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Bruce Peterson Focuses On Traceability

Since Bruce Peterson resigned from Wal-Mart, people have waited with baited breath to find out what his next step would be. So when the press release arrived advising that Bruce had entered into a collaboration with Michael McCartney, Principal of QLM Consulting, to promote a traceback effort for the produce industry, we wanted to find out more.

We asked Pundit Investigator and Special Projects Editor, Mira Slott, to speak with Bruce.

Bruce Peterson
President, Peterson Insights and
former Senior VP Perishables, Wal-Mart

Q: In our discussions going back several years, you were predicting food safety would be a paramount issue in the produce industry, long before the spinach E. coli crisis jolted the industry into a new sense of urgency. What triggered your foresight?

A: The way the industry has responded to food safety is by trying to improve how stuff is grown. It has focused on Good Agricultural Practices. That’s fine, a nice thing to do. Growers have been improving how they grow produce for the 30 years I’ve been in this business. The evolution of agriculture continues to improve from a food safety perspective. It always has, and it always will.

The spinach outbreak centered on the growing of spinach, and as a consequence the perception was that if the industry fixed how it grows spinach the problem would be solved.

Q: Where should the focus be? Growers say more responsibility should be placed on the processors, others say retailers and foodservice operators should be more discerning on who they buy from, and still others argue that without a kill step like in cooked products and processed goods, irradiation is the best alternative to alleviate food safety risks in fresh produce. Is the industry missing the big picture?

A: As Senior VP Perishables at Wal-Mart, a day didn’t go by… ok, maybe not every day, but some 250 times a year… where we had a product recall because of a wrong label, wrong code, a date-quality issue, it didn’t taste good, to more serious problems of E. coli, salmonella or lysteria, and most of these recalls were with products you’d know and trust.

Why aren’t these consumer products companies going out of business? There’s a really simple answer: What CPG companies like Proctor & Gamble, Sara Lee, and Kraft have that the produce industry doesn’t have is effective recall.

A CPG company says, “We have a problem with this lot of lunch meat,” then separates it and communicates that to the public in two ways. The company issues a statement, and secondarily FDA issues a statement. All these three things happen within hours, sometimes days, but usually within 24 hours.

Q: Contrast this to the spinach outbreak’s chain of events?

A: In the spinach crisis, it was weeks before the industry figured out they had a problem. To this day no one knows the source of the problem. In my mind, this is the key issue. You can have all the GAPs in place. No one can tell you that if the California Marketing Agreement were followed, another outbreak wouldn’t occur. What happens to consumer confidence the next time a food safety incident occurs in California and it becomes linked to a signatory of the Marketing Agreement?

I’m not suggesting that focusing on GAP is a bad idea. I will say it’s not the retailers’ job to tell growers how to grow stuff, but that’s another issue. What the industry needs to do is redirect its efforts to traceability and recalls in a monumental way, which it is not doing now. There is an urgency to establish a global network to improve supply chain traceability.

In the CPG industry, for manufactured goods, companies have the benefit of being able to implement HACCP and Good Manufacturing Practices (GMPs), but they still have food safety problems. Bottom line, if they didn’t have effective traceability, their businesses would be doomed.

Q: Is it really fair to compare P&G’s or Kraft’s prowess in tracking and recalling packaged products with the complexities and unique challenges the fresh produce industry must overcome? What are the biggest issues you see?

A: I think basically four issues are paramount that the industry gets focused on. Traceability and recall is number one. I suppose you’re going to ask me the other three: immigration, transportation and water utilization. Those are the four issues most important in the produce industry.

The produce industry is very different in a lot of ways from manufactured products. There is a seasonality component, a geographical factor, and you can’t easily apply HACCP-like practices to agriculture. It’s an open environment.

Q: Also, on the technology side, aren’t there obstacles to applying RFID technology to fresh produce that a CPG company would avoid? Couldn’t RFID be a powerful catalyst in building a seamless supply chain tracking information system?

A: When you get down to the item level, RFID is a problem, but at the case level it’s manageable. RFID plays a role but is not the whole picture. RSS (Reduced Space Symbology, now called GS1 DataBar) will open this area as well. RSS doesn’t provide unlimited information; it has its boundaries, but it is not as narrow as PLUs or barcodes. RSS can be used in conjunction with RFID and as an interim solution during the transition to RFID.

Here’s the other problem. The produce industry is fragmented. There’s a wide gamut of people that produce fruits and vegetables, from large corporations down to an individual corn grower in Florida. We have to come up with a process that includes the entire supply chain. This is difficult, yes, but impossible, no. There has to be a minimum set of standards. If a company is going to produce fresh fruits and vegetables, the FDA has to mandate these standards. It can’t be a voluntary system.

Q: How does one start the process?

A: It requires an industry initiative. There has to be an effort put toward traceability in the way a lot of people wanted to focus on the spinach crisis. The same way airlines think about flying safely. Years ago, the airlines got together and said they would never let air safety become a marketing issue.

Q: What are the pitfalls to marketing food safety?

A: Already in the produce industry food safety is becoming a marketing issue. If we say Texas spinach is ok and California spinach is not, the consumer isn’t going to only buy Texas spinach, the consumer just won’t buy spinach period. Marketing food safety is also irrational. It’s a complicated business, due to seasonality, weather, and products come from all over the U.S. and globally.

Q: During the spinach crisis, when retailers were allowed to sell spinach again, they carried spinach with signage that product was grown outside California, far away from Salinas, sometimes with inaccurate signage or merchandising that created consumer confusion. Are you finding incidents where marketing food safety is continuing?

A: Canada has put restrictions on California leafy vegetables. You have to be a signatory of the California Marketing Agreement. That only applies to California. You could have a California farmer growing in the same way as a New Jersey farmer, and Canada will accept the New Jersey product and not the California product. It has become a marketing issue.

produce statistically is one of the safest things you can eat. And this includes not just U.S. product, but product from Mexico and Canada and countries around the globe. Outbreaks are very rare in the big scheme of things. The way CDC keeps data on this, if someone gets sick from lettuce, that is what it reports. That lettuce could have been stored under hamburger that was tainted. The fact remains that fresh produce is one of the safest things you can eat.

Q: How does the industry’s safety record get so distorted?

A: Focusing on GAP becomes an issue because no one can tell if the product is safer because of a marketing agreement and to what degree. There will always be a risk. It might not have anything to do with the fields or production. It could be handlers or retailers or what the consumer does with the product at home.

That is why the industry has to have effective recall, the ability to isolate product and communicate to the public, and make it happen quickly. The longer the problem goes on, the bigger the problem it becomes.

Q: So lack of an integrated supply chain traceability system contributed to the spinach crisis escalating out of control?

A: Produce has become the poster child for unsafe food, which is ridiculous. It’s absurd. If the spinach crisis teaches us anything, it teaches us how vulnerable we are. This was an industry wake-up call that all the Good Agricultural Practices in the world won’t help.

Think of the millions and millions of dollars it affected with spinach. It can bring an industry to its knees. This industry was really rocked by the spinach crisis. Can you imagine if this was potatoes or tomatoes, billions of dollars instead of tens of millions?

All the efforts that are put into GAP now don’t address the traceability issue. There has to be a mobilized effort of this industry to get behind this and figure this out. It’s a monumental undertaking to cause this to happen.

Q: How will your new collaborative venture with Michael McCartney, Principal at QLM Consulting, help drive the process? Michael told me a couple of years ago he’s always seen RFID as the Holy Grail of the supply chain. Do you have benchmarks, an estimated timeframe of how a project of this scope could unfold?

A: In terms of a timeframe, a lot will depend on if the industry believes as I do that this is the biggest issue. If I can persuade enough influential people, then we can get some critical mass. It’s necessary to have global collaboration to get the job done. You can’t have Kroger, Safeway, and Markon doing separate programs. This has to be a shared industry effort. The key would be to get the buyer coalition for food safety to focus on the process of traceability and communication. Since our press release came out about our mission, I’ve gotten a lot of calls.

Significant retailers and significant growers/shippers have expressed great interest in this project. One advantage Mike and I have is the time to get involved. This will take a lot of coordination. Much of the groundwork has been set. It’s important to create a lot of energy behind this.

When I was at Wal-Mart and first started going on the road of RFID, I had coffee with Mike at FMI in Chicago. He was working heavy on the RFID side, and we were talking about the importance of traceability and the need to get the produce industry off the dime on this. What Mike brings to this is an in-depth understanding of what the supply chain can look like. We both bring different areas of expertise to a discussion.

Q: What steps are you facilitating near-term and further out?

A: I’d like to see the leadership group we pull together meet in July to drive this forward. The whole thing will depend on people believing this is the urgent issue I believe it is. It’s a monumental effort, but not insurmountable. People questioned whether the industry could agree on PLUs and standardized pallets.

Mike and I are spearheading several steps to get this done. In my mind the first thing we have to do is bring a large number of growers together. We have to get growers to agree on what records have to be kept in case of a food safety crisis, preferably electronically and readily accessible.

The second thing that has to happen is the process of connecting the dots. Find out the consumer bought tainted product at one end of the supply chain and connect the dots to the other end. RFID and RSS can help but there has to be a process.

Third is communication, precise and prompt and in connection with the FDA. Suppose Bruce Peterson’s broccoli has a problem. We need FDA to validate the industry claim — that’s critically important, plus that’s their job. The industry has to work with regulators to reassure customers. That’s what happens with other products, not produce.

We have to get food safety away from being a marketing issue. If we approach food safety like the airlines approach air safety we’ll be in business. It never enters the mind of airline executives to say American is safer than Delta.

What is nice about this interview is to learn that Bruce, after having left Wal-Mart, still continues to focus on industry-wide initiatives. What is important is that Bruce is suggesting a different type of solution to the food safety crisis that has beset the produce industry.

While supporting efforts to get both growers and processors to do things more safely, Bruce argues that since none of these initiatives can ever guarantee 100% effectiveness, there will still be future outbreaks.

His focus thus is on an industry initiative to constrain the effect or reduce the consequences of the next outbreak. To accomplish this, he is focusing on traceability and has formed a collaboration with Michael McCartney, who has long been active in traceability, RFID and related items.

Bruce’s initiative is important and a needed direction for the trade. In the heat of the spinach crisis, industry leaders had to basically run around to legislators, regulators and the media, promising massive efforts to make sure nothing like this ever would happen again.

Now, as we have more perspective, we can see that though this is a goal to be worked toward, we just don’t have the knowledge to offer such assurance.

What we do have the knowledge to do, however, is to limit the scope of any outbreak with effective traceback.

If the California Marketing Agreement had been in place last year and we still had the spinach outbreak, there is no particular reason to think that the FDA would have behaved any differently.

Yet, if, at the first sign of a problem, we could have instantly tracked all the product that could have been affected, recalled it all and thus assured the FDA that no further damage was going to be done, that almost certainly would have changed the FDA’s actions.

Now accomplishing all this is possible but not easy and involves more than just technology.

For example, one of the key things is that processors have to batch-process and then sanitize. In other words, if a processor just keeps processing, then identifying the time and date of a contamination does no good since the contaminated product may have contaminated the line and we can’t draw a stopping point.

If processors create discrete batches, then stop and sanitize the equipment, we can limit the scope of recalls.

It also remains problematic to trace back product when the supply chain includes spot buying. In other words, the path is pretty clear if a grower/shipper grows and packs produce and sells it to a retail chain. It gets much harder if you look at horizontal trading, say as is common in Nogales, or fill-ins from terminal markets. This strikes us a major gap because the FDA might not be satisfied with a system that can’t be inclusive of the whole trade.

Of course if it was easy, it would have already happened. Hopefully we will see the trade associations and others step up to the plate to try to make this happen for the trade. And we all owe thanks to Michael and Bruce for their efforts to move this along.

It is worth making a point about marketing. It seems to us inevitable that if safety is relative — that is if different programs will produce different levels of assurance of safety — and if buyers — trade or consumer — are focused on safety as an attribute they look for in produce, some sort of marketing is inevitable around this issue.

The key is to make sure it is done appropriately and in full recognition that it can come back to haunt the marketer.

Bruce’s reference to the airline industry is telling. As the jet plane came into use, bringing air travel to many more consumers, many of whom were afraid of flying and feared for their safety, Pan Am, then America’s flag carrier to the world, introduced a slogan: The World’s Most Experienced Airline.

This was a discreet but clear reference to the safety a consumer would seek in flying with a carrier that had safely transported so many people.

Of course, in light of Pan Am’s bankruptcy and dissolution, we suppose it is worth noting that its marketing didn’t do it much good.

Kneeland Leaves Roche Bros. For Kings

We always knew Paul Kneeland was destined for big things. After all, when PRODUCE BUSINESS magazine, in conjunction with the New England Produce Council, began bestowing our annual Retailer of the Year award, he was the very first person so named.

You can read the award citation here.

Now Paul, longtime Director of Produce/Floral at Roche Bros. Supermarkets, as well as a founding board member of the New England Produce Council, has accepted the position of Vice President of Produce & Floral for Kings Supermarkets, headquartered in Parsippany, New Jersey.

Though leaving Roche Bros. — where he started as a part time clerk in 1981 — and resigning from the New England Produce Council must be bittersweet, the opportunity to run produce and floral for Kings is an exceptional opportunity for Paul.

And his hiring is a good sign for the industry at large.

There was a time, back when Kings was owned by the Bildner family and run by Allen Bildner, that it was one of the most innovative chains in the United States. It had a store manager training program second to none (one of the graduates of which is Lee Smith, publisher of Pundit sister publication DELI BUSINESS) and was responsible for many innovations in fresh foods and ethnic marketing.

In produce Kings pioneered the Jersey Fresh program, was a leader in introducing a full specialty produce line from Friedas and was unique in instituting a taste-based produce testing program in which many items were brix tested. Even if competition carried the item, Kings would not put it on the shelf if it didn’t have the sugar.

Kings was also a pioneer in food safety, putting in a strict two-day coding system on all prepared salads.

After the chain was sold in 1988 to Marks & Spencer, the British retailer, the chain stagnated, so it is good news that following Marks & Spencer’s sale of the company to an investor group, the new owners are seeking such great talent. It bodes well for the possibility that this chain can once again be a font of industry innovation.

Best of luck to Paul and to Kings. We look forward to great things.

Immigration Compromise
Looks Less Likely To Pass

The news out of D.C. is that the immigration compromise that included the AgJOBS initiative is in trouble.

Opposition has been building from business, which has been concerned over a clause of the bill that takes away businesses ability to hand pick individual people with exceptional skills for immigration while the bill was also amended in a vote that cut in half the number of guest workers.

A vote on an amendment seemed to break the coalition that had held together to support the “grand compromise” on immigration reform:

The Senate imperiled the legislation earlier today when it voted 49-48 to adopt an amendment by North Dakota Democrat Byron Dorgan to force expiration of the guest-worker plan in five years unless Congress renews it.

The guest-worker plan is a cornerstone of the fragile agreement worked out between Democrats and Republicans…

As the bill looks increasingly unlikely to get through the Senate, much less through Congress, both parties were looking to assign blame:

Reid and the Democrats sought to portray the failure as President Bush’s responsibility, pointing to a lack of Republican support for limiting debate even though reforming the nation’s immigration laws is a top priority for the White House.

“The headline is going to be: ‘The president fails again’,” Reid said.

Perhaps, though we suspect that voters know the Democrats run the Congress, if a bill doesn’t get to the President’s desk, it is more likely to be the Democrats that are held responsible. Although we are not sure the bill is so popular its demise will hurt either party.

President Bush has endorsed the bill but his treatment of Republican doubters has alienated many Republicans:

As time ran short for an agreement that could rescue the bill, Reid said Bush must lean on Republicans to back a deal that the president spearheaded and most Democrats are eager to support.

“If the president has any clout at all within his own Senate Republican delegation, shouldn’t he be pushing to have Republicans vote for this?” Reid said.

In a hint of how contentious the measure is within Republican ranks, however, Sen. Trent Lott of Mississippi, the GOP whip, said Bush might have better luck steering clear of the issue.

“I hope he concentrates on the G-8,” Lott said, referring to the annual meeting of industrialized nations Bush is attending in Germany.

“His comments last week were not helpful,” Lott added, alluding to Bush’s remark — repeated twice last week — that those who deride the bill as amnesty are trying to frighten Americans.

We have run many articles on immigration and AgJOBS: Doubtful Immigration Policy, Pundit’s Mailbag — Immigration, Straight Talk On Immigration, Immigration And The Poultry Industry, Reducing Labor With Technology, AgJOBS Take 2, Pundit’s Mailbag — AgJOBS vs. Lou Dobbs, Pundit’s Mailbag — AgJOBS Bill Needs More Support, AgJOBS Gets ‘Pull’ From PMA While United And Others Provide The Push, Compromise Reached On Immigration Reform, But The Battle Is Far From Over. Pundit’s Mailbag — ‘Unworkable’ Immigration Plan and most recently Pundit’s Mailbag — English and Immigration.

Just the other day, United Fresh was imploring industry members to speak out:

The bill being debated, Comprehensive Immigration Reform Act of 2007, S. 1348, would address 1) enhanced border security, 2) reform of the current employment verification system 3) a transition to legal status of the 12 million illegal aliens currently in the U.S., and 4) provisions for future temporary worker programs to fill jobs where there are insufficient U.S. workers.

Yet we keep getting the sense that the attempt at a “grand compromise” is so large, involving so many interests, it may collapse of its own weight.

If the bill fails, it will not be for lack of produce industry effort. It will speak to the limitations of an industry to impact legislation on an issue that affects our country in so many ways.

Ocean Spray May Have
More To Lose Than Lawsuit

The Chicago Tribune picked up on the Pundit’s coverage of the Ocean Spray controversy and mentioned the lawsuit between the Nolans and Ocean Spray in a piece discussing the Robinson-Patman Act, entitled Why it’s all in the packaging.

The question of the efficacy of the Robinson-Patman Act in producing lower prices for consumers is an interesting one, but we suspect this reporter’s claim that the reason warehouse clubs carry larger package sizes is to avoid Robinson-Patman isn’t often true. The nature of the warehouse club business model, where margins are so low, favors selling products in larger volumes and thus generating fewer expenses per unit handled.

The interesting thing about this case, though, is that though nominally a Robinson-Patman case, it really speaks to different issues. The Chicago Tribune article explains:

Chris Phillips, a spokesman for Lakeville-Middleboro, Mass.-based Ocean Spray, said: “This case has nothing to do with our competitive practices which abide with all laws and standards. It is a case of a disappointed former employee whose contract was not renewed,” he said

He was unwilling, however, to discuss the company’s marketing practices outlined in the case

prevor said he was fascinated by the suit’s depiction of the cutthroat nature of competition and what it means for business ethics.

“You just can’t favor one customer over another when you are selling the same item and maintain any customer loyalty,” he said.

Mr. Phillips is correct that the proximate cause of the lawsuit is a disappointed former employee and a disappointed former contractor to Ocean Spray electing to file the lawsuit. This is both true and obvious. This is also why all business operators who do business in our litigious society know that it is a good idea to do all you can to have employees who leave your organization leave on good terms.

The bigger issue, though, is whether the allegations made by the Nolans are true. If they are true, we can’t imagine one person or organization that Ocean Spray does business with that would care less if the Robinson-Patman Act was violated or not.

Here are the big produce-relevant issues:

  1. Did Ocean Spray provide a better price to Costco than to Sam’s Club or BJs?
  2. Did Ocean Spray provide H.E. Butt better prices than competitive retailers in Texas, such as Wal-Mart, Kroger, Safeway, etc.
  3. Did Ocean Spray treat its growers unfairly and violate the PACA? For example, how did Ocean Spray decide who got credit for a high priced sale to Sam’s Club and a low priced sale to Costco? Did Ocean Spray urge and allow C&S to claim “bad quality” on fruit Ocean Spray knew was in good condition — and did this impact grower returns? Did Ocean Spray offer deals to Costco and H.E. Butt on fresh product to assist with the marketing of processed product — and did this impact grower returns?
  4. Did Ocean Spray publish official price lists and then not follow them, thus deceiving its best and most loyal customers into believing that everyone was paying the same price?
  5. Did Ocean Spray expect employees to lie or to fail to disclose to customers that competitors were receiving special treatment?

Even if it turned out that the Nolans were dismissed in accordance with the law, it strikes us that the industry would still demand answers to these five questions and Mr. Phillips’ unwillingness to “discuss the company’s marketing practices” will not stand.

There is a quick way that might resolve all this without a trial. When this situation started to heat up, Ocean Spray commissioned a special investigation conducted by a big-time law firm.

If Ocean Spray had retained a management consulting firm to do the investigation, the results of the report would already be public record through the lawsuit. But because Ocean Spray had a law firm write the report, it can claim attorney-client privilege and refuse to reveal the findings.

Yet, clearly, in an issue that has caused such controversy it would behoove Ocean Spray to clear its name by waiving attorney-client privilege and making public the results of the report.

It seems doubtful that growers and retailers alike, all of whom are being denied access to this document, are going to conclude that it exonerates Ocean Spray. That may be unfair but, by simply publishing the report, Ocean Spray could reassure the industry that it is being upfront about this entire matter.

You can find a continuously updated “hot topic” summary of our writings on this lawsuit right here.

DeLorenzo Named President And
CEO At Dole

In a case of, at least partially, what Yogi Berra called deja vue all over again, we have word that David A. DeLorenzo has been named President and Chief Executive Officer of the Dole Food Company:

Dole Food Company, Inc.
Names David A. DeLorenzo
President and Chief Executive Officer

WESTLAKE VILLAGE, California — Dole Food Company, Inc. announced that it has named David DeLorenzo as its new President and Chief Executive Officer. Mr. DeLorenzo has been associated with Dole for over 37 years, and is currently serving on the Board of Directors and chairs the Audit Committee. David DeLorenzo has held various executive positions at Dole including President, Chief Operating Officer and Vice Chairman of the Board.

Richard Dahl, currently President and Chief Operating Officer, will be leaving the company to pursue personal business interests.

David H. Murdock, the owner of Dole, previously acted as Chief Executive Officer and will remain Chairman of the Board. Mr. Murdock commented that, “We are pleased to have David undertake this expanded leadership role in the company. His knowledge and experience in the industry are unprecedented.”

Dole Food Company, Inc., with 2006 revenues of $6.2 billion, is the world’s largest producer and marketer of high-quality fresh fruit, fresh vegetables and fresh-cut flowers. Dole markets a growing line of packaged foods and frozen fruit and is a produce industry leader in nutrition education and research.

David was President before, but we think this is his first go around at CEO.

As the largest marketer in the industry, Dole’s actions are immensely important to the trade. During the spinach crisis, it was often the leadership of Eric Schwartz, President of Dole Fresh Vegetables, Inc., that helped move the industry to act on the California Marketing Agreement.

And, as we discussed in this profile of David H. Murdock, Dole’s Chairman of the Board and owner, Mr. Murdock has a deeply passionate vision of the role that Dole and the produce industry at large can play in enhancing the health of people in America and around the world.

Over many years responsible for some of the most stalwart support of 5 a Day, Dole has produced some of the most innovative produce promotions, including recently, an unprecedented tie-in with the Curious George movie.

We are sure the associates at Dole are thankful to have a known commodity, and we wish David and Dole much success as David A. DeLorenzo assumes his new position.

Pundit’s Mailbag —
In Defense Of Wal-Mart

We have run a series of articles focused on Wal-Mart and its changing procurement practices:

First, we looked at the change from DC assignments to dollar-value assignments, plus looked at the growth of “opportunity buys” in our piece Wal-Mart Continues To Change Its Buying Practices.

Second, we spoke with Ron McCormick, Vice President/Director of Produce and Floral for Wal-Mart, who explained Wal-Mart’s reorganization of procurement, including distinguishing between strategic and tactical vendors. We entitled that article, Ron McCormick Of Wal-Mart Elaborates On Its Procurement Reorganization.

Third, we ran Wal-Mart’s Changing Treatment Of Suppliers, which was built around a letter sent from a supply-side member of the industry decrying how vendors on the fruit side of the business felt they were being treated.

Fourth, we addressed the many calls we had received from Wal-Mart vendors that differed in specifics, but all seemed to feel things had changed for vendors at Wal-Mart and in a negative way. We named this piece, Calls On Wal-Mart Point To More Vendor Negativity.

Fifth, we ran ‘Anyone But Wal-Mart’, which pointed out the enormous psychic switch as Wal-Mart, which once was the preferred customer, has suddenly being the one everyone wants to diversify away from.

Sixth, we asked if Wal-Mart’s thirst for lower prices on produce is symptomatic of a value-shift in Has Wal-Mart’s Desire To Buy Cheaper Changed Its Values?

Seventh, we looked at whether an increased use of “opportunity buys” at Wal-Mart meant a lessening of emphasis on other issues, such as the use of RPCs, RFID and food safety. This piece was entitled Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company

Eighth, and most recently, we looked at how an initiative to audit payments from Wal-Mart made to produce vendors was being handled in From The Frying Pan Into The Fire — Wal-Mart Finds Another Way To Alienate Suppliers.

This series brought a letter in defense of Wal-Mart:

Regarding Wal-Mart and their “Opportunity Buys”, this change in practice is the exact reaction to vendors taking advantage of the previous co-managed Wal-Mart business model.

I’m sure many vendors did a good job and did not take advantage of the system but many, many vendors took full advantage of the situation.

previously the vendor was supposed to keep an eye out for Wal-Mart and offer value in a cheap market by lowering prices in order to keep Wal-Mart competitive with a “special buy”. This also offered the vendor an opportunity to move more volume by lowering the price and allowing the customer to “Save Even More”, (win-win situation).

The vendor too often took too much advantage of a high contract price often negotiated based on top of the market in order to keep from losing money if the vendor had to supplement by buying from competitors on a tight market.

So, Wal-Mart ended up paying a seasonal high price and then did not get the opportunity to pay less when the market was cheap. This abuse of the win-win system was done by the vendors, not by Wal-Mart.

Wal-Mart tried to play fair, but the vendors took full advantage, and many of them got rich while doing so, a few even went public and their stock trades at higher numbers than Wal-Mart’s.

Wal-Mart tried to be fair to the vendor by trying very hard not to buy the special buys from anyone other than the actual vendors but inevitably the vendors killed the golden goose by not special-buying themselves to keep Wal-Mart competitive.

Instead the greed and thrill of making huge margins (sometimes 50-100%) by buying on the cheap spot market and billing a contracted high price to Wal-Mart was too great, and the vendors neglected their responsibility to keep Wal-Mart competitive.

This opened the door for other vendors to offer fair market prices to Wal-Mart and make the co-managed Wal-Mart vendor look like they were taking advantage of Wal-Mart’s desire to be fair.

The model was like a smaller version of the freedom of democracy. It was the best thing going but there were still too many people who took it for granted and could not resist taking advantage of the system to the detriment of the entity that allowed it to thrive in the first place.

In the end, I suspect the new system of “opportunity buys” is not the final version of how Wal-Mart will deal with vendors, but it is the pendulum swinging back and firing that shot across the vendor communities’ bow by letting them know it is not just Wal-Mart that should look out for the vendors, but the vendors should look out for Wal-Mart as well, and we should not forget that we all live in a competitive environment including the biggest retailer in the world.

The vendors have to compete for business and to perform at the highest levels, and Wal-Mart too must stay competitive or, as a public company, will have new management who will find a new way to compete.

Ken Kodish

It is always a pleasure to be able to share this forum with an industry member who wants to stand up by name and be counted on an issue of great industry importance — the procurement system of the largest buyer in the trade.

It is, of course, easier to do that if one is speaking up in defense of a big buyer rather than suggesting changes in a large buyer’s procurement system.

Though we appreciate Ken’s letter, we would respectfully submit that his view of the responsibilities of a Wal-Mart vendor is, how shall we say, unique? Let us look at Ken’s two main arguments:

  1. Ken claims that contracts entered into between Wal-Mart and contracted vendors were “…often negotiated based on top of the market in order to keep from losing money if the vendor had to supplement by buying from competitors on a tight market.”

    Perhaps vendors would have liked to get prices in their Wal-Mart contracts that were so high that these vendors could still make money if they had to buy in product at the top of the market. However, vendors did not get to dictate contract prices to Wal-Mart. These were, and are, the subject of intense negotiation.

    Obviously Wal-Mart had many interests at stake in these negotiations. It wanted to both offer consumers the lowest price and maximize its profits and so desired to buy as inexpensively as possible. Although it generally took a long term and comprehensive view and didn’t believe that it would benefit if its core suppliers went broke, Wal-Mart also recognized that “costs” inherent in a procurement model involve not only the price on the item bought but issues such as reliability of supply thus avoiding out-of-stocks, consumer brand or variety preference, etc.

    So a contract was not put out for bid to simply see who would come up with the lowest price, but it really is unlikely that the negotiated contract price would be “top of the market”.

    A more realistic scenario is that an annual contract price would be higher than the lows of the market — when growers would normally lose big money — but also lower than the highs of the market — when growers would normally make big money.

    Our sense is that Wal-Mart did generally negotiate contracts in which the dollar paid was slightly higher than the market, but it was buying from mostly top brands and it was getting more than just product, including a commitment to keep Wal-Mart supplied even if product was short.

    Remember that the vast, vast, majority of Wal-Mart’s procured product was not purchased on the spot market. The enormous volume Wal-Mart required precluded this procurement option. Instead, the product was grown and packed in order to fulfill those contracts, so for most of the volume the negotiations really hinged on a grower getting paid enough to cover his bills.

    In any case Wal-Mart was and is a big boy and was perfectly capable of negotiating a contract price it thought was fair and it would be insulting to Wal-Mart and its executives to think they did anything less.

    To maintain that these contracts were typically at “top of the market” when the top of the market can commonly be double or triple the average of the market implies that for 15-plus years, Wal-Mart has been paying double or triple what Safeway, Kroger or Supervalu have been paying on average. Just a little knowledge about typical gross profits at retail indicates that this cannot possibly be true or Wal-Mart produce would have been hemorrhaging money for well over a decade — which is not true.
  2. Ken’s assessment of a vendors responsibility to Wal-Mart is that “…the vendor was supposed to keep an eye out for Wal-Mart and offer value in a cheap market by lowering prices in order to keep Wal-Mart competitive with a “special buy”.

    Here it is not completely certain what Ken means. If he means that during periods when markets are in surplus, vendors were supposed to sell their normal contracted volume at normal contracted prices to Wal-Mart and then give Wal-Mart an option, at market prices, on any surplus production they had, we don’t disagree and doubt any producers would disagree.

    But if he means that contracted vendors were supposed to voluntarily lower the contracted price for all volume they were selling to Wal-Mart, we would disagree. After all, what is the point of a contract if the responsibility of the vendor is to make sure Wal-Mart always has the lowest price?

    Obviously vendors cannot be indifferent to the success of their customers. However, a contracting program means that on some weeks Wal-Mart will be overpaying for produce and other weeks it will be underpaying.

    If a buyer needs to be “competitive” every day, it shouldn’t contract, it should only buy on the free market. The decision to contract means that buying every day at market price is not the top priority. It means that other things, such as assurance of supply, are more important than always buying at the market price

We appreciate Ken’s letter but we are old enough to remember when the system was set up and its form and function were clear:

  1. Wal-Mart would contract because it would need enormous volumes. Trying to buy those volumes on the spot market would drive up market prices anyway. Getting the cheapest price was less important than getting the brands it wanted — remember Wal-Mart had no equity with consumers on produce so wanted to piggyback on branded equity — and avoiding out of stocks.
  2. The contracted price would be in line with an average price for the market over the term of the contract but with a bias toward making sure suppliers could stay in business.
  3. Wal-Mart would attempt to contract for 80% of its weekly volume needs.
  4. When markets were cheap, Wal-Mart could buy additional product — then called “special buys” — and average down its costs and its price offer to consumers.
  5. If markets got dear, Wal-Mart would try to raise retails so that demand would fall and it would be able to live with the 80% of volume it had contracted for and not have to buy high priced product on the free market.

Now here is the key: The contracted vendors’ responsibility was not, as Ken seems to imply, to do all these things that were not mentioned in the contract. The contracted vendor’s responsibility was even harder: it was to fulfill the terms of the contract.

This meant not only having product, but having it in the forms required, such as RPCs, having it delivered within various metrics such as for out-of-stocks and rejections.

Only a minority of produce industry firms could handle being a direct Wal-Mart vendor. Most were just capable of shipping a commodity.

The current dispute over “Opportunity Buys” is really a discussion over what it is going to mean to have a contract with Wal-Mart.

Up until just recently, the Wal-Mart plan was to every week buy about 80% of their volume needs from contracted vendors at contracted prices.

All these articles we have run are basically vendors explaining that this expectation isn’t true any more.

Now, vendors are saying that if Wal-Mart contracted for 52 trailers of product, if the market price is below contract price, Wal-Mart is reserving the right to tell the vendor it doesn’t want a trailer this week. Then next week, when the market price is above the contract price, Wal-Mart is reserving the right to double up and ask for two trailers of product.

It is a free country. Wal-Mart can ask for anything it wants in its contracts. The question is this: Once the vendor community understands what Wal-Mart means by a contract price, on what terms will that community enter into contracts with Wal-Mart? And, in the end, will Wal-Mart be doing itself a favor by insisting on these terms?

We would hold that for a contract to be valuable in the fresh produce industry, it has to contain a price, a volume and a time period.

We would also say that the nature of business is such that costs go down substantially with steady business. So, at a minimum we would think a contract has to say when it wants the product — 10 trailers for week 10, 12 trailers for week 11, etc.

To drive costs out of the system, a contract ideally will provide steady volume certainly throughout a season and ideally throughout the year.

As far as Ken’s concern that suppliers have gotten rich off Wal-Mart, an important motivator for people to perform for a customer is that if they do so, they might be successful and even get rich.

Considering that the Walton family is the wealthiest family in the world, it is hard to argue that all these vendors got rich at the expense of Wal-Mart. It seems more plausible to contend that it is the combined efforts of everyone to serve the consumer that has allowed for the creation of so much wealth.

Our discussions here at the Pundit are really an effort to make sure that this wealth generation continues. What we are doing is helping vendors to bring to light issues they feel need to be dealt with, but which they don’t feel comfortable bringing up directly with Wal-Mart executives.

We appreciate Ken’s input and the opportunity his letter provided us to discuss this important issue.

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