While we have been writing a great deal about Tesco, its much larger American rival, Wal-Mart, has been busy revolutionizing its procurement system.
It seems much larger than produce or perishables but a tsunami set to roll through the company to change the way the company buys and merchandises with substantial impact on vendors and possibly even consumption of produce in America.
For many years, Wal-Mart’s produce procurement worked on a distribution center assignment system. Individual vendors would be given the opportunity and responsibility for solely supplying a specific distribution center or series of distribution centers with the product or products that were in its designated assignment — stone fruit, grapes, etc.
Many vendors thrived under this system. Vendors valued the predictability of business that came with a DC assignment and also valued the fact that exclusive DC assignments allowed for easy comparison with other vendors. So if a vendor invested in producing a superior product, then that DC would show less shrink, more repeat purchases, etc., then — dream come true for quality vendors — Wal-Mart would pay a premium to get that premium product.
In contrast, the traditional produce procurement model used in most supermarkets called for an intermingling of product from different shippers, bought on a spot basis, in a given DC. In that environment, it was virtually impossible to even know if one shipper’s product had lower shrink than another shipper’s product — so it was rare to get a premium for producing premium product.
In early 2007, things started to change, and we ran 10 pieces focusing on Wal-Mart’s evolution in procurement:
Wal-Mart Continues To Change Its Buying Practices
Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization
Wal-Mart: The Name On The Door Is the Same; The Thoughts Inside Are Very Different
Wal-Mart’s Changing Treatment Of Suppliers
Calls On Wal-Mart Point To More Vendor Negativity
‘Anyone But Wal-Mart’
Has Wal-Mart’s Desire To Buy Cheaper Changed Its Values?
Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company
Pundit’s Mailbag — In Defense Of Wal-Mart
High Lettuce Prices Strain Supplier Relations With Wal-Mart
Now we know that this was all only prologue, and a new corporate-level initiative will lead to a revamp of procurement in which the old unified divisions that handled both procurement and merchandising will be dissolved and a new four-pronged approach will take its place.
There will be separate teams set up to separately do each of four things:
1. Negotiate Prices with Vendors
This team will have nothing to do with merchandising, marketing or anything except getting the lowest price possible.
2. Establish Retail Sales Price
They won’t determine where things go in the store, size of display or anything like that — solely set the retail price.
3. Financial Planning
These are the financial wizards who are supposed to make sure they make money.
4. Category Management
This team will determine how much space each product gets and where it gets the space in the department.
Simultaneous with this switch, which will roll out over a few months across the Wal-Mart empire, massive staff reductions are expected. Perhaps a third of all buyers will be reassigned elsewhere in the company.
Although we have indications that produce industry stalwarts, such as Steve Tursi and Mike Agostini, will have a place in this new organization, we have not been able to determine what exactly that will be. We have been able to learn nothing about how or if Ron McCormick will fit into this new arrangement.
On the face of it, the reorganization is not necessarily good or bad for the vendor community. The $64,000 question is how will these four areas interact?
Typically in produce, close coordination between procurement, setting the retail price and merchandising is essential to effective performance. If you know supplies of a product are tight (procurement), you raise the price (setting retails), and move the product to a less visible location (merchandising). This brings supply and demand into balance.
If all these areas really function independently, Wal-Mart will wind up pushing sales of items it can’t get. It also won’t sell enough of the high profit items to maintain its margins or dollar profits.
One wonders if this corporate initiative has really been thought through with regard to perishables and produce where supplies and prices fluctuate dramatically and quickly.
The idea of a department dedicated to just getting the lowest price is a bit scary for the vendor community. However, if Wal-Mart reduces its number of buyers substantially, those buyers really won’t have time to focus on much but the very largest commodities. And there, Wal-Mart’s leverage cuts both ways.
Friends in the banana business tell us that Wal-Mart is up to procuring around three boats of bananas each week. Although that certainly gives Wal-Mart enormous bargaining power, it is also true that this kind of volume is not replaced with the snap of a finger and vendors can only be pushed so far. The Fresh Produce Journal in London reported this:
Del Monte is re-evaluating its position in the UK after “walking away” from Asda’s banana business.
UK md Peter Miller told FPJ: “We decided that it was no longer the right proposition for us to continue supplying Asda with bananas.
“We walked away from the Asda tender because we didn’t like the money, but we still have 80 per cent of their pineapple business, a significant and developing share of their melon business and a massive proportion of their fresh-cut fruit business.”
There is no question that Wal-Mart will find people to sell it produce to keep the shelves filled. But the best growers have options, and one wonders if a department single-mindedly driven to get the best price won’t wind up chasing the best growers away.
We have many friends scattered throughout Wal-Mart as well as many friends in the vendor community. This looks like a big change. We hope it is for the best.
We wish Wal-Mart good fortune in integrating these four efforts. We wish that the people who work at Wal-Mart should find good opportunities in this new organization and we wish for the vendor community…that someone at Wal-Mart should remember that only a profitable supply base can invest in the continuous improvement of product and process that Wal-Mart will require if it is to continue to grow and prosper.
We’ve written many pieces about Tesco and its entry into the American market. Now we have received a letter from an executive of a grower/shipper with experience in branded marketing who visited a couple of Fresh & Easy stores:
Attached are a few photos of two Fresh & Easy Stores that I visited the other day.
|The exterior photos were essentially all I was able to photograph; no photos allowed inside the store, although I did manage to take one of grapes and berries before an employee came around the corner.|
|The hybrid car parking idea is a ‘first’ and was empty — great, one more reason — in addition to the handicapped spots — why I cannot park in front of the store.|
The last photo is a Hollywood Blvd store in a mall that only has access from the street or underground parking.
Our assessment is similar to those of the Perishable Pundit:
- Virtually everything is Fresh & Easy brand; 100% of the produce, milk, and butter, and 80% of the remaining items were Fresh & Easy, even most of the wine.
- Limited foot traffic — the first store in Buena Park had maybe 10 people (2:30pm on a Tuesday), and the Hollywood store perhaps 20 people (5pm on a Tuesday).
- We did not see any obvious out-of-stock items; everything was pretty full.
- However, in the perishable departments of produce, milk, and other items, virtually every item had an expiration date of January 30th (we were there on the 29th). This means that perhaps all of the stock we saw (no shortage of anything was apparent) would be rotated off the shelves the next day. Depending on the disposition of the product, most of the items were destined for the trash bin. What a waste — and most of the product looked good in the produce department!
- Branding: Most brands take years to develop a following. As an American, Fresh & Easy means nothing to me. Tesco, as a brand, means nothing to me. My experience with company brands has always been ‘cheap, low price, discount’, not premium. The Springfield brand of canned goods at Safeway comes to mind. And yet, 90 percent of the store is the Fresh & Easy brand — it is like walking into an outlet mall to buy ‘seconds’ or ‘discontinued’ items — serviceable, but potentially defective in some way.
- The single brand in produce constantly reminded me of the extra packaging expense and the carbon imprint of ‘all that plastic’ that was added to the product and therefore was not necessarily ‘adding value or convenience’ to my purchase.
- As a produce seller, there is ‘no opportunity’ to sell directly to Tesco. Because of their branded packaging concept, every item must go through a third party, and someone has to be responsible for the shrink in packaging ‘before’ the product is in its final form. It does not seem efficient and the expected value added was not there for many items (salad mix excepted).
- If you buy at least $20, the checkout person gives you a $5 coupon, which was immediately credited from my bill. I assume there must be coupons in mailers or the newspaper, but no matter, the checkout person gave me one right there in the store for immediate use.
- The expected 90 stores planned to come on line may be a train wreck waiting to happen unless the engineer decides to put the ‘cars’ (stores) on a side track for some concept ‘repair’.
Perhaps Fresh & Easy is starting to make progress on its out-of-stocks problem. And the customer count is higher than previous reports, such as here and here. But the Hollywood store, where our correspondent reported 20 customers, just had its grand opening, and sales and traffic typically decline initially after a grand opening, especially one like this where the Hollywood location brought lots of media attention.
The critique of the brand and its lack of equity with American consumers is pointed. When Wal-Mart rolled its supercenter concept across the United States, it also had no brand equity in fresh produce. Bruce Peterson made the decision to “borrow” brand equity by carrying only the top brands. This allowed a no name in the field to compete. Some of the top brand marketers have told us that Fresh & Easy won’t be carrying their product because Tesco was only interested in price. The company probably would have done better to carry the top brands and gradually introduce its private label.
The plastic issue cuts both ways. We have heard from many consumers, including Mrs. Pundit, that they prefer the produce to be packaged as Fresh & Easy does it, thinking it less likely to have been contaminated by workers or other shoppers. At the same time, Tesco has been so sanctimonious about its “green” credentials, one supposes that the particular customers it has tried to attract — those who care about “green” things — will see the packaging as a breaking of trust.
We also suspect that whatever consumers may say, the beautiful, artistically lit fresh display at, say, a Safeway Lifestyle store is far more likely to encourage shoppers to buy than the sanitized, plastic-covered environment. One is warm and inviting; the other cold and off-putting.
The frustration with vendors who don’t want to be indirect suppliers is expressed in this letter. Although the other day, we heard the first report of a break in the system:
All five stores had consistent merchandising, pricing and the same SKUs in produce. They also all had two specials leading off the produce dry section — 10# bag russet at $1.99 and a 10# bagged navel at $3.99. This is the first time they have allowed the vendor to do the packaging and use their own brand and you could tell it was to cut cost and they were in bins.
One of the challenges of the Tesco procurement system is that it makes it difficult to take advantage of opportunities grower/shippers would otherwise present. Especially now, when Fresh & Easy is so small, the company could get many opportunities to offer consumers, but the product may already be packed or time is of the essence, or vendors would rather offer it to a chain who will buy direct.
This is the second time we have heard of this $5 coupon off $20 purchases being given out to everyone in the store. Although the hope, of course, is that consumers will buy $100 baskets and get 5% off, our Pundit Intelligence Network finds little of that. Supermarket margins being what they are and Tesco not having the advantage of low real estate costs as they do in the UK, giving away 25% of sales is pretty hefty.
Both our assessment and that of the independent report by Willard Bishop is that sales are running around $50,000 a store — when Tesco was expecting around $200,000 a store. This means the stores are hemorrhaging money and the coupon is an attempt to both bring in customers and get customers in the store to try more products.
Tesco has put-off revealing sales data but that will only last so long. We can expect a concerted effort to boost sales before Tesco has to release numbers. If the company released them today, heads would have to roll.
We also got a kick out of the hybrid car parking sign. We’ve dealt with Tesco’s wearing its environmentalism on its sleeve in Tesco, Polar Bears And Social Responsibility. We think that for all their consumer research, they seem to have missed how diverse our culture is and that pronouncing one’s positions in this way is at least is as likely to alienate Americans as to win friends.
What is Tesco exactly saying to the vast majority of its customers who analyzed their personal situation and decided that buying a non-hybrid car was the smart thing for them? That they are stupid and should listen to Tesco?
What is Tesco saying to the poor, single mother who needs a car to get to work but can only scrape up enough money to buy a very old used car from the time before they even had hybrids? That she isn’t thought very highly of at Fresh & Easy?
That sign is symbolic of a lot of Tesco’s problems in America. It consistently alienates people from the community it is supposedly trying to build.
There is a tin ear at Tesco, some odd sensibility that leads the company to offend Americans time and again.
Besides, how precisely, will the hybrid car parking spot be enforced? Presumably Tesco will call a tow truck belching greenhouse gasses to tow the car “illegally” parked in the spot. Even if this happens only occasionally, has Tesco done a Lifecycle Analysis to measure the total Carbon Footprint of this initiative?
No, they haven’t? Shame on them; they wouldn’t let a supplier get away with that.
When we ran WGA’s Primal Scream… And Dirty Glasses, we reported on an undercover report in Atlanta showing hotels that were systematically leaving unsanitized glassware in rooms, thus exposing guests to harmful bacteria.
Now there is a video floating around the Internet that finds when restaurants put a lemon wedge in your iced tea or soda, they are often putting in bacteria that could cause an illness.
The risk seems pretty slight but, still, this kind of information won’t help consumption any. The bacteria seems to have two basic sources. Either it was on the rind to begin with or it was added at the restaurant while slicing or just by picking up the slice and putting it in the drink.
The bacteria on the rind reminds us a bit of the piece we wrote about the efforts of the watermelon industry to enhance food safety. Watermelons, like lemons, are pretty safe — the problem is typically on the exterior. With watermelon, you really would like people to clean the rind before they cut into the watermelon. Lemons have the same issue — maybe more so, because the lemon is typically dropped into the drink, whereas the watermelon rind rarely comes in contact with food.
We questioned many of the efforts of the National Restaurant Association to get involved in horticultural standards. We suspect they have problems enough working to make sure everyone who works in a restaurant is ServSafe-certified.
We found the system that Cheesecake Factory had of tying manager bonuses into performance on food safety audits seemed most likely to produce results.
One other thought: If the lemon wedge was perfectly sanitary when it was delivered to the table, but the customer picks it up to squeeze it into his tea — wonder how clean are the hands of the typical consumer? There would probably be plenty of bacteria just from that.
You can take a look at the video below.
Our piece, Teaching Kids About Produce Is Better Than Sneaking Around, brought this rejoinder from an industry executive… and a mom:
I read with great interest your recent piece on getting kids to eat their veggies. I have long practiced the old adage of introducing a new item about 12 to 15 times before kids accept them, and I’m also the mean mommy who quips “This is what’s for dinner. If you don’t like it, then I guess you’re not eating tonight.”
For my kids, apparently this tactic works, because my kids eat not only salads, but veggies, some with passion and longing, like “Mommy, can we make artichokes for dinner?” or “Yeah, roasted asparagus!”
The produce department is just like any other section of the store for us, where they venture out, find a favorite, and come back and say “Mom, can we get some raspberries?” as much as they would say, “Mom, can we get some wheat thins?”.
I know I’m lucky. Maybe it’s my tactic. Maybe it’s my freakish kids. Not sure, but when the produce department is an adventure, and they’re included in the purchase and decision making process, it seems to go better than “What is this green thing?”
My point for writing is that I got very excited when I read your article mentioning the asparagus risotto recipe from Raymond Sokolov, both being favorites of my 10-year-old daughter and 7-year-old son. I opened the recipe with excitement, only to get to the second line…”8 tablespoons (1 stick) of butter”. HOLY COW! You might as well serve a snickers bar on the plate. There are better ways to introduce asparagus than adding 1 stick of butter to it.
I’m sure this is delectable, but again, holy cow. Unfortunately, my family will not be savoring this dish unless it had a make-over in Cooking Light magazine.
Keep up the good work Jim.
— Cindi Dodd
Director of Marketing
NewStar Fresh Foods
We confess that the Pundit Mom did use the phrase, “This is not a restaurant,” more than once when there were complaints from the peanut gallery about that evening’s dinner. Despite her protests though, she was careful to mostly cook things she knew everyone liked.
As the kids got older, she often did prepare two dinners: A new intriguing recipe that she and the Pundit-to-be would try — since we were the adventurous eaters — and something more basic for the rest of the family as they had more conservative tastes in food.
Cindi’s letter makes two very important points:
Children need to be exposed to items many, many times. You can’t introduce children to something new and determine from that one exposure that they don’t like the item. This was confirmed by a lot of the research done around the Food Dudes program, which we dealt with here, here and here.
It is worth noting that children are not unique in this. We’ve recently run pieces here and here, dealing with the merchandising of heirloom tomatoes. The key point is that consumers of all ages need to be exposed to new products many times. If Cindi’s 12 to 15 times is the correct number, it means that a once-a-week shopper may require almost four months of exposure to a product at retail before she is ready to buy it.
The most significant thing about Cindi’s letter is that she takes her children food shopping and involves them in that process. Many parents do not. Sometimes it is because the children are difficult in the stores, always demanding their favorites or even items they won’t even eat but that happen to have a cartoon character on them. Other times it is schedule. With both parents working, many parents now shop at night or on the weekend when the kids are either asleep or at activities.
But Cindi’s point — that used correctly, shopping is a fantastic educational opportunity — is beyond doubt. In fact, here is an idea for the Produce for Better Health Foundation: How about a national “Take Your Children Shopping for More Fruit & Veggies Day!”
We could coordinate with retailers, commodity promotion boards and the Fruit & Veggies — More Matters! program to have in-store educational materials — including videos with Emeril, Rachel Ray and other popular chefs — all teaching children how to select and enjoy fruits and vegetables of all types.
Bet we could get a Presidential proclamation and every newspaper in America to publish a guide/workbook for the event.
The butter issue is an interesting one. We confess that we too recoiled when we saw that in the recipe. We published it anyway, because the whole issue of butter and health is controversial. Panaceas that at the time were promoted as replacements — such as margarine — are generally seen as worse than the original today. Many people, such as the authors behind Why Butter Is Better, say that butter contains important characteristics that enhance the health of Americans.
Others, such as the Food and Brand Lab of Cornell University, caution that a focus on eating “healthy foods” can bias one’s perception of caloric intake and lead to overeating desserts and other indulgences:
The Health-Food Halo
Healthy foods can bias calorie estimation and cause higher side-dish consumption
Over the past 15 years, the number of restaurants offering healthy food items has increased dramatically, yet the obesity rate has increased. Why? We found that customers at Subway, in contrast to McDonald’s, were more biased in their calorie estimation of foods purchased there.
In one study, people eating Subway meals that contained the same number of calories as a McDonald’s meal estimated it as containing 35% fewer calories. People often think they’re eating healthier just because it’s advertised that way, and even end up ordering more high-calorie side dishes — like soda and cookies — that increase their total calorie intake.
So remember, just because you ordered a turkey sandwich on wheat, that doesn’t make that bag of chips any healthier. (in Journal of Consumer Research, 2007).
Most chefs seem to feel that the problem is processed food… that if we eat a diet filled with whole foods, such as eggs and butter, real milk, etc., we will mostly be healthy. Julia Child never wavered from her belief that plentiful use of butter was fine. In one of her last TV shows, she put it this way: “If you’re afraid of butter, as many people are nowadays… just put in cream!”
We are not sure she was right — although it is a basic doctrine of nutrition science that there are no good foods or bad foods, just moderation. Which means Cindi can go ahead and serve her children the butter-rich Risotto, just not too much, nor too often.
Which actually brings up an issue for the produce trade… When the Pundit did a demo session on artichokes a number of years ago, we found many people who loved them, but didn’t want to buy them. Why? Because the only way they knew to enjoy them was by dipping each leaf in melted butter… and they didn’t want to do that.
Maybe some cross-merchandising with some equally delicious low-cal dips would give a boost to sales?
Many thanks to Cindi Dodd for her intriguing letter.