We’ve focused on the issue of generic promotion for some time and, in different circumstances, have wound up on different sides of the issue.
For example, back in 1998 there was a proposal for the Washington State Apple Commission to get a substantial assessment increase. The plan called for the commission to increase consumer advertising from $7 million to $23 million per year. We had concerns, but in the end, our piece, Assessing Assessments dealing with the issue in Pundit sister publication, PRODUCE BUSINESS, issued a clarion call:
The only solution is marketing. And the only mechanism set up to do that right now on the scale needed is the Washington Apple Commission. I recommend a yes vote on the increased assessment.
Yet in October 2001, we wrote a piece in PRODUCE BUSINESS, titled The Watermelon Vote, where we addressed a proposal that called for a dramatic increase in revenues for the National Watermelon Promotion Board, which would be achieved with a multi-channel assessment that would have disadvantaged wholesalers and we came down just as strongly on the other side:
The National Watermelon Promotion Board (NWPB) is holding a November referendum hoping to break the long tradition that commodity board assessments be marketing-channel neutral.
Under the rubric that everyone who profits from selling watermelons ought to pay to promote them, the NWPB is proposing to levy assessments not only on the grower/shipper level but also at the broker, wholesaler and processor level.
The argument is superficially appealing, and PRODUCE BUSINESS is giving the NWPB the chance to say its piece… But this proposal is wrong and will hurt the trade. It should be defeated…
So when the proposal for a national generic promotion program for produce was announced earlier this year, we already had a track record of analyzing these matters and we had already shown the intellectual independence to endorse such programs when they seemed likely to work and reject them when they were problematic.
We have written dozens of pieces analyzing the proposal. You can review most of them in our round-up, here.
In the end, though, just as we issued a call to pass the apple assessment and a call to reject the watermelon proposal, we felt the need to state the obvious: That the industry needed to move on, and we did so in a piece we titled Got Produce? Let’s Cancel The Effort And Start Afresh.
Now comes word that the Produce for Better Health Foundation has decided to do exactly that:
NATIONAL FRUIT AND VEGETABLE RESEARCH
AND PROMOTION BOARD NEXT STEPS
PBH Involvement is Winding Down
Wilmington, Del. — Between April and October of 2009, Produce for Better Health Foundation (PBH) sought feedback from the fruit and vegetable industry about the possible development of a national fruit and vegetable research and promotion board. After various webinars, presentations, town hall forums, and an industry survey, PBH’s Executive Committee has concluded that the decision about next steps needs to be in the hands of industry leaders most affected by such a promotion board.
”PBH acted as a catalyst to spark the discussion about a national promotion board and we’ve heard a great deal of valuable feedback, from individuals who support the concept, as well as from those who oppose it,” said Paul Klutes, Director of Brand Sales at CH Robinson and Chairman of PBH. “Our industry survey over the summer highlighted some of the concerns on both sides of the issue. PBH’s Executive Committee believes that only those most affected by such a promotion board can truly decide what is in their best interest moving forward.”
Several industry leaders have expressed their interest in exploring next steps, and if they come together to do so, it will be at their own initiative and without direct PBH involvement or sponsorship. PBH will share all that has been learned, both positive and negative, with these leaders if they desire, but these individuals will not be bound to follow the recommendations of the PBH Task Force, whose thoughts have framed this discussion since April.
”Our role, consistent with the Foundation’s mission, has been to stimulate the conversation and to provoke industry consideration of the idea”, Klutes said, “We have accomplished that task, and now it is the time for industry stakeholders, the people who would be writing the checks, to pick up the ball and carry it forward, or not, as they see fit. If there is a decision to move forward, it will be under independent industry leadership; and, at this point, PBH will not play a direct part in that effort.”
The proposal as outlined in April was: To increase consumption in the United States of all forms of fruits and vegetables for better health through implementation of a comprehensive health marketing, communications, and education effort. A total of $30 million was proposed to be collected from first handlers. This amount was proposed to be collected via a 0.046 percent assessment (less than 1/20 of one percent) of the free-on-board (FOB) market value of all first handlers and importers of both fresh and processed fruits and vegetables. The creation of such a promotion board would be dependent on the outcome of a referendum, or vote, of first handlers.
”Everyone agrees that the industry needs to do more to market itself. Currently, PBH is the preeminent industry wide voice promoting the benefits of eating more fruits and vegetables. We’re still very excited about that mission, and are finding new, effective ways to promote our Fruits & Veggies-More Matters® message to the consumer every day! For example, one of PBH’s major initiatives for 2010 is to develop a plan to get doctors, pharmaceutical companies, and insurance companies to help us communicate the benefits of eating more fruits and veggies to their patients. We have a great message and we need to get everyone who shares an interest in a healthier America to collaboratively promote the benefits of eating more fruits and vegetables” said Klutes.
In our article, we had pointed out that both United and PMA had representatives on the PBH executive committee, so on at least some level they had acquiesced in at least having the discussion. We called, though, for United and PMA to exert their influence:
The silence of the industry speaks very loudly. It is time that the folks from United and PMA speak up and say that we need to set this initiative aside and start working to salvage PBH before that comes down in a whirlpool with this generic promotion initiative.
PMA was, at least publicly, silent but United Fresh, over the signature of Jim Lemke, Senior Vice President, C. H. Robinson Worldwide, Inc., Eden Prairie, Minnesota, and current chairman of United, made this point:
Statement by United Fresh Chairman Jim Lemke
on PBH Decision Regarding National Promotion Order
“On behalf of the United Fresh Board of Directors,I’d like to thank the Produce for Better Health Foundation for advancing the discussion of a potential national promotion order for fruits and vegetables during the past six months. It’s important that all of us in the industry work together to always be looking at creative ways we can help increase consumption of fresh fruits and vegetables. Thinking outside the box is an important contribution to that effort.
But I’d also like to congratulate PBH today for listening to the many industry members who felt that this was simply not the right proposal at the right time. After six months of dialogue and industry debate, it was clear that there was not a substantial majority of the industry that wanted to drive this concept further.
We also believe it is time now for all of us to recommit our energies in support of current PBH efforts, which have sometimes been clouded during this discussion of a national promotion order. Our industry cannot sit back and hope that produce consumption grows; we need to be pursuing all available opportunities to make that happen.”
Jim was channeling three points: First, with its government affairs focus, United was never as concerned with having a generic promotion program as with making sure the industry wasn’t embarrassed in the councils of government. If the vote wasn’t going to be an overwhelmingly strong industry endorsement, better to not get USDA involved. Second, not only was there not overwhelming support; there was hardly any at all. This came out clearly during discussions held by United’s board. Third, it had become clear that donations and support of the Produce for Better Health Foundation were threatened by the whole matter and that cutting the losses and getting back to basics were absolutely essential if PBH was to be preserved as an industry institution capable of interacting with government and public health authorities for the benefit of the people and the industry.
Elizabeth Pivonka, President of the Produce for Better Health Foundation, Mark Munger, Vice President of Marketing at Andrew & Williamson and immediate past chairman of the Produce for Better Health Foundation, and Paul Klutes, Director of Brand Sales at C.H. Robinson and the current Chairman of the Produce for Better Health Foundation, have been the primary advocates for the proposal and all, clearly, wanted better health for the citizenry and prosperity for the industry.
Though they seem to want to stick to the idea that it was appropriate for PBH to spearhead this effort, we don’t see the issue so much as a question of appropriateness; we see it as a question of effectiveness. And on that score, the answer, at this point, is self-evident.
We could argue that the leadership at PBH didn’t perceive the extent to which many would see the advocacy of a mandatory program to be a political act, outside of PBH’s warrant.
What we will argue is that there are three really good lessons here for anyone looking to make anything happen:
1) The availability of PBH money to fund the effort allowed the effort to proceed prematurely. Had the advocates set out to raise money for an advocacy effort, they would not have been turned down, but they would have been asked many questions. They wouldn’t have been able to proceed until satisfactory answers had been produced. This might have saved the initiative.
2) The importance of go/no-go points. The odd thing about this initiative is that they had a study group that was assigned to draft the plan, but when all was said and done and the report was issued, it didn’t come with the endorsement of the organizations represented on the committee. Any effort of this type requires a series of go/no-go points: Can we raise $250,000? Can we get the endorsement of at least 80% of the organizations represented on the steering committee? Can we get the endorsement of our own Board of Directors? There needs to be these interim steps that provide indications as to whether further effort is justified. No matter who said no, this was a steamroller that was going to go on. Steamrollers typically offend because, at base, that attitude means that the attitude of others doesn’t matter.
3) Transparency should be the default option. We all know that sometimes secrecy can facilitate negotiations. But much of this effort had nothing to do with negotiations. Why draft a secret committee to come up with a proposal? Why not announce that you are planning on developing a proposal and are seeking great ideas? Why not post drafts on the Internet to encourage comments? Virtually all objections to the plan could be surfaced long before the plan is presented.
Although Elizabeth, Mark and Paul all had the best of intentions, it would be wrong to view the end of this process as a failure for the industry. As every businessperson knows, often the best deal is the one you didn’t get.
PBH’s goals are to enhance health through increased produce consumption, not to maximize profits for the produce industry. Much of the objection to the proposal came from those who would pay the assessment and who realized that there was a lot of space in between increasing produce consumption in general and increasing the profitability of any individual operation.
We think the industry owes a debt to those who were willing to engage publicly on these issues. Here at the Pundit, we had many letter-writers who asked for their confidentiality to be protected, but we also had some bold individuals, on both sides of the issue, who were willing to speak out and contribute to the debate:
- Kevin Donovan, Phillips Mushroom Farms (Got Produce? What Is PBH’s Purpose If Not To Promote
- Bill Vogel, Tavilla Sales (Pundit’s Mailbag — Generic Promotion Plan Does Not Allow For Differentiation)
- Mike O’Brien, Schnuck Markets (Got Produce? Schnuck’s Mike O’Brien Tries To Add “Balance”)
- Eric Schwartz, Steve Franson and Company (Pundit’s Mailbag — More Targeted Approach Needed For Generic Promotion)
- Sharon Sass, R.D., Arizona Department of Health Services (Pundit’s Mailbag — PBH’s Effectiveness May Best Be Seen At State Levels)
- Veronica Kraushaar, Viva Global Marketing Strategies (Got Produce? Will Big And Small Producers Ever Agree On Generic Promotion?)
- Fred Medero, Kincannon & Reed (Pundit’s Mailbag — Measuring Success Or Failure Of Generic Promotion)
- Dick McKellogg, Lowe’s Foods Stores, Inc. (Pundit’s Mailbag — Got Produce? Objection To Mandatory Component)
- Harry Kaiser, Cornell University (Got Produce? Generic-Promotion Expert Enters Debate With Some Shocking Analysis and Got Produce? Cornell Professor Responds To Pundit Criticism… and Got Produce? …And Spawns Virtual Debate On Generic Promotion)
- Chuck Zambito, Zambito Produce Sales (Pundit’s Mailbag — Got Produce? Advantage Goes To Convenient Produce)
- Julian Lipschitz (Pundit’s Mailbag — Got Produce? Advantage Goes To Convenient Produce)
The industry also owes a debt of thanks to Lorri Koster, Co-Chairman at Mann Packing and Chairman at the Grower-Shipper Association of Central California, and to Rick Antle, CEO of Tanimura & Antle. PBH is like mom and apple pie, so when Lorri and Rick took to the stage — Lorri at PMA’s Foodservice Conference and Rick at the PMA convention in Anaheim — daring to speak truth to power, they gave needed voice to industry concerns. Most would see no upside for themselves in speaking out, but Lorri and Rick spoke what others would not dare. We owe them both much.
It would be a mistake to think that this seals the fate of generic promotion. One of the problems with this initiative has been that it went prematurely to timelines before need and efficacy were fully established.The history of things like the National Mango Board is that such efforts can easily take a decade, sometimes more.
The advocates should not be disheartened. They started something and certainly those in this industry know one can wait many years before a sapling bears fruit. Seeds once planted, grow in their own time. Few wars are won without many battles lost.
Out of the ashes of the Spinach crisis of 2006 was born the California Leafy Green Handler Marketing Agreement, which led to the establishment of a sister organization in Arizona and may yet lead to a national organization.
Last year, we lauded the willingness of the California Leafy Green Handler Marketing Agreement to decertify companies who weren’t conforming to standards in a piece we titled Leafy Green Marketing Agreement Reviews Its Audits And Actions: New Report Released.
Now the CLGMA has released its 2009/2010 report:
2009/2010 LGMA Annual Report Just Released
Food safety audits of California’s leafy greens farmers increased 51% last year, according to LGMA’s newly released annual report.
The report shows the LGMA’s 2008/09 major accomplishments including:
- Mandatory government audits increased in quantity and rigor.
- The flexible nature of the LGMA’s food safety practices was clearly demonstrated with the addition of important new “metrics” designed to prevent pathogens from entering leafy greens fields.
- A computerized database system was created to capture and maintain important information collected from each audit of leafy greens fields.
- Governor Arnold Schwarzenegger was formally recognized for his role in establishing the LGMA.
- Research results show that consumers have confidence in the LGMA program
When it comes to food safety, boring is very good, so we are pleased to report that this year’s CLGMA annual report is mostly a snoozer. The overall impression is of a well run organization steadily making incremental improvements.
This year the metrics were updated to reflect information learned from a 2006 FDA investigation regarding the possibility that waste water from dairies or other animal operation might come into contact with irrigation water used to grow leafy greens. There was a new database developed and unannounced inspections were implemented.
Some sensationalists will surely pull out some of the detailed numbers that indicate there were more citations issued this year than last — but a careful reading shows that is really a function of more audits and a shift in auditing from paper-trail verifications to field audits.
The report includes a nice tip of the hat to the Center for Produce Safety for funding research in this field and well it should.
If one wanted to critique the CLGMA, the most trenchant critique would be that we simply don’t know all that much about things like E. coli 0157:H7 and about what produces food safety. Therefore the CLGMA uses a science-based, yet commonsensical approach.
For example, the initiation of unannounced audits seems like it would be good for food safety; it would seem to encourage habitual food safety habits and a culture of sustaining food safety practices rather than cramming for an audit once a year — so, for those sort of commonsensical reasons, we applaud such a change. Yet, in reality, there is no rigorous science showing than farms with unannounced audits produce safer food that firms that undergo only announced audits.
There is still a case for mandatory government action: the 1 or 2% of the industry that doesn’t sign up is troublesome, even if they are mostly small farmers.
And the occasional decertification is both meritorious — because it shows the program has backbone — and troubling — because these miscreants seem to still find a home for their produce somewhere.
The national program proposal is, of course, designed to address the obvious issue that leafy greens from other states and countries are not necessarily produced under the same standards.
By and large, the program is doing its job and doing it well. The fact that there are no fireworks should not distract us from the fact that it is a model for the world.
Which doesn’t mean there can’t be another outbreak tomorrow.
Thomas Jefferson is said to have written that “The price of liberty is eternal vigilance.” The price of food safety is no less, and the California Leafy Greens Marketing Agreement is the industry’s expression of a willingness to pay that price.
When ABC broadcast an exposé on child labor in agriculture and specifically focused on the Adkin Blue Ribbon Packing Company, the reaction was both predictable and inevitable. It was certainly no surprise to us. In a piece published over two years ago in Pundit sister publication, PRODUCE BUSINESS, titled Wages And Social Responsibility, we warned that interest in sustainability and social responsibility will inevitably circle back to labor and working conditions in the fields, both in the US and developing countries.
To deal with the exposé, several things happened quickly:
The United Fresh Produce Association sent out a letter to its members, basically saying that everyone has to redouble their efforts to make sure there is no illegal child labor in their operations:
October 30, 2009
To All United Fresh Produce Association Members:
The examples of illegal child labor in farm harvesting reported today by ABC News should be alarming to us all. While I am confident that these reports show an unfortunate exception compared with the real picture on fruit and vegetable farms across the country, we need to be clear that illegal child labor in our fields is totally unacceptable and must be prevented 100% of the time.
My first instinct upon seeing the ABC report was to say that these instances do not represent the commitment demonstrated every day by thousands of growers across the United States. It’s important that we are transparent in our operations, and make sure that ABC and, most importantly, our consumers recognize that these conditions are not widespread in our industry.
Yet simply saying so without taking further steps would be inadequate. I am asking each of you today to redouble your efforts to ensure that no young children are ever working illegally on our farms. I know you all have policies against illegal child labor, but it is our responsibility to make sure policies don’t just sit in a binder somewhere but are being enforced every day. It is our responsibility to meet with farm managers and field supervisors to reinforce the critical importance of these policies. It is our responsibility to teach these rules to all workers who might not understand the importance of keeping children in school and out of harvest fields. It is our responsibility to ensure total compliance with the law.
I know that the vast majority of you are already following these steps. But this is a powerful reminder to ensure that your own operation can live up to the scrutiny and expectations that consumers have of our industry, and the law requires.
I thank you for your commitment to providing American consumers with healthy, great-tasting fruits and vegetables grown and harvested in the most responsible manner.
United Fresh Produce Association
After the buying organizations identified in the ABC Report — Wal-Mart, Kroger and Meijer — announced they were suspending purchases from the farm pending further investigation, news outlets published many pieces saying things like, Blueberry Grower Shunned Over Child Labor Charges. All these buying organizations, of course, wanted to distance themselves from this illegal activity:
Wal-Mart and two other top retailers said Friday they are suspending business with a large southwestern Michigan blueberry grower after investigators found children as young as 6 working in the grower’s fields.
Wal-Mart, Kroger and Meijer said pending further information, they have stopped buying products from Adkin Blue Ribbon Blueberry Co. near South Haven, about 85 miles northeast of Chicago.
And the U.S. Department of Labor announced that it was imposing fines on Adkin and others:
Two blueberry growers, Jawor Brothers in Ravenna and Adkin Blue Ribbon Packing Co. in South Haven, have been fined a total of $2,584 for child labor violations.
The fines are the result of an investigation by the U.S. Department of Labor, which found children younger than 12, including a 6-year-old in one case, working in the fields.
Tony Marr, general manager for Adkin Blue Ribbon, said the company has strict policies on allowing children in the field. It is written in English and Spanish and employees must sign it before they start work.
“We allow no children under 12 in our field,” he said. “A couple of kids were out there hanging out with their parents. It’s something we’re looking into and reviewing to make sure that doesn’t happen again.”
Poor housing conditions also resulted in fines totaling $33,550 for seven fruit and vegetable growers, including another $4,600 fine for Adkin Blue Ribbon.
Marr said they were surprised by the federal violations because the company meets all state standards.
“What we’re finding out is their standards are different from the state,” he said.
He said some outdoor bathrooms were too close to the living units, and they didn’t have enough shower heads.
“Everything at the labor camp was corrected within three days of them pointing it out to us,” he said.
There was hardly another way to handle it. The use of farm labor under age 14 is typically illegal.
Still, it is worth a moment to think about the practical effects of this law and of everyone’s reaction to the exposé:
1. It is important to note that the investigation, though broadcast now, was done during the summer when school was out. There is no suggestion of truancy here.
2. It is also important to note that though the activity is illegal, it is only illegal because the parents of these children are hired help or because the farm is a large one.
If the parents owned the farm, the children could engage in the EXACT SAME WORK, and it would be perfectly legal:
Exemptions from Child Labor Rules in Agriculture
Complete Child Labor Exemptions
Youth of any age may be employed at any time, in any occupation in agriculture on a farm owned or operated by their parent or person standing in place of their parent.
In fact, if they worked on “small farm” and the parents gave consent, the children could, once again, do the EXACT SAME WORK and it would be perfectly legal:
If the youth is younger than 12, he or she can only work in agriculture on a farm if the farm is not required to pay the Federal minimum wage. Under the FLSA, “small” farms are exempt from the minimum wage requirements. “Small” farm means any farm that did not use more than 500 “man-days” of agricultural labor in any calendar quarter (3-month period) during the preceding calendar year. “Man-day” means any day during which an employee works at least one hour. If the farm is “small,” workers under 12 years of age can only be employed with a parent’s permission and only in non-hazardous jobs.
3. Since Wal-Mart, Kroger and Meijer can’t be associated with illegal activity, they all did the smart thing by disassociating themselves from this farm and this controversy. It is, however, worth noting, that it is not at all obvious that their actions help these children, which is, presumably, the point of the child labor laws.
The parents who bring their children to the fields are poor. If these chains won’t buy their employer’s blueberries, the company will have to lay off the workers. When you live close to the waterline, you drown if you miss one paycheck. So in all likelihood, although disassociating from the situation may be legally required and create good press, it is not likely to help the children if their parents lose their jobs.
4. We have to guard against a kind of moral obtuseness where if we don’t see the harm, that means it doesn’t exist. These poor people can’t afford to send their children off to day camp in the summer so they can do archery and go swimming. They can’t afford an academic program so the children’s achievements won’t dissipate over the summer. They can’t afford to have Mom quit work and stay home to watch them, so they bring their children to work.
It is not in any way obvious that the children would be better off if their parents made them sit by the side of the field all day long doing nothing. By harvesting they get to be closer to their parents, they get to do something useful and feel like they are making a contribution to their family.
These people get paid by the piece, so a little extra money from the kids working, for a family at this level, means a new pair of sneakers before school, a chance to go the dentist or maybe a little something in a Christmas stocking.
In all the anxiousness of retailers to distance themselves from this morally “shocking” activity, nobody stepped up to say the only thing that would really make a difference, which would be to pay more for blueberries and set up an arrangement so that the money would go to fund a free summer camp for these children.
5. There is not the slightest indication that the parents of these children don’t love them and want the best for them. We all know there are cases of child abuse and neglect but, in general, parents are the ones who best know what is best for their children, and when we pass laws banning behavior but without providing alternatives, we are not being ethical; we are just allowing ourselves to feel self-righteous because we “banned” an activity — whatever the consequences for those these bans actually affect.
There is a very interesting book titled Outliers: The Story of Success by Malcolm Gladwell that explores the nature of what makes certain people successful.
One chapter has to do with Joe Flom, a living legal legend and the last living named partner of Skadden, Arps, Slate, Meagher and Flom, the prominent and very successful law firm. The author uses Flom as a symbol for a generation of Jewish families that arrived in New York at the turn of the century and who worked in the garment trade and whose descendents became professionals.
He quotes a study done by a grad student named Louise Farkas who went to nursing homes in New York City and Miami Beach to write up family trees of these Jewish families — but these “trees” were based on occupation, and they were remarkably consistent. Here is her account of “subject #18”:
A Russian tailor artisan comes to America, takes to the needle trade, works in a sweat shop for a small salary. Later takes garments to finish at home with the help of his wife and older children. In order to increase his salary he works through the night. Later he makes a garment and sells it on New York streets.
He accumulates some capital and goes into a business venture with his sons. They open a shop to create men’s garments. The Russian tailor and his sons become men’s suit manufacturers supplying several men’s stores…The sons and the father become prosperous…The son’s children become educated professionals.
Malcolm Gladwell gives another example to show how consistent the story is. Here is another family tree illustrating a leather tanner who came from Poland in the late 1800s:
The Russian tailor, who brought home piece work for his wife and children to help with, did not do it because he hated them. He did not do it because he was indifferent to their well being, he did it because they were poor and, in his opinion, this was the best route to get the family out of poverty.
We don’t know what is the best available option for the children of migrant farm workers in the blueberry fields of Michigan. And, of course, we have to follow the law.
Still, we are wondering if this law really helps the children or if it just helps advocates feel good. We suspect that our Jewish tailor from Russia and his family would not have been better off had the government inserted its judgment for what was best for the tailor’s children between the tailor and his family.
Just because these migrant farm workers are a different religion and from a different place, we are not really convinced that they shouldn’t be given the same right to exercise judgment in order to help their children as we extended the Russian tailor decades ago.
Water is essential for life, including the life of the produce industry. Although discussions of sustainability have often focused on carbon emission, many experts in the field see water as the issue of the future.
Though, in California, it is the issue of today. Working with the Governor, the State Legislature finally came to a compromise agreement that, though surely not perfect, has been widely hailed. The San Francisco Chronicleeditorialized with a piece titled, A Water Deal at Long Last:
For decades, California’s water wars have flared unabated — cities versus farms, north against south — while half measures left the Sacramento-San Joaquin River Delta drained and decimated. A solution involving all sides was only a dream.
After days of closed-door talks and an all-night session, the Legislature pulled off a remarkable achievement this week. With the governor’s prodding, Sacramento has crafted a five-bill package that goes a long way toward ending the constant feuding, promising stable water flows, environmental safeguards, and billions in bond money.
“Save, share and store” is the slogan used by Senate leader Darrell Steinberg, D-Sacramento, to describe the basics of the deal.
Some wanted agriculture to be held to the same water conservation standards as urban areas so they are unhappy with the bill, which requires urban areas to cut consumption by 20% but calls on agriculture to follow “best practices,” and there was a large dispute over the consequences for siphoning off water. So these matters will certainly fester.
Much is still uncertain: The Bill includes authorization for an $11.1 billion bond issue — but that must be approved by the voters — and a crucial issue — a new peripheral canal — is punted off to the future.
Still, most observers see the package as a breakthrough and significant achievement, even if much more work will need to be done.
Prior to the announcement in Sacramento, the drought in California had prompted us to ask Mira Slott, Pundit Investigator and Special Projects Editor, to speak with an expert to get some historical perspective and context:
| Holly Doremus|
Ph.D., Professor of Law
University of California, Berkeley
Author, ”Water War in the Klamath Basin: Macho Law, Combat Biology, and Dirty Politics”
Q: What lessons can we learn from your book for the future of water management and conservation? The title is quite provocative. What’s behind Macho Law, Combat Biology, and Dirty Politics?
A: I can tell you what the conflict was all about. In the summer of 2001, it was a critically dry year in the northwest and the Bureau of Reclamation, which operates the Klamath irrigation project, announced it wouldn’t deliver any water to irrigators at all. That had never happened before.
Q: How did the Bureau of Reclamation justify the action?
A: The reason they said they needed to do that was predicated on protecting two sets of fish in the basin; suckers listed endangered at the top of the watershed and salmon listed as threatened at the bottom of the watershed. The National Marine Fisheries Service told the Bureau of Reclamation it had to leave a certain amount of water in the river downstream for the salmon.
At the same time, The U.S. Fish and Wildlife Service said it had to keep a certain amount of water at the top of the lake for suckers. And that’s why none was left. They literally closed the head gates of the project and this was the first time for a federal irrigation project.
Q: At that time, disturbing reports were documenting thousands of dying fish washing up on the Klamath River shoreline, and environmental groups were outraged. Was this sweeping action to divert the entire water supply from farmers to endangered species an anomaly? What is the probability this phenomenon could reoccur?
A: I see parallels with the Central Valley Project (CVP) and State Water Project (SWP). These involve Delta smelt, tiny fish that live in the estuary in the Bay Delta, and salmon that live in the Sacramento River system. They both need water deliveries at different times. And here we are in a critically dry year, not as dry as it looked early on, but dry.
The Bureau of Reclamation announced a preliminary forecast for deliveries. And water contractors had been told they’d get zero. Since then, it became widely believed they would get something, due to ensuing storm activity, but nothing like normal allocation.
Q: How have expectations panned out? Is there a way to track water allocation activity?
A: The most recent data on CVP allocations that I’m aware of can be found at http://www.usbr.gov/mp/cvo/vungvari/
water_allocations_historical.pdf. For the SWP, the numbers are at http://www.water.ca.gov/swpao/docs/notices/09-07.pdf.
Q: Haven’t cutbacks occurred in the past? Is this forecast scenario so unexpected? Should the produce industry elevate this issue to higher level of concern?
A: It’s not uncommon in recent years to have deliveries cut back a little bit for fish. And that’s what happened in the Klamath Basin. Before the Bureau of Reclamation stopped all delivery to irrigators in 2001, there had been incremental cutbacks. The farmers sued even for those.
Q: How prevalent are lawsuits in situations like this? You reference lawsuits like they’re a matter of course. Is this rooted in pure economics or do these opposing parties view this as a fight for righteous justice?
A: Lawsuits in the Klamath water wars were quite numerous. Everybody sues; that’s part of the lesson. That’s part of what we mean by “macho law”. Two legal systems come into conflict in these situations. Each provides beneficiaries with what they believe are very, very strong rights.
The first one, water rights and water delivery system: irrigators and their water districts hold either water rights under state laws or contractual rights to delivery of water. What they think they have are strong property rights that can’t be interfered with without compensation. They believe this is their legal entitlement.
On the other side is the Federal Endangered Species Act (ESA) passed in 1973. A lot happened in the late 60’s and early 70’s. The Act says the federal government can’t by its actions jeopardize continued existence of listed species. The federal government can’t do something that will cause a extinction. The ESA is widely seen as the strongest in a substantive sense of the federal environmental laws. It flat out says the government may not go ahead with action. Environmentalists think they have a very strong legal right to have fish protected.
Here are two opposing groups, and each thinks they should win. That tends to make the conflicts worse in a sense because it means neither side is inclined to negotiate. They both feel strongly about legal entitlement but also the importance of what they are arguing for.
Q: So this is not primarily an economics issue at its core?
A: Sometimes in the talk surrounding water regulation issues, it sounds like they’re money-related, but it goes deeper. People on both sides won’t change for money. A true environmentalist believes it is not OK to cause extinction for any price.
Q: Similarly, the produce industry is built on generations of dedicated family farms, so your point is that passions run deep on all sides?
A: In the Klamath Basin, most agriculture is actually done on small family farms. For these people, it’s their life. Farming is part of their identity, and with it a sense of obligation for the generations that came before and to pass on to generations after. In California, irrigated farming is done on much larger operations. I don’t know if it can become just business at such a big scale. I imagine in family-run operations, the historical ties remain strong.
Other sets of interests in both the Klamath Basin and Delta complicate matters further. Commercial fishermen have much at stake. Ocean salmon fisheries were closed for the first time last year. There was no commercial fishing off the California coast last year. The fishing families and communities have both an economic and lifestyle interest. Also this is a key part of their identity as growing produce is for the farmers.
Q: What is the history behind water distribution? Do you think farmers have become accustomed to a certain system over the years in which to plan their business operations, both from a cost and crop allocation standpoint? If so, transforming farming methods and the types of fruits and vegetables one grows to accommodate new water utilization regulations could involve huge investments and take years depending on numerous variables.
A: Historically, farmers throughout the West have gotten water, highly subsidized water, through federal irrigation projects. The theory comes from the Reclamation Act, which is a law constructed in the early 20th century. The idea was the federal government had the resources and the ability to construct these projects, but the farmers should actually pay the cost over time. That’s almost never actually happened or if so with zero interest rates over a long period.
The government heavily subsidized these projects, and farmers paid nearly nothing for water themselves, and much less than municipalities or other interested parties do. They do pay for distribution in theory to cover the cost of operating the project, but in many cases they don’t and they get the water itself for free. It’s something that can be changed, but it’s very difficult to change it. There are a lot of federal and state irrigation projects. In California, we have one of each that operates jointly, and the water pricing is a little different, but in both cases are long-term contracts with constraints on price.
The Klamath project is associated with a utility that has a series of hydro electric dams. Those dams have been providing power to the farmers at highly subsidized rates until very, very recently. After an initial contract period, there was legal authority to change rates but it was politically difficult. Finally, it has gone through the Oregon regulatory body. The farmers underpay for water and underpay for power to deliver water.
Q: If farmers have been granted relatively abundant water at less-than-market value, where is the incentive to conserve, develop more efficient irrigation methods, or reconfigure crop production to maximize water use? Doesn’t this system put growers in a precarious situation when water availability dries up?
A: Over the past several years, the farming community and the ag extension community has really started paying a lot more attention to this problem. I was talking to ag extension people a few months ago, who were developing new ways to grow alfalfa so farmers can survive deeper cuts in water availability.
There are ways not to lose a crop in a bad drought. I would have thought in the abstract annual crops are easier to adjust to hydrology. I’ve read, though, about farmers planting almonds because they can go through droughts and they won’t lose the trees.
Q: Water utilization issues seem to have reached a boiling point. Is the California drought the catalyst? And does the focus on global warming exacerbate the problem?
A: One thing that came out of the problems in the Klamat Basin and Delta, I hope, is a greater sensitivity that we live in a wildly hydraulically variable climate. Most scientists believe variability will change more with climate change. Farmers will have to find ways to deal with drought.
In the past, farmers have been dependent on reclamation to smooth over the variability in hydrology. As a matter of self-preservation, farmers have to figure out ways to smooth out their own risk, whether this means investments to help hedge or practices that can better hedge against drought.
Q: To many, the decisions on who gets water appear arbitrary or politically motivated rather than scientifically-founded. What is the reality here? Is this where “Dirty Politics” comes into play?
A: I don’t think the decisions are ever arbitrary, yet they are easily seen as underdetermined. There is a lot of uncertainty in these systems. If trying to protect fish, we don’t know how much water fish need. At the beginning of the irrigation system process, we don’t know what the water situation will be. A lot of these decisions have to be made in advance, estimating weather patterns, etc. The Bureau of Reclamation has a set of models to estimate how much water will be available and makes predictions as time goes on. There may be a lot of calculations premised on historical data.
Everyone thinks it is dirty politics with special interests fighting for their share. There isn’t a mathematical formula cranked through to say, “This is how much water for farmers and this is how much for fish,” in a neat division. Inevitably, a lot of judgments are being made. And of course, given there are these deep divides and a lot of people with a stake in these systems, it’s easy for people to suspect judgments are being made on the basis of raw politics. And sometimes this may be true. Some of the judgment is wholly legitimate and in fact is inevitable. What we want is judgments made on a principled basis and as much transparency in how these decisions are made as possible.
What tends to happen is farmers think the wildlife agencies are demanding too much to protect fish because that’s all they care about. Environmentalists think farmers have more political power, are making calls to legislators, going through back channels, and everyone is bending over backwards to help them.
Accusations are flying around in both directions. We think agencies are trying to do their job to the best of their abilities in a world where they know they’ll get their heads chopped off no matter what they do.
Q: After all these years, have we reached a turning point in addressing water utilization supply-and-demand issues, or will the next big storm wash away the urgency?
A: Drought brings them to the fore, but these are underlying issues. One thing about drought and variable climates… they tend to be issues we sweep under the rug in a wet year; human nature, just the way it is that we put off dealing with these things. There are systematic problems. The demands for water from cities, eco systems, and farmers exceed the reliable supply.
Put it all together and our waters are over appropriated. We’ve made too many promises to too many sets of interests. None of the solutions are easy. That’s one of the reasons we tend to sweep them under the rug. These are not clear-cut answers.
Q: What action steps must be taken to drive the process toward meaningful change?
A: Ultimately, we think what’s needed is better articulation of a workable vision of a sustainable landscape. What we’ve got right now is water law on one side, developed when we thought agriculture was very important and the environment was of little importance. Then environmental laws are all about sustaining the environment.
What we don’t have is a means of putting these sets of interests together. Here’s what we want: we want fish and farms to simultaneously thrive, and here’s how we can combine these goals. The need for that new articulation is made even stronger by the specter of climate change coming down the road.
In the West, climate change is a very real and current threat to our water systems. Because of climate change, we know we can’t go on with the status quo. We see a train wreck coming in the distance. We need to figure out our vision.
Q: Is there a working group, a grand coalition of all these interested parties uniting for a common cause?
A: We’ve tried various things. In the Klamath years, there were various attempts to get groups together, and the same with the Delta. The CalFed Bay-Delta Authority still has its web pages. It’s a partnership with the State of California and the U.S., which is supposed to manage these water projects in the Bay Delta. The idea was that we could have reliable water supply and reliable environmental protection at the same time.
The problem is that CalFed denied the need to make tradeoffs and hard choices: ‘Let’s engage all stakeholders, and give them a reason to join.’ It fell apart in large part because no one got what they thought they had been promised; the environment didn’t get better and farmers’ water situation didn’t get better. Everyone went back to court.
We need a process and mechanism to make the hard choices.
Q: Your book couldn’t be timelier; water wars have resurfaced with a new vigor.
A: We did see this Bay Delta crisis coming. These kinds of conflicts are very difficult to solve because they are quite entrenched in history. People have their emotional and financial investments tied up in many ways. And we don’t have institutions to find a way to make the tradeoff that has political support and credibility.
When I talk about dirty politics, a lot of these decisions are appropriately political. Unfortunately, politics is just a dirty word. The political system is the way we make decisions about these societal values. That’s a wholly legitimate place, albeit an imperfect system, but the only system we’ve got. So we need to try to make it better, instead of prolonging environmental conflicts of the last 10 to 20 years.
Q: Is there general consensus on the soundness of the scientific data and analysis out there? What role can science play in resolving these conflicts?
A: We need science to inform choices but we’re fooling ourselves to say science can make those choices. Science can highlight the consequences of making choices. Science can pinpoint degrees of risk, but can’t tell us the right degree of risk or the right level of cost to reduce that risk. In the context of water conflicts, we often have a high degree of uncertainly with what the fish need. What level of sacrifice should we demand of farmers, of cities or other interests knowing we can’t guarantee things will get better?
Right now state water contractors and federal contractors just filed legal challenges questioning the scientific evidence used by The Fish and Wildlife Service. The law says The Fish and Wildlife Service has to consider the best scientific evidence available. Really what the contractors are arguing about is whether they should have to give up water when there is no certainty the water diverted to fish will save them.
Farmers say cutting off water sacrifices important food production. The fact is that alfalfa going to feed cows is a very inefficient use of water. The farmers don’t want to be told here’s what you should grow. If the argument is we need water to feed the nations of starving people, the farmers need to show that.
We don’t mind sacrifice, but we want to know that society is getting something out of sacrifice. There’s a political question of how much risk we’re willing to submit fish to, and how much we’re willing to give up when we’re not sure we’re solving fish problems.
It’s thought about under good science, but that’s not really what this is about; it’s about social willingness to accept different kinds of error.
We appreciate that Professor Doremus was willing to invest her time to help educate the industry on this important matter.
One of the key points Professor Doremus raises is the failure of the CalFed Bay Delta Authority. The new California water package includes a new board with seven appointed members. It is supposed to oversee water issues in the Sacramento-San Joaquin River Delta. But the good professor’s point is that structure can take us only so far, at some point courage is actually required.
The real courageous act that is required is to move water out of the scope of political allocations and into a market-based system. It is preposterous that states and localities will order people to not wash cars and not water lawns, when unlimited amounts of water are for sale in every supermarket’s bottled water section and when the oceans are filled with water ready to be desalinated.
Farmers have often benefited from political allocations in the past and are loathe to give that up, but keeping water prices below market is pernicious as it reduces incentives for conservation and leads to distorted decision-making such as planting the wrong crops in the wrong places. Besides, with the farm population a tiny fraction of what it was, how reasonable is it to think that farmers will, forever, be able to sustain their advantages politically?
In a discussion we had with Bruce Peterson, he pointed out that water issues will be crucial for the industry to consider, and a stream — pun definitely intended — of newspaper articles has pointed to drought conditions ravaging California, Texas and other regions forcing farmers to leave fields fallow, etc.
The short term solution has to be government action as in California’s new agreement. Long term, we have to have a market-based solution so that water flows to the places it is valued most, its waste is minimized and alternatives most robustly developed.
Our piece, Safeway and Stater Bros. Approach Recession Differently, brought a number of thoughtful letters including this one:
You provide an interesting analysis in comparing the business models of two retail chains, but I think you are missing the point in drawing the conclusion that branding and image placement determine long term success and that Safeway has the best strategy.
A Gucci bag can be purchased at Neiman Marcus, but not J.C. Penney, whereas the same head of lettuce can be had at either Safeway or Stater Bros. If Stater Bros. sells it — and thousands of other products — for less than Safeway, then I, as a rational shopper, will go where I get a better overall value. I’ll still go to Neiman to buy the Gucci handbag as that’s all about image.
Stater Bros. has always positioned itself in the “value” category even though many of their stores rival Vons (Safeway in southern California) in ambiance, image, and product offerings. Dominick’s was a very successful “value” chain before Safeway bought it and if it is now returning to its roots, so much the better.
The Stater Bros. strategy hasn’t changed for years, whereas Safeway and Kroger responded to the perceived Wal-Mart threat by expanding externally through acquisition instead of internally by pricing to generate traffic and volume. The economies of scale were to generate cost savings via increased purchasing power and reduced overhead. It didn’t work. They compete with the “value” chains with their loyalty card programs and occasional specials that do not substitute for regular pricing that reflects the true cost of the product plus an appropriate retail markup. Chains like Stater Bros. have been successful during both the boom times and the current recession by consistency in pricing and bringing value to their customers.
The produce industry, consumers, and stockholders would be better served if the Safeways and Krogers of the world would execute pricing strategies to move volume instead of to maximize unit margin. Nothing irks me more than looking at vine ripe tomatoes in a Vons store priced at $2.99 per pound when the f.o.b. price to the grower located a few miles away is $7.00 per box. Long term viability and success of any company is based on the correct strategy, properly executed.
Value pricing is a proven strategy in both good times and bad. Image and brand placement don’t go to the bottom line or generate customer loyalty in the retail grocery business. Good value does.
— Dave Westendorf
Bay Area Produce, Inc.
San Clemente, California
We appreciate Dave’s analysis because it gives us an opportunity to think about the nature of fresh produce and the strategies likely to drive success both for individual companies and the broader industry.
One clarification: We didn’t say that Safeway had the “best strategy.” What we said was that, in this matter, Steve Burd, Safeway’s CEO, had a better “argument” than Jack Brown, CEO for Stater Bros.
This is a significant difference. The best strategy for a company is typically determined by that organization’s strengths and weaknesses. If we used Dave’s example of a Gucci bag, but went back to Gucci itself, if a recession causes a severe drop in sales of Gucci products — so much so that the company is hemorrhaging money and heading for bankruptcy — then whether long term the Gucci brand would be enhanced and Gucci’s profit maximized by continuing to sell only upscale products is irrelevant. If Wal-Mart is willing to write a big check that will save the company but the price is selling a brand “Gucci for Wal-Mart,” the best strategy is to stay in business, live to fight another day and deal with long term issues of brand equity from a state of solvency.
We actually wrote about this issue in a piece titled, Wal-Mart Needs To Take Lessons From Tiffany and HEB. A big part of that piece dealt with an internal battle among executives at Tiffany & Co. — for years Tiffany had been goosing its earnings by selling inexpensive silver jewelry. The theory that justified the effort was that young girls would get accustomed to buying Tiffany products and would, in a sense, grow up with Tiffany jewelry starting out with a $100 charm bracelet and moving on to very expensive engagement rings and adult jewelry. There was another possibility, though, and an article in The Wall Street Journal detailed the point:
People inside the company debated the problem for months. “Some people would look at it one way and say, ‘If every 16-year-old gets her silver jewelry from Tiffany, they’ll eventually want their engagement ring from Tiffany 10 or 20 years later’,” says Mark Aaron, Tiffany’s vice president of investor relations. But “what if some of those teenagers fill up their jewelry boxes with Tiffany silver, and as they get older, they perceive Tiffany as where they got their teenage jewelry?”
The same piece pointed to the financial dilemma:
Everyone knew how beneficial lower-end silver was to Tiffany’s bottom line. Any effort to curb it could dramatically slow sales and affect profitability — and likely upset shareholders.
Ultimately, the company says it relied on focus groups to make the decision. Complaints about crowding were beginning to appear in internal consumer research. The research also flagged concerns that Tiffany’s brand was becoming too closely associated with inexpensive silver jewelry. “We didn’t want the brand to be defined by any single product,” says Mr. Kowalski.
In 2002, Tiffany began aggressively raising prices on the pieces most popular with teenage girls, particularly the Return to Tiffany charm necklace and bracelet.
Tiffany & Co. was a strong enough business to accept a great deal of short-term pain — loss of a very large and profitable cheap silver business — to sustain and enhance brand equity in the hope of maximizing future profits.
Of course, Dave is talking about produce, not jewelry, and supermarkets, not jewelry stores, and that, of course, makes a difference — the question is what difference it makes?
Now Dave, points to one big difference — product stratification. Upscale producers won‘t sell items such as Gucci purses to discount stores. Although retailers such as Costco have been known to acquire some of these items through third parties, it is difficult for them to sustain availability.
In contrast, produce is mostly available to all comers. Although it should be mentioned that this isn’t necessarily the only way it could be.
When Wal-Mart rolled out its supercenters, it tried to buy Boar’s Head product and Boar’s Head, which we recently wrote about here, here and here, simply refused to sell Wal-Mart. One can argue whether this was the best decision for Boar’s Head, but it is not obvious that a fresh-cut brand, for example, couldn’t have gained market share with such a “No Wal-Mart” pledge. Many supermarkets would have been interested in carrying a brand that would never be at a discounter such as Wal-Mart or Aldi, so they would never worry about being caught in an unfavorable price comparison on the same brand.
Still, with the current situation of pretty much universal product availability to all retailers, Dave focuses on a “rational consumer” and makes this case:
“A Gucci bag can be purchased at Neiman Marcus, but not J.C. Penney, whereas the same head of lettuce can be had at either Safeway or Stater Bros. If Stater Bros. sells it — and thousands of other products — for less than Safeway, then I as a rational shopper will go where I get a better overall value.”
Fair enough but it still raises this question: How does a consumer interpret “better overall value.” We have lots of evidence that it is not simply price. Location is a key matter. So in Los Angeles, for example, Kroger invests a lot of money getting great locations, in many cases, having to pay for parking structures, etc. These investments may prevent Kroger from being the cheapest in town, but The Kroger co. obviously thinks that many consumers will value propinquity more than low price.
Lots of surveys indicate consumer interest in cleanliness, assortment and other attributes as being very high up there, along with price, in consumer concerns.
Price is quite important but the consumer is buying a range of services and experiences that go along with the product. Sometimes a high price can be a key element of attraction for a product. Whole Foods has struggled with how to present itself during this recession for good reason. Sales suffered as consumers became more focused on price. Yet the core Whole Foods customer believes he is getting a superior product, not necessarily in the physical product but in values that go around it: That Whole Foods makes sure workers are paid fairly, that the environment is considered in its purchases, are intrinsic parts of its appeal. If Whole Foods were cheaper than Wal-Mart, it would lose credibility with its core customer who believes that Wal-Mart is too cheap to take care of all the things this customer values.
Selecting a retailer, more than an individual product, is choosing an experience. There are lots of people who choose one store over another because they are uncomfortable mingling with the clientele. So offering great bargains, although it may attract some customers, may also dissuade other customers who find those seeking all these bargains less pleasant.
The point is that part of the “overall value” delivered by a store is much more than the price of a product. If a Safeway store has wooden floors and nice lighting and if it’s a bit pricey and that keeps parking convenient and creates an opportunity to run into a shopper’s friends on the charity circuit, who is to say that isn’t a value to that consumer?
We’ve known Roger Schroeder a long time and he has done a terrific job at Stater Bros. If we were giving an award for most improved produce operation in southern California over the last decade, we would give it to Roger and to Stater Bros., yet we would be hesitant to say that their stores are equal to the best. Some are, particularly the 38 stores they acquired during the Lucky/Albertsons buyout. Many of the stores in the inland empire are old and small, and the big opportunity for the chain is really to spend the money to expand those stores to equal their best stores. In fact where they have done this, business has boomed. Showing, once again, that price is just one attribute of retail success.
Yet we agree with Dave that Stater Bros. has emphasized value and that its consistency in doing this has brought the chain great success. Where we may differ is in a willingness to extrapolate from this success a “general principle” that applies to all consumers all the time. We are more inclined to say that Stater Bros. is an excellent example of one way in which consumers can be served. There are others.
Dave makes clear that he recognizes some purchases are about image — the Gucci purse again — but, by implication, he is saying that produce doesn’t fall into this category. We are not so certain. If one is hosting a dinner party, a brunch or even a cook-out, and the guests ask, “Where did you get so much wonderful food?” — we think there are many places in America in which an answer, “Oh, I went to Wal-Mart” will create a different perception than if the answer is, “I went to Whole Foods.”
That many of the retail acquisitions Dave mentions did not work well is undeniable. A chain like Dominick’s is a pale shadow of its former self. But we would attribute the problems that Safeway, for example, had with chains such as Genuardi’s not so much to their retail pricing as to the desire of Safeway executives to maximize manufacturing and procurement efficiencies, especially on private label items, even at the cost of selling products and brands not familiar or acceptable to the shopper base.
Now Dave will win nods across the production end of the industry when he makes this call:
The produce industry, consumers, and stockholders would be better served if the Safeways and Krogers of the world would execute pricing strategies to move volume instead of to maximize unit margin. Nothing irks me more than looking at vine ripe tomatoes in a Vons store priced at $2.99 per pound when the f.o.b. price to the grower located a few miles away is $7.00 per box.
We also get irked at these kinds of disparities but we also think that this is an area where the production sector has the responsibility to do a lot more research.
After all, supermarkets all have different merchandising and marketing strategies. If one chooses to make margins in fresh produce and discount beef heavily, that may not win that chain many friends in the produce industry, but it is not unethical behavior. Presumably another chain will see the elevated prices and identify an opportunity to discount produce.
The degree to which lower prices increases volume varies by item and, on a surprisingly large number of items, consumer demand seems to function off a set-point price. As long as the item is under X price, it sells, and making it X minus 10% doesn’t have a large impact on volume.
We can shift volume from week to week with sales and specials, we can move volume from item to item with space allocations, sales and specials, but, especially considering the labor that additional sales involve, it is not easy to increase the profitability in dollars of a retail produce department by cutting prices.
The math is pretty foreboding. If we accepted that on a hypothetical high margin item that a retailer is making 75% on an item (buying it for a cost, delivered at store level, for a quarter and selling it for a dollar), and the retailer cuts the price by 50% (so now buys it for a quarter, sells it for 50 cents), one has cut the gross profit by 2/3rds (from 75 cents to 25 cents), so sales have to triple for the gross profit dollars to remain the same.
But it is more complicated than that. If sales of Dave’s vine ripe tomatoes triple but the business comes at the expense of gassed green tomatoes, grape tomatoes or lettuce, the total department profit is likely to drop. If the great bargain makes a consumer not buy a high-margin tomato and mozzarella salad in the deli, store profits are almost certain to go down. Plus the store level labor allocated to the item will increase substantially if sales triple. So even a tripling of sales will not produce the same gross profit dollars for the retailer.
Optimal pricing is important and it would well behoove production agriculture to fund some studies here so they can speak to retailers with authority.
We suspect that as frustrating as high retail prices may be for growers, it is actually an advantage to have one’s customers make a good profit on one’s product because that gives the retailer good incentive to give large displays and to promote the item.
We do fault retailers for doing things for the wrong reasons. One friend at a big retailer showed us some statistics that a private label initiative was costing the store money on certain produce items and that consumer satisfaction numbers had dropped on certain produce lines that had been transitioned to private label. The produce executive was opposed to the whole initiative but said his hands were tied because high-ups were demanding the initiative — though these executives were ignorant about produce and expecting large margin gains as they realized in other categories. This is a loss for consumers, retailers and vendors alike.
Although we agree with Dave that “Value pricing is a proven strategy in both good times and bad,” we will have to agree to disagree on his assertion that “Image and brand placement don’t go to the bottom line or generate customer loyalty in the retail grocery business.”
Safeway just spent $8 billion renovating its stores; it clearly thought that, for its customers, such an expenditure could indeed build customer loyalty and, ultimately, earn a return on investment. Besides, what is the real option? Can unionized supermarket chains operating out of high-priced real estate possibly beat Wal-Mart, Aldi, the warehouse clubs and the independents we highlighted in the October issue of Perishable Pundit sister publication PRODUCE BUSINESS on price?
If not, then wouldn’t a focus by Safeway on low price just guarantee its position as an also-ran?
This seems to us the crux of the matter. We doubt anyone at Safeway would deny Dave’s point that “good value” will go to the bottom line and generate customer loyalty. They would just say that having attractive stores and offering convenient and delicious prepared foods and stocking high end wines are part of the value Safeway delivers.
In the end,the question really is this: Has the recession created some permanent shift in psychology so that Safeway’s strategy of high service, lots of organics, beautiful shopping environment, etc., is now permanently less appealing to large numbers of people. Or, are memories short and if the economy comes back, consumer demand for the finer things in life will come roaring back as well?
Steve Burd… and the shareholders of Safeway… have much riding on this question. Many thanks to Dave Westendorf for helping us wrestle with this important matter.