thought that electric charging stations would bring in lots of customers, they would be sprouting up like weeds in every Kroger parking lot. That they are not makes us think that top executives at Kroger are thinking in line with top executives at Costco in saying this is not likely to be a significant consumer draw for a long time to come.

Many thanks to Tim Smith for sharing his thoughts on this issue.

 




Pundit’s Mailbag — What IFCO Was Told About Wal-Mart’s RPC Decision… And What Was Not Said

A prominent industry consultant had asked us to weigh in on the motivations behind Wal-Mart’s move away from RPCs, particularly as this move seemed inimical to proclamations Wal-Mart had made regarding sustainability. We answered in a piece titled, Pundit’s Mailbag — Wal-Mart’s RPC Decision Is Part Of Its Bargain-Hunting Produce Procurement Strategy, and that piece brought several letters including these:

Great article. It made me wish that everyone could have the advantage I had: The opportunity to take Max Brunk's research course.

First thing Max taught is people give one answer, and reality is somewhat different. Max knew marketing, and while new forms of research have developed over the years, the basics remain the same. Max was tough to work under but he was at the peak of his profession.

—Dave Diver
Formerly Vice President of Produce at Hannaford

Author of Retail Perspective monthly column
at PRODUCE BUSINESS



I wanted to add a few comments on your recent response titled: “Pundit’s Mailbag — Wal-Mart’s RPC Decision Is Part Of Its Bargain-Hunting Produce Procurement Strategy”. IFCO has worked as a partner with Wal-Mart for many years, and certainly Wal-Mart’s change in procurement structure has been an adjustment for all of its vendors and business partners like IFCO. Although it’s understandable, the recent events and press this summer have been exaggerated or slightly taken out of context by many in the produce community.

Wal-Mart, like many retailers, is seeking various ways to drive sales and reduce costs. The big difference is for many years both of those ingredients for success repeated themselves rather easily year after year since Supercenters emerged 20 or so years ago.

The display-ready carton (DRC) initiative emerged this summer when Wal-Mart especially yearned for sales increases specifically in the orchard fruit categories. Some of the buyers at Wal-Mart want to test consumer messaging and see if direct messaging to the consumer can help drive sales for them. While the communication in the form of different memos and meetings from various people has somewhat confused the produce vendor community, Wal-Mart did clarify in August they wanted to start very slowly to determine if a substantial change is warranted. Moreover, IFCO is also working with Wal-Mart on consumer messaging directly on the RPC as well as other marketing agents which may drive sales.

The DRC is only being tested later this month with one commodity from only one of their many suppliers in a limited market.The upshot of the discussion is Wal-Mart is testing and analyzing all of these options before changing the entire orchard fruit category to any particular packaging configuration. Through the collaboration with Wal-Mart’s suppliers, Wal-Mart realizes small changes in the supply chain create significant implications to the growers, the distribution centers and the stores.

It’s also important to note all of the packaging testing is focused on orchard fruits. When Global Food Sourcing (GFS) first started at Wal-Mart, there was a lot of uncertainty about many commodities and packaging. However, Wal-Mart has continued to expand RPC usage in most commodities. Furthermore, Wal-Mart also is working with IFCO on collaborative new products like the new banana RPC, which will be tested at Wal-Mart later this month.

Overall, it’s quite understandable for any news or gossip related to Wal-Mart to escalate. Just about every retailer with whom we work has asked “What is really happening at Wal-Mart?” The RPC industry and IFCO, in particular, have continued to grow at multi-double-digit rates for years.

Major retailers like Kroger, Safeway and Loblaw continue to expand their RPC usage, while many regional retailers from coast to coast in North America also have started new RPC programs in the past few years. As long as retailers want better quality and lower supply chain costs, both of which may be obtained through an RPC program, RPCs will continue to grow at Wal-Mart and retailers across the continent.

—Andy Hamilton
Vice President - Sales East 
IFCO
Atlanta, Georgia

We appreciate both of these letters, and Andy Hamilton has clearly laid out the official story. We have no reason to think that it is not the story that he has been told by Wal-Mart. As far as it goes, it is almost surely an accurate explanation. However, as with many things there is a back story.

Bruce Peterson — then just starting the roll-out of Wal-Mart’s produce program — visited the United Kingdom in the early 1990’s, prior to Wal-Mart’s acquisition of ASDA. Bruce observed that RPCs were utilized by all the major UK retailers.

His interest was not so much the RPC itself, but the entire process by which they were deployed.

Basically Bruce was trying to think through four critical questions:

1. Were standardized display-ready boxes desirable?

2. If so, what should the standards be for display boxes?

3. What material should the boxes be composed of?

4. If plastic, could or should Wal-Mart’s US stores have a system-wide network of returnable/reusable assets?

Bruce had already been involved with CHEP in rental pallets, and CHEP was looking to move into this area as well.

The initial thinking as to why it would be a valuable system to use RPCs in a returnable/reusable system evolved over time. Initially, Bruce focused on the idea that Wal-Mart could realize labor and execution benefits through the use of RPCs.

Rather quickly, though, it become apparent that quality on display improved and shrink was reduced dramatically.

Ultimately, the whole concept of a "smart box" surfaced. Wayne McKnight and Michael McCartney played instrumental roles in that development and in advancing Bruce’s thoughts as to the potential for RPCs and an associated system.

It is a little known fact that it was through this initial work that the whole era of RFID emerged at Wal-Mart. Few realize that it was the produce division's journey into RPCs that brought Wal-Mart to RFID!

One only has to recount this little story to realize that it is implausible to think that a chain focused on such deep and long-term benefits such as labor, execution, quality, reduced shrink and, later, sustainability, would suddenly abandon such concerns simply because some executive wants to “message” to consumers more effectively about stone fruit, apples and citrus.

Obviously this type of messaging about orchard fruit is a relatively unimportant thing and, surely, the mighty Wal-Mart could figure out any number of ways to communicate with consumers besides altering its whole system of produce distribution.

We would submit that the key insight in understanding Wal-Mart’s willingness to change in this area has little to do with a sudden need for boxes to “message” on and a lot to do with a desire to be able to standardize procurement on the most common packaging so that Wal-Mart can more easily buy from the cheapest bidder.

We realize that Wal-Mart never said that, but as Dave Diver reminds us in talking about Max Brunk’s research class, when companies authorize their executives to speak, they do not always feel compelled to have them tell the whole story. Indeed the executives asked to speak often are not told the whole story themselves.

Max retired as Professor of Marketing at Cornell’s Department of Ag Economics in 1983. After his retirement, he wrote a column, called Agricultural Marketing, for our first issue of PRODUCE BUSINESS in 1985 and continued to write for many years. After Max “retired” from PRODUCE BUSINESS, his star pupil, Dave Diver, took over Max’s space.

There are a lot of people and publications to repeat what the press release said. Our job here at the Pundit is a bit more complex… to find the significance latent in actions and events. In this case, that is to say that we have a chain that today is consumed with getting a low F.O.B. It used to be a chain consumed with maximizing sales and profits by offering consumers a deal, while evaluating the total supply chain costs including impact on quality, impact on out-of-stocks, etc.

It is only a shift in those concerns that adequately explains the direction in which Wal-Mart has decided to move.

Many thanks to both Dave Diver and Andy Hamilton for their important letters.

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