Much is going on at Wal-Mart — some produce specific and some indicative of broader changes in company philosophy.
The big news is that Manolo Reyes, a Costco veteran, has taken over the functional role of Ron McCormick’s old position as Vice President/DMM of Produce & Floral, though perhaps with a different title.
He will have his hands full as so much of what the domestic Wal-Mart buying program was used to doing is being undermined by the project we detailed that Global Procurement is running on Washington State apples.
In fact there is wild disconnect at all levels of the Wal-Mart organization. It seems that different buyers are interpreting Jack Sinclair’s pronouncements in different ways. So some big volume items are running mostly business-as-usual while, for example, some suppliers for sprouts and certain specialties say their buyer seems to want to make his mark by “going direct” and “driving out costs” in this very tiny category.
Now Wal-Mart has announced its earning and the news reports, such as this one from The Wall Street Journal, are headlined Wal-Mart Profit Rises Despite Slowing Sales.
International sales, the great hope for Wal-Mart’s growth, did grow by 1.6% but profits dropped 5.3%. We understand that back in Bentonville, the international division dropped 60 executives and gave them until Feb 1 to find new places at Wal-Mart.
The most revealing point of the earnings announcement was portrayed in The Wall Street Journal article this way:
…Gross margin rose to 25.2% from 24.6%.
Mr. Castro-Wright attributed the margin expansion to, among other things, lower inventory levels and fuel costs. Another contribution to the margin expansion, he said, was an increase in advertising costs paid for by vendors.
If it was significant enough to mention, Wal-Mart must really be hitting vendors up big time for advertising money.
The more important issue though is this switch: The traditional Wal-Mart way, Sam’s way, was to look at Wal-Mart as “the buying agent for the consumer,” and so if Wal-Mart managed to buy less expensively or to drive costs out of the system, it passed those savings onto its customers.
In this way, Wal-Mart created a virtuous cycle of ever-increasing sales as customers drawn by low prices increased sales per square foot, which kept lowering costs per item, which enabled Wal-Mart to lower prices still more and keep the virtuous cycle going.
Sales were flat this quarter, though, and Wal-Mart wanted to make its profit number so it decided to keep the money in its pocket rather than acting as a buying agent for the consumer. It won’t take many more quarters of doing that before consumers realize they can’t just assume that Wal-Mart is offering a good deal.
If Wal-Mart loses that level of consumer trust, it will have lost something precious indeed.
Considering the extensive nature of our discussion related to Tesco’s Journey to America as Fresh & Easy, we are often asked what we see as the most likely outcome.
It is, of course, unpredictable, but it seems most unlikely that the stores will earn a good return on investment without a significant format change. Yet the kind of format changes required — we suggested switching the stores to Aldi or Trader Joe’s clones depending on location — seem to offend Tesco’s notions of serving everybody.
Closing the stores, though, would be an enormous embarrassment to Sir Terry Leahy, Tesco’s CEO and to Tim Mason, the son-in-law of Tesco’s former chairman Lord MacLairin, who was sent to America to run the operation.
So if Tesco can’t fix it and won’t close it, the logical choice is to expand the US division with a massive acquisition and then wash the numbers for the failed Fresh & Easy division through a much larger operation.
We have previously suggested that an acquisition of Meijer would make sense. As the last remaining independent supercenter operation, a Meijer acquisition would give Tesco a critical mass to roll out supercenters across the US.
We also suggested an acquisition of Whole Foods, since Tesco’s anxiousness to portray itself as green could be facilitated by such a move.
Now all over London, the papers have been picking up on a suggestion made by ING analysts Peter Brockwell and John David Ring. For example, Bloomberg ran a piece, Tesco Should Consider Buying Ahold, ING Analysts Say:
Tesco Plc, the U.K.’s biggest retailer, should consider buying Royal Ahold NV at a cost of about 15 billion euros ($22.2 billion) to accelerate its U.S. expansion, ING analysts wrote in a note.
Ahold, the Amsterdam-based owner of Stop & Shop and Giant supermarkets in the U.S., is “cheap on all metrics,” which may lead to takeover interest, analysts Peter Brockwell and John David Roeg wrote in a note dated Oct. 30 and received today. Tesco runs Fresh & Easy shops in the world’s largest economy.
“The U.S. market is too big to ignore, yet any attempt to increase the scale of Fresh & Easy could prove very risky,” wrote the analysts, who recommend buying both companies’ shares. “Ahold should be viewed as a one-off opportunity to acquire an undervalued asset at a low point in the U.S. consumer cycle.”
… Buying Ahold would add about 700 grocery stores operating in the eastern U.S. to Tesco’s 115 Fresh & Easy stores it has opened since 2007 in western states, including California and Arizona. Together with Albert Heijn, the biggest supermarket chain in the Netherlands and Ahold’s businesses in central and eastern Europe, that would boost Tesco’s full-year sales in 2011 to 96.9 billion pounds ($159 billion), the ING analysts said.
“A tie up with Ahold would enable Fresh & Easy to benefit from more favorable supplier terms, give it access to Ahold’s talented U.S. management team as well as enable Fresh & Easy to scale back the size of its overhead cost base,” ING said.
There are all kinds of economic reasons why such an acquisition might make sense. Tesco is a multi-format operator in the UK and other places; there is no reason to think it wouldn’t look to be a multi-format operator in the US.
The enormous overhead that Tesco has thrown — both physical and managerial — against what is basically a small chain of superettes makes profitability impossible without massive growth.
And, of course, Tesco has continental scale ambitions in North America and this would provide an easy and logical leap to the east coast.
If the acquisition happens though, the most likely reason is that it would allow Tesco to subsume its Fresh & Easy operation in a much larger “North American division” and thus avoid the embarrassment of closing it down or recognizing the waste of well over a billion dollars.
A&P announced the opening of its first Food Basics store in Connecticut:
The Great Atlantic & Pacific Tea Company, Inc. (A&P) (NYSE:GAP) today debuted the first ever Food Basics store in Conn., located at 1700 Park Ave. in Bridgeport, bringing customers quality products at unbeatable prices. The savings never stop at the Bridgeport Food Basics with aisle after aisle of all the products you need at prices you can’t believe. Food Basics boasts the lowest prices of the week — guaranteed. We won’t be beat on all of the items featured on our circular’s front page — see for yourself.
The new Bridgeport Food Basics store will allow shoppers to maximize their shopping budget by getting high quality products at low, affordable prices. Shoppers will also enjoy great values on fresh foods such as meats and baked goods. Customers can also find their national brand favorites as well as an extensive variety of private label brands, including America’s Choice and Smart Price — all at phenomenal prices.
Compare Food Basics prices with our competitors and you will be amazed at the savings. In fact, shoppers can save up to 27 percent over other supermarkets everyday with the unmatched prices that Food Basics has to offer!
The Food Basics chain has performed very well in the pricing studies conducted by Pundit sister publication, PRODUCE BUSINESS. In our Wal-Mart Pricing Report of chains in Detroit, Michigan, when A&P had stores there, the concept actually outperformed Wal-Mart in pricing, coming in with a basket priced at 17% under Wal-Mart. We did point out, however, that we had to restrict the items in the basket to accommodate the limited assortment Food Basics offers.
What we saw of particular interest is that Food Basics offers a strong low price guarantee on certain items:
Food Basics also offers triple difference price guarantee on these 10 most-needed items:
• Fresh Bananas (1 lb.)
• Milk (store brand, one gallon)
• White Bread (store brand, 1 lb. 6 oz.)
• Eggs (store brand, dozen large)
• Butter (store brand, 1 lb. quarters)
• Lettuce (iceberg)
• Sugar (store brand, 5 lbs.)
• Tomatoes (1 lb.)
• Potatoes (russet, 5 lbs.)
• Huggies Diapers (jumbo pack)
Note that 40% of these items are fresh produce: Bananas, lettuce, tomatoes and potatoes. Add in milk, eggs, butter and bread — and 80% of the items are perishable.
It shows where the leverage exists in retail today. But with a triple price difference guarantee, it also shows how difficult it is to build a business just on low prices.
During our extensive discussion of the possibility of implementing a national generic promotion program all the way through the decision by the Produce for Better Health Foundation to withdraw from the effort, three things became clear about industry attitudes toward increasing produce consumption:
1. The overwhelming consensus seems to be that the low margins in many sectors of the industry combine with the inability to assure that increases in consumption will rebound to the benefit of current producers. This means that the financial contribution the industry can make to increase consumption is limited. Since the primary beneficiary of increased produce consumption is the general public, who benefits through increased health, it is part of the government’s mandate to “promote the general welfare” to promote proper diet generally and increased produce consumption, specifically.
2. That maximum leverage can be gained through specific efforts by government and industry to make sure fresh produce is widely available. These efforts can include program’s such as the vending machine concept Del Monte unveiled at PMA. It also can involve programs such as United Fresh has been promoting to put a salad bar in every school.
3. Maximum effort should be applied to getting children to eat more fresh produce as establishing good dietary habits is the most likely way to increase health.
An example of the kind of effort these three principles support is the ongoing effort of the United Fresh Produce Association to get a “salad bar in ever school.”
Back in September, United brought a salad bar to its Capitol Hill reception to highlight the initiative:
The United Fresh Produce Association announced today that it will feature a salad bar at its Fresh Festival event … in the Cannon House Office Building during the association’s Washington Public Policy Conference…. The salad bar, stocked with fresh fruits and vegetables, will underscore the need for lawmakers to support United Fresh’s initiative to promote a national school salad bar policy in the upcoming Child Nutrition Act.
“This is certainly a great opportunity to advance policy that directly affects the health of so many young Americans,” said United Fresh Vice President of Nutrition and Health Dr. Lorelei DiSogra. “Having a salad bar in front of so many lawmakers shows them how salad bars can be an effective tool for increasing produce consumption and promoting healthy eating habits among students.”
Capitalizing on the success and nationwide expansion of the Fruit and Vegetable Snack Program, United Fresh looks to build on kids’ love of fruits and vegetables with a salad bar in more than 100,000 schools across the United States.
“Research has proven that, when presented with the option of a salad bar, children will increase their intake of fresh and fresh-cut fruits and vegetables,” said DiSogra. “We are hoping that by providing the same options to lawmakers in the House and Senate, salad bars will become a standard feature in every school cafeteria.”
Following the public policy conference, United Fresh will donate the equipment to a Washington-area school.
“United is pleased to contribute our salad bar to a local school,” said Ray Gilmer, United’s vice president of communications. “Working with District of Columbia school officials, we will track the salad bar’s impact on students’ produce consumption and demonstrate to policymakers the efficacy of the salad bar strategy.”
We’ve spoken with and have gotten letters from Lorelei DiSogra, United’s Vice President, Nutrition and Health, many times, including here and here.
Now Lorelei and United are urging produce firms to sign a letter that would indicate their endorsement of the Children’s Fruit and Vegetable Act of 2009.
Here is a list of organizations that have already signed on.
If your organization would also like to sign on to the letter, you can do simply by filling out this short form, here.
With the collapse of the generic promotion effort, it is important that the industry does not fall into an either/or mentality.
There are many efforts that can boost consumption.
United’s effort in this area is well in tune with the zeitgeist of the industry.
Our piece, When Child Labor Laws Don’t Necessarily Help Children, brought many phone calls from retailers explaining why they could not possibly be associated with child labor in the fields.
Yet it also brought some interesting letters backing the Pundit’s position:
As an apple grower in New York, recently introduced to the Perishable Pundit, I wanted to write and congratulate for the unabashed use of common sense in your thoughts about child labor in agriculture.
If there is one thing that has almost completely disappeared from our everyday dealings, it is common sense. I can’t believe I’m in the minority thinking like this, if only there were more “Pundits” in the media willing to stand by the obvious.
— Rod Farrow
Lamont Fruit Farm, Inc
Albion, New York
The issue of November 9, 2009 was perhaps your best issue ever — full of great articles and arguments! I also just finished the book you mentioned, Outliers: The Story of Success, and loved the “10,000 hours” argument for achieving perfection. The Pundit must be logging in around that many hours by now!
But actually, this comment is about your piece on child labor in the fields…
As someone who has worked with growers from Mexico for many years, I have seen the misconception of “children working in the field” perpetuated by the U.S. media.
In many of Mexico’s northern ranches dependent on migrant labor from southern states, they recruit entire families to work for several months. They provide housing, food, hospitals, dentists, soccer fields, and yes, schools and day care. All this at high cost and great effort by the growers. (If anyone in the industry has a chance to visit these exceptional facilities in ranches in Sinaloa and Sonora, everyone should do so. Media and retailers we have taken on these tours are amazed.)
That means that when the parents are working, the children are in school or day care. The children are required to attend school. If per chance the children are out in the fields, it is because school is out and the parents desire the children to be out there with them.
You made the argument regarding the immigrant Jewish families mentioned in Outliers who took home piece work and had their wives and children pitch-in… It’s also valuable to look at the Mexicans as seeking to pave the way for the future by having their children watch and learn. Possibly this will be their “trade.” If not they still learn about hard work and discipline. Again, this is the choice of the family, and never forced by the landowner/rancher.
We need to make this important distinction and understand human choice when we argue against what we see in this country as forced child labor.
— Veronica Kraushaar
VIVA Global Marketing, LLC
We thank Rod Farrow for his kind comments. Though we would say that the issue is not so much a question of common sense but, rather, a question of a sort of rarified sensibility that many people affiliated with issue advocacy groups seem to possess.
We approach the issue from a perspective which says that what counts ethically is not our intentions but the results of our actions. So, in this case, we look at the children and what will help them or hurt them.
For many, such calculations simply don’t enter into their assessments. What they are concerned with is themselves; it is that they should never be exposed to something untoward.
So, if a proverbial “sweat shop” opens up in their neighborhood and people work 12 hours a day in difficult conditions — they want it closed. They don’t want to see it. Even though closing it might mean the same people go back to their country of birth and work 18 hours a day in worse conditions for less money.
It is also the case that wiping something from one’s sight is often cheap and easy — ban it, close down the operation, pass a law.
Really doing good typically takes more effort and expense.
In this case, funding scholarships to send children to sleep away camp, opening a summer tutoring program so the kids can keep up academic achievement during the summer just like rich kids do… all these things are expensive and difficult and the volunteers to step up are few.
Veronica Kraushaar always performs a valuable service by pointing out the reality of life in Mexico and how cultures adapt to the realities of their situation.
Veronica’s mention of the “10,000 hours” argument from the book raises an intriguing point. The gist of this argument is that it takes 10,000 hours to acquire true proficiency in things.
The book starts out by pointing out that in Canada, where they make an incredible effort to find children who have hockey-playing potential, the top Canadian skaters are disproportionately chosen from the ranks of those with birthdays early in the year.
Basically what happens is that as young children the coaches select the bigger and stronger kids to be in more advanced leagues. Though the skill level may be inconsequentionally different between two children — one with a January birthday and the other 12 months younger in December — the selection of one child to qualify for an advanced league that includes more ice time and better coaching is filled with consequence. Fifteen years later that inconsequential difference in skill has become a massive gulf due to practice and training or, in the terminology of the book, because one kid got his 10,000 hours on the ice and one did not.
Perhaps this is the reason our society should not be content with simply wiping something like child labor from its collective view. If we are really concerned about this issue, we have to develop beneficial alternatives.
In the mass of young children either in the field or shunted aside doing nothing because of the laws, there is a great concert pianist — but she must begin playing. There is a biologist who will cure cancer — but he must start studying. There is a planet of human potential — but it must be developed.
Our complaint with things such as President Bush’s No Child Left Behind Act is that these initiatives are only focused on bringing underperformers up to average. In a Democracy, every person counts — so we support this ideal. However, the future really relies on getting the most intelligent students working to their potential.
We just wish that instead of everyone being so outraged and everyone rushing to disassociate themselves from child labor, someone would step up and offer an alternative that will help us allow every child to learn up to his or her own potential.