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Perishable Pundit
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Is Tesco Sending A Message To U.S. Competitors?

It is hard to know if it is bluster — like Muhammad Ali unnerving his opponents with his bragging and strong claims — or if it is a strategic mistake that will telegraph to competitors what needs to be done — as George W. Bush would say about efforts to delineate precisely what has to happen to take US forces out of Iraq — but Andrew Higginson, Tesco’s Finance and Strategy Director, gave a rather odd interview with The Business, a U.K.-based business publication.

Tesco is renowned for its secrecy. When the Pundit wants to know the name of Tesco’s new carrot supplier in America, he has to practically put on his trench coat and meet his Tesco employed friend in a darkened alley — so fearful are these people about company policy.

So it is strange to see someone as high up as Mr. Higgenson chatting away. Still, he made several key points:

“This is a launch, not a trial. The way we see this is it is an investment — if we create a success it will be something we can roll out that will create billions of pounds in value. But if not, the business [Tesco] can sustain a loss of £1.5bn in terms of failure; our careers might not, but the business would.”

This is kind of shocking. It is hard to know if he is challenging Kroger, Safeway, Wal-Mart and others by signaling to them that Tesco is prepared to lose £1.5 billion or roughly $3 billion.

Remember that because of the large market share of the incumbent retailers, a decision to compete aggressively with Tesco and prevent them from getting a toe-hold in America is likely to cost these players many times what it will cost Tesco.

Presumably Tesco thinks it could sell its capital investment in warehouses and stores for something around what it paid for them. So the “loss” being referred to is probably an operating loss. Some would be a normal ramp up as stores mature after an opening but if, say, $2 billion of this loss might be what Kroger’s CEO used to refer to as “investments in lower gross margins” — attempts by U.S. retailers to remain competitive could easily cost the U.S. industry $20 billion.

Of course, with a “neighborhood” format, price reduction would be much less if U.S. supermarket chains could confine price reductions to stores serving the same neighborhoods.

Perhaps Mr. Higgenson spoke intentionally, but he was directing his message to the financial community, concerned about the £65 million start-up cost (roughly $130 million U.S.) designated to the U.S. venture. The City, London’s version of Wall Street, gets nervous about Tesco’s management possibly falling in love with an unproven business concept. By publicly capping the losses, Mr. Higgenson may be limiting the damage to Tesco’s share price.

Whatever the motivations, Tesco is giving its competitors a clear message: Make this too difficult or expensive and we will give up. That is a little like dangling a red flag before a bull.

Mr. Higgenson does show awareness of the vulnerable nature of the Fresh & Easy concept:

“The concept will catch the green wave — there is a lot of fresh high quality produce and meal solutions — there is not a big ready meal market in America so we will have to see whether they like that.”

It is a rather shocking statement. Who opens 200 stores “to see whether they like that”? They must feel that their concept can be easily duplicated. Otherwise why not open a few to test it out before rolling out such an effort and incurring such expense?

Sometimes the interview comes across as if the concept is a blur:

“In America we are positioning it in between America’s Whole Foods Market, which does fabulous food unbelievably expensively, and Wal-Mart, which is as you would expect. We want great quality and price.”

It is hard to know what this means. Isn’t this the standard positioning for Kroger, Safeway and most U.S. supermarkets — more prepared foods and fresh items than Wal-Mart but less than Whole Foods, priced better than Whole Foods but more expensive than Wal-Mart? Wanting great quality and price sounds more like a slogan than a business model.

“Tesco has retained its fake store, hidden within a warehouse, where it has been trying out different concepts on consumers. Higginson says he has been pleasantly surprised by the reaction of consumers and also noted that Tesco’s American shareholder base has almost doubled, leaping from 17% to 28%.”

This fake store has been talked about so much it might be worth remembering that consumer research becomes very difficult once consumers know they are being studied. Especially in a concept such as this that, as Mr. Higgenson explained, is going to attempt to “…catch the green wave…” One wonders if in the surrealistic environment of a test store, people aren’t free to express their noble “green” aspirations.

Of course the important questions — Will they consider a limited assortment neighborhood market convenient or an inconvenience as Kroger CEO Dave Dillon explained here? What will consumers pay to be green? And other such questions can only be answered in the context of a life actually being lived.

Considering that only a tiny fraction of the U.S. population had ever heard of Tesco before its launch in America led to news coverage — well, it is not surprising to see greater awareness result in increased shareholding.

Besides, it is Warren Buffet’s Berkshire Hathaway alone that accounts for over 10% of the U.S. holdings.

We also think Tesco is making one big mistake:

Fresh & Easy will not have any reference points to its parent’s heritage. Higginson explains: “Tesco means nothing in California. We are about local business for local people. There is no point in being some quirky British thing landing in California.”

Don’t they know that Americans are mostly anglophiles? And love a great entrepreneurial story: Jack Cohen, the son of a Polish tailor, spends the £30 he received from serving as a soldier for our American ally, Britain, in World War I and invests it in food to sell at a stall on the east end of London and from that grows a retailer that spans the globe.

Most Americans upon hearing that story would react as Yogi Berra did upon learning that a Jew had been elected Lord Mayor of Dublin, by saying: “Only in America.” Tesco should test that on its fake store wall.

You can read our coverage of Tesco’s voyage to America right here. And The Business piece right here.

Hannaford Becomes First Organic-Certified Mainstream Retailer

When Whole Foods announced plans to open a store directly behind Hannaford’s flagship store in Portland, Maine, it was bruising for a fight — and now it’s got one.

Hannaford Bros. just became the first mainstream supermarket chain to be fully certified by Quality Assurance International, the same organization that certifies Whole Foods Market.

QAI runs a retailer program that is designed to enhance consumer confidence in a retailer’s organic offering by both auditing the procurement process and looking at things such as avoiding cross-contamination at the store level.

The Portland Press Herald picked up on the news and ran a piece entitled Grocers Heed Call for Organic Products and pointed out what this can mean for local Maine growers:

Russell Libby, executive director of the Maine Organic Farmers and Gardeners Association, said the number of certified organic farms in the state has grown from 16 in 1986, to 180 in 1996 and to 360 this year.

Libby said the number of organic farmers is probably much higher because some may follow organic growing principles — by not using pesticides or artificial fertilizers on plants and using organic diets and no antibiotics or growth hormones for animals — but haven’t sought certification.

Libby said the biggest growth has been in dairy farming, which is significant because it usually takes a couple of years for a dairy farm to shift to organic production.

There are three significant markets for organic food, Libby said. A fast-growing segment is direct-to-consumer, which means sales via farm stands, farmers’ markets or community-supported agriculture, in which consumers buy a share of the harvest up-front and get a steady supply of fresh fruit and vegetables through the year.

A second market is the small wholesale business, he said, with sales to restaurants and independent local natural food stores. The third is traditional wholesale sales to grocery chains, and the growth in organic farms is essential to providing a large enough supply for those customers, Libby said.

“That has built some real nice markets,” he said. “The opportunity is for, literally, thousands of (organic) farms in Maine.”

Hannaford is the customer of choice for local growers looking to sell to mainstream supermarket chains for the simple reason that Hannaford has a warehouse in Maine. To a small grower, a trip to Massachusetts or New Hampshire can make a big difference.

About 10% of Hannaford’s SKUs are now certified organic. One battle is that a lot of local growers may follow organic practices but don’t want to spend the money and do the paperwork to get certified. That means that the product can’t be marketed as organic.

Hannaford has developed “Nature’s Place” as its private label organic brand on dry grocery. Recently, however, the produce department began labeling most of its organic produce items with the Nature’s Place brand, turning it into a consistent, master brand that the consumer interacts with throughout her shopping experience.

Hannaford is known for an integrated set, in which organic dry goods are sold adjacent to their conventional partners, but that is difficult to sustain in selling organic produce in bulk as the dangers of consumers returning a stray plum to the organic section, and thus contaminating the display, are not insignificant.

The Portland Press Herald article ends with some doubts about the sustainability of the organic boom:

…while the price difference has narrowed and organic products have caught on with consumers, Balzer (vice president of NPD Group, a consumer marketing research firm) warned that the days of rapid growth in sales may be numbered.

He said Americans place the highest value on products that are low-cost and make life easier. Organic foods, most of which require a little more preparation than popping them into the microwave, “don’t make life easier or cheaper.”

“Our willingness to try (something) new is insatiable,” Balzer said. “We like to see results right away, (and with organics) the only immediate feedback is it costs you more.”

And this is the real question: Is this Hannaford effort and similar efforts around the country merely an effort to prevent the defection of a tiny minority of shoppers to Whole Foods or is there a substantial mainstream business that is seeking to buy organic? We dealt with some of this in a discussion regarding a presentation on organics in conventional stores given by the Perishables Group, entitled ‘Take-Aways’ From United’s Short Course On Organics.

The Perishables Group saw many reasons for optimism. Yet with organic in mainstream stores accounting for only 3% of produce sales and far less in volume, it is probably too early to really say.

One big advantage for Hannaford is its deep roots in Maine and New England. It should try and identify farmers whose parents, grandparents and great-grandparents sold to what started out as a produce store and became a produce wholesaler and eventually morphed into the Hannaford we know today. People in Maine may like organics but they love Maine’s heritage, and Hannaford is an integral part of that in away a Texas upstart can never be.

QAI certification is a feather in its cap, but buying locally in Maine since 1883 is a slogan Whole Foods can never match.

Ben Stein On Wal-Mart

The New York Times Sunday Business section often publishes a column entitled Everybody’s Business written by the eminently sensible Ben Stein. He is probably most famous for playing the role of a boring teacher in Ferris Bueller’s Day Off and as a game show host of “Win Ben Stein’s Money,” but he is also an important writer on business and finance and the son of Herbert Stein, who was Chairman of the Council of Economic Advisors under both President Nixon and President Ford.

In his most recent column, Ben Stein pondered the inanity of opposing the opening of Wal-Mart in Manhattan. More broadly, though, the column is about the motivations of the politicians who fight against Wal-Mart openings in so many places:

Alas, all of the mysteries I’ve been pondering in the last week are about large, global issues. Another thing that preoccupies me, albeit on a slightly smaller scale, is an enduring mystery of the retail economic world: why don’t people in New York City want a Wal-Mart in Midtown?

Manhattan is the most underserved market I have ever seen for retail customers. There really is nowhere for bargains on ordinary household goods and groceries in the whole borough. Yes, I know unions hate Wal-Mart. But not every New Yorker is in a union, and every New Yorker needs food and paper towels. (I, by the way, am a member of three unions: the Screen Actors Guild, the American Federation of Television and Radio Artists, and the Writers Guild of America, West. How many unions is Mayor Michael Bloomberg in?)

Don’t the consumers deserve a break, too? I know Wal-Mart is not hip, slick and cool. It’s for people who have to live within a budget, not for people who see movies with subtitles and have houses on Martha’s Vineyard (or would like to). But don’t working-class people deserve bargains on their daily bread?

To keep Wal-Mart out of New York — or my home, Los Angeles — is simply to inflict a snobby class prejudice on working people. Why they and their representatives put up with this classist, “let them eat Whole Foods” nonsense is yet another mystery, and one that could be solved if politicians really cared about consumers.

You know, even thinking about politicians really caring about ordinary investors and consumers actually made me laugh as I was writing this. Pretty sad, huh?

Ben Stein has written about Wal-Mart before and made a more general point:

When a Wal-Mart opens in a town … it’s as if everyone in the town got a raise. That’s because the stuff at Wal-Mart is so much cheaper than that same merchandise was anywhere else. This is not a trivial thing. Now, don’t get me wrong. Target and Sears and K-Mart and J.C. Penney and Brooks Brothers also sell good stuff usually at bargain prices, but they do not have the same reach of stores, the same astounding prices that Wal-Mart offers every day. This makes the people who shop there richer. Price matters a lot to most people.

I am sure Wal-Mart is stiff competition for the stores and supermarkets across America. I feel bad for the people who lose their stores because of Wal-Mart. But not everyone is a store owner. Everyone is a consumer, and Wal-Mart is about as good a friend as the consumer ever had.

Wal-Mart just announced an 8.1% rise in first quarter profits but Wall Street, mostly composed of people who never operated a business a day in their lives, isn’t satisfied and Wal-Mart Chairman Lee Scott feels the need to apologize:

“Quite honestly, we’re not satisfied with our overall performance,” Scott said during a pre-recorded conference call. Sales and profits for the quarter were “not where we would have expected to be nor where we believe we should be.”

“You will see us be more committed than ever to price leadership,” Scott said.

Wal-Mart has been wildly distracted, losing any sense of why customers shop it with ridiculous PR-oriented approaches at being upscale and green. So a refocusing back on the core appeal — price — is a great idea.

But to really focus on price means to really focus on costs and all these initiatives have been costing money and raising General & Administrative expenses. Wal-Mart should be aiming to lower gross margins and to reduce the cost structure to allow the company to operate profitably at lower margins.

Then it would get back on its virtuous cycle in which lower prices mean higher sales, which mean lower costs per dollar of sales, which means lower prices … and then Wall Street would be more happy and Wal-Mart would do more for the common man than will be done by all the ads in Vogue or all the organic produce the company could buy.

King William’s Produce Requests

Jr Pundit Primo, aka William, is five years old. His parents purchased at the school auction the opportunity for young master William to be “King of the Lunchroom” for a day. This is an august title that carries with it the right to be first on line that day, to wear a crown and, crucially, to select the menu.

William thus had a meeting with the head of the independent catering company that runs the lunchroom to discuss the menu. And with all our industry efforts to increase produce consumption, it struck this, admittedly biased Pundit, that he had a lot of good points to make:

First, he reamed into the guy about seasoning and sauces that the cafeteria staff is always slathering on the vegetable of the day: “Little kids do not like those spices,” said William, “you should not put them on any more.” A perfectly accurate assessment of the situation.

Second, William pointed out that “If you want kids to eat healthy vegetables, you have to have ones they like. So you always should offer a second choice in case they don’t like the first one.” Seems sensible enough. How serious are we about getting kids to eat vegetables if we put out one on a “take it or leave it” basis?

Third, he attacked the lack of variety in the fruit offering. There is a basket in the back where adults can get the children apples or oranges, but the only fruit that the children can pick up themselves are tiny plastic containers of mandarin orange sections, melon bits and sometimes a fruit cup. William blasted this: “We like big pieces of fresh fruit. How about some nice melon? Cantaloupe, honeydew, watermelon and some berries, like blueberries. And we like a lot of it, not little containers.”

William assured the caterer that he should watch what everyone eats on the day that young William is King of the Lunchroom and thus the day all his advice is certain to be followed — “You will see, all the kids will love their fruits and vegetables!”

We’ll report back after the event, but two things struck this Pundit: First, that the Jr. Pundit had acquired his father’s penchant for expressing strong opinions. Second, that this five-year-old’s advice, if followed nationally, is as likely to boost consumption as any of the other efforts around.

Pundit’s Mailbag — A Look At Organic Versus Conventional Yields

Our piece ‘Take-Aways’ From United’s Short Course On Organics, brought this thoughtful missive:

Regarding a quote from your 5/9 Pundit article ‘Take-Aways’ From United’s Short Course On Organics, “Scott Owens of Paramount Citrus pointed out that his horticultural people tell him that the instant they move to organic production, yields drop 30%.” I don’t know the context of Scott Owens’ statement, but wouldn’t it be safe to expect that in practically any new endeavor or method there will initially be a period of significantly reduced output?

Much of the rest of the discussion in the “Take-away” article is on the fact that organic production does not begin in “an instant”. So it would be interesting to see how yields go during the transition period, and how they compare among producers who have developed different methods over time.

It is a very important question whether organic production is inherently less productive per unit of growing area. Depending on who you quote, there’s quite a range of answers.

— Bob Sanderson
Jonathan’s Sprouts

In addition to growing and marketing sprouts, Bob imports Certified Fair Trade organic bananas and grapes, so he swims in the waters where these issues are often discussed.

And he hits on the $64,000 question when he inquires if the lower yields for organics are a permanent situation or a transitional experience.

That issue was discussed at the workshop as ace moderator Steve Lutz of the Perishables Group skillfully guided the conversation. Brian McElroy, who was speaking as Organic Business Manager for Driscoll’s Strawberry Associates, but had previously worked for California Certified Organic Farmers, raised the same question — are yield reductions inevitable?

Billy Heller of Sunripe spoke to the issue in different ways. He seemed less concerned about a year-to-year drop in yields as he was with the occasional crop failure. Basically he implied that conventional agriculture has some “silver bullets” so if confronted with a problem, the crop could often be salvaged. This wasn’t the case with organic growing techniques. Of course, this didn’t preclude developing better techniques over time.

Billy also raised another point: that in many cases the acreage that has successfully raised conventional crops for years is not the ideal place to grow organically. Billy spoke of the need to identify specific microclimates that are conducive to growing organically.

Now Billy grows row crops and can more easily try new locations, Scott Owens, speaking for Paramount Citrus, is pretty much stuck with where the trees were planted.

Beyond this, what Billy was saying seemed to imply that conventional growing was much more adaptable to different soils, climates, etc., whereas with organic growing you had to have a lot of things stacked in your favor.

This seems to favor a notion of organics remaining a niche crop.

Billy clearly stated that, all things considered, he didn’t think it was viable to see organics priced at only 20% over conventional product.

The other thing to consider is that, though more experience in organic growing may boost yields, conventional product seems to be poised for a second green revolution, with genetic modifications serving the yield-boosting function of fertilizers, pesticides and improved seeds of the first green revolution.

Since organic rules do not allow the use of genetically modified seed, it seems highly likely that the gap between conventional and organic yields will become a chasm, not disappear as proponents hope.

Many thanks to Bob for his thought-provoking letter.

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