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A Solution For Wal-Mart’s Organic Woes

With Whole Foods now open in London, it can make Americans think about the prospects for the organic industry in the United States. Business Week ran an interesting article entitled Organics: A Poor Harvest for Wal-Mart that told an interesting anecdote:

Last fall, Peter Ricker got an order from Wal-Mart Stores for organic apples that was the biggest he had ever seen. “I’m talking trailer truckloads,” says the 34-year-old, eighth-generation apple farmer in Maine. Ricker had heard of the giant retailer’s push into organics, and he thought the order could be the beginning of a surge in demand. But that wasn’t the case. While most retailers place orders with Ricker Hill Orchards once a week, Wal-Mart never came back…

Farmers like Ricker are now dealing with the fallout from Wal-Mart’s faltering demand. He has decided to pare back his organic apple farm, from 150 acres to 120 acres. He says organics are just tough to grow. Without pesticides, insects and disease attack his McIntosh, Gala, and Honeycrisp apples. Production per acre dropped about 30% when he switched from regular farming methods 10 years ago. Now he plans to switch back. “The grocery stores want the perfect, blemish-free apple,” he says, “and that’s difficult to produce.”

The story is intriguing but also makes no sense at all. We never had the pleasure of meeting Peter Ricker, but the spin that Business Week put on this anecdote — that Ricker had to switch back to conventional production because Wal-Mart didn’t come through with orders — makes no sense.

We are in the midst of a high demand period for both organics and locally grown, and the fact that Wal-Mart ever found Ricker is evidence of the lengths it has gone to in order to get organics. With very few supercenters in New England, Wal-Mart is one of the least logical buyers for this product.

Business Week didn’t know enough about the business to ask him why Hannaford, which as we profiled in Hannaford Becomes first Organic-Certified Mainstream Retailer, didn’t pick up the slack, or Whole Foods, which not only opened a store directly behind Hannaford’s flagship in Portland, Maine, but whose London store opening was facilitated by David Doctorow who came to Whole Foods as a result of its acquisition of a Boston area chain, Bread & Circus. Where were Stop & Shop and Shaws?

For that matter, who did Ricker sell the apples to the year before that he could just take an order that was “the biggest he’d ever seen” without leaving his longtime customers in a lurch? The whole thing doesn’t make sense.

Which is a shame because by pointing to Ricker’s turnaway from organics and connecting it to Wal-Mart’s pullback from organics, the Business Week article seems to imply that there will be a decline in organic production — which is not true.

In all probability, Ricker’s pullback from organic production is a function of the great difficulty east coast apple growers have had, in a horticultural sense, with producing organic apples. It is one reason eastern apple growers have been promoting locally grown so hard, trying to play their environmental advantage over their western competitors who seem able to grow certified organic product more easily.

In Pundit sister publication PRODUCE BUSINESS, the Pundit wrote a piece entitled Wal-Mart’s Organic Woes that defined Wal-Mart’s organic woes more clearly:

First, it threw out Sam Walton’s rulebook of trying to please the customer and sell what they wanted to buy. Instead it approached the issue of organics as a geo-political issue, and top Wal-Mart executives felt the need to push organics into the stores as part of its sustainability initiative. This was driven not by customers demanding sustainable practices but by political concerns, such as anti-Wal-Mart legislation and difficulty getting site approvals for new stores.

This transformed what should have been a “Store of the Community” initiative, in which organic products were added to serve the purchasing desires of customers in certain neighborhoods, into an effort in which Wal-Mart was attempting to “push” product into the market baskets of consumers who often were indifferent to organics and unable to see the benefits of such purchases.

Second, at the highest levels, Wal-Mart executives forgot that Wal-Mart, with its extraordinary reach, cannot just do every nifty thing. It can only do those things that are scaleable. And organic agriculture, living under the tyranny of an iron-clad three-year transitional requirement before conventionally farmed land can be certified organic, is practically the least scaleable thing in agriculture. If Wal-Mart wants more Tickle Me Elmo dolls quickly and wants them bad enough, it can have its suppliers run three shifts a day and fly them on planes rather than ships, etc.

But for all its might and all its money, Wal-Mart can barely influence the amount of certified organic apples available this fall because that quantity is based on decisions made three years ago. Add to this that many organic growers feel culturally alienated from Wal-Mart and are uncertain of “Wal-Mart’s commitment to organics — which means they are unlikely to simply abandon long time users because Wal-Mart comes to town — and it is instantly obvious that it would be impossible for Wal-Mart to procure enough organic fresh produce to fulfill the hype.

In fact so many organic producers are so small and seasonal that Wal-Mart’s buyers were spending wildly disproportionate amounts of time attempting to track down tiny bits of supply to fulfill the announced plans.

Which brings us to the third problem: a PR machine that simply went out of control.

Because it was a message they enjoyed talking about and because the whole purpose of the organic initiative was to enhance public relations, it was portrayed as if Wal-Mart was going to make a major commitment to organic and become an organic leader. Four hundred organic SKUs were talked of and all would be priced within 10 percent of conventional items.

Call it the arrogance of a big company. At the top corporate level, executives were used to thinking they could tell suppliers to jump and the suppliers would ask “how high?” The plan became detached from any tie to the difficulties on the ground of executing such a strategy.

Despite the many problems Wal-Mart has experienced with its organic initiative, the word is that Lee Scott, Wal-Mart’s CEO, still thinks a focus on organics is important as a way of positioning Wal-Mart as environmentally friendly.

If that is his motivation, then there is a major opportunity for Wal-Mart.

Wal-Mart can’t be a major player in organics because there is not enough organic product in the world to account for a significant portion of Wal-Mart’s sales.

We would estimate that less than 25% of the food sold at Whole Foods is organic — Whole Foods is a relatively small chain that actively seeks organic product.

For Wal-Mart, organic food is, at best, a “store of the community” initiative in which a few stores in appropriate neighborhoods will get stocked.

What is the opportunity? Well take a look at the ad of one of our Pundit advertisers, Stemilt, on the side of this page. Note that one of the things Stemilt is promoting is a line called Artisan Naturals which is billed as “Stemilt’s new transitional fruit program.” We discussed this in a piece entitled What If We Only Had Organic Fruit?

Every retailer is pushing organics now. What if Lee Scott went on television and explained to the American people that for farmers to convert to organic, they need to transition their land for three years and that most farmers being in a netherworld of not getting the yield of conventional growing, but not getting the price of organic growing, just can’t afford to make the leap.

What if Lee Scott said that Wal-Mart was going to take the lead in helping America support farmers in their transition to organics by promoting the country’s largest transitional fruit and vegetable program?

It would place Wal-Mart in a position of environmental leadership that Tesco would like to seize and would give Wal-Mart an opportunity to raise awareness among its own shoppers on this whole issue.

Because Wal-Mart could work with its existing suppliers, we wouldn’t have the food safety worries that can come with fragmented production.

Instead of being just another retailer doing the same thing everyone else is doing — pushing organics — Wal-Mart would be positioning itself as both a friend of the farmer and one really helping to move society on environmental issues.




Costco 3rd-Quarter Slideshow Available

Costco has posted a slideshow highlighting its 3rd quarter results for fiscal year 2007. Most of the graphics are picked up from its 2nd quarter slideshow that we talked about here.

What is interesting to us and accounts for why Costco is such a fierce competitor is this slide:




At a time when Wal-Mart has refocused on increasing gross margin, note how Costco relentlessly drives gross margin down. Note that selling, general and administrative expenses this quarter were 9.83% of sales. With gross margins at 10.36% of sales, they are running the warehouses to make just a tad over half a percentage point.

The big profit is the 2.18% of sales they take in from membership fees.

What an incredibly strong value proposition to offer to any Costco Club member. And that number is over 27 million households.

You can view the whole slide show here.




Could Tesco Pounce On Wild Oats If
FTC Blocks Whole Foods’ Purchase?

If the FTC succeeds in its effort to block Whole Foods from buying Wild Oats, what is likely to happen next to Wild Oats? We now are certain that the major shareholders would like to sell if they can get a decent deal. The sale announcement brought attention to the fact that there is real upside with Wild Oats as it generates only around half the sales per square foot that Whole Foods does.

Any major retailer could step in to get a place at the table in what the FTC is claiming is a distinct organic supermarket sector, but perhaps the most intriguing possibility would be for Tesco, whose voyage to America we’ve covered extensively here, to buy the chain.

Wild Oats is a small footprint store, larger than the typical Fresh & Easy stores but nothing Tesco isn’t used to from the U.K., and its green ethos fits right in with the image Tesco is pushing for Fresh & Easy. With Tesco’s backing, Wild Oats could open superstores in places like Austin, New York and, well, London!

At one fell swoop, Tesco could acquire some U.S. scale, operations in 24 states and one Canadian province, an operating model that doesn’t require Tesco’s investment in regional distribution centers, an organic supply chain and a brand for expansion.

Maybe the operation is too small and scattered for Tesco to bother with but, maybe, the experience actually selling to consumers in 24 states would be a big plus for Tesco as it looks to roll out across the country.

After all, setting up a store in a warehouse and calling it a movie set may be clever, but even the best movie sets have their limitations as consumer research devices.

If the FTC drags this on and if Tesco opens profitably, it may leap just to grab the real estate.




Risk And Raw Milk

We have paid some attention to the issue of selling raw milk in articles such as Raw Milk And Dirty Produce: Perfect Together and a follow-up piece that looked at the issue and tied it together with irradiation — you can read that piece here.

Now we find The Flint Journal profiling the fact that a Local Woman Finds Her Niche In Cow Shares. The title references the fact that since raw — unpasteurized — milk is illegal for sale in most places but is not illegal to drink, advocates of raw milk are getting around the law by “selling” shares in cows. Then, as an “owner” of the cow, the owner gets the milk as a kind of dividend:

Kris Unger found there is a market for raw milk — milk that has not been homogenized or pasteurized.

But there’s only one way she and eight other dairy farmers around the state, where it is illegal to sell raw milk, can provide it — by selling shares of cows and have those who buy the shares get the milk themselves.

Unger’s herd of 26 Jersey and Milking Short Horns are there for the taking — one share equals 1/25th of a cow — at Dairy Delight Cow Boarding, a farm near the apex where Genesee, Shiawassee and Livingston counties meet.

She opened for business in January and has already sold 115 shares with much more room to grow on 126 acres south of Byron and north of Howell in Livingston County’s Cohoctah Township.

“I can handle 500 to 600 shares,” Unger, 51, said.

Share owners come from miles away for fresh milk with a tall head of cream. They drive from Dearborn Heights, Farmington Hills, Utica, Chelsea and closer by like Fenton and Linden.

“A Canadian man drives 84 miles one way for his milk,” she said. He fills several containers and freezes it. She said those who make the effort are committed to a healthy lifestyle and environment.

“They are very concerned,” she said. “A lot of them home school, are spiritual, they just care.”

One share guarantees the owner one gallon of milk a week. The share costs $60 and the boarding fee is $21.50 a month. The cost of a gallon figures out to about $5.

“It’s so much better for you,” Unger said. “All the nutrients, enzymes and good bacteria are all there.”

Unger said the government went too far when it outlawed raw milk in the name of safety from disease. She said if people would educate themselves, do their own research, they’d find risk is minimal.

“You can get sick from any food product,” she said, citing the E-coli contaminated spinach shipped nationally from California last winter. “We disasterized the food system,” she said. “How dare the government tells us we can’t drink raw milk.”

How dare indeed. This issue of risk and to what degree consumers should be free to pursue it is a question that all food safety discussions have to confront.

Interesting enough, while this is going on in the U.S., a related story is brewing in France. The headline there is French Surrender Exclusive Camembert Status:

The fate of one of France’s best-loved cheeses is in question after the two biggest manufacturers of “real Camembert,” the traditional variety made with untreated “raw” milk, stopped production, citing health risks for the consumer.

To the fury of purists, Lactalis and the Isigny Cooperative, who together supplied 90 percent of “lait cru” (raw milk) Camembert made in the northwest region of Normandy, have switched to using treated milk for their top brands on the grounds that it is safer.

In so doing they have had to surrender the coveted “Appellation d’Origine Controlee” status, which is normally seen both as a certificate of authenticity and a vital boost for sales. It is the first time ever in France that a cheese producer has voluntarily withdrawn from an AOC.

Spokesmen for the companies said the reason for the unprecedented move is the impossibility of eliminating the health threat from bacteria in milk that has not been subjected to heating or “microfiltration”.

“This was an extremely difficult decision to take. ‘Lait cru’ Camembert is in our genes,” said Luc Morelon, communications director at Lactalis, the world’s biggest manufacturer of dairy goods.

“So why did we do it? Because consumer safety is paramount, and we cannot guarantee it 100 percent. We cannot accept the risk of seeing our historic brands disappearing because of an accident in production.”

But food campaigners are up in arms because they say Lactalis and Isigny Cooperative are acting out of purely business motives. And they fear the companies may yet use their commercial weight to get AOC regulators to change the rules, placing the future of traditional Camembert in real jeopardy.

“They talk about a supposed danger to health, but they know it is nonsense. Their real reason is that they want to step up production, and it is impossible to do that using ‘lait cru’,” said Gerard Roger, president of the newly-created Defence Committee for Authentic Camembert.

“What this is all about is the limits of mass marketing. A behemoth like Lactalis cannot answer to the needs of the real Camembert, which is not just a cheese but part of our culture,” he said.

For cheese-lovers, the difference between a genuine Normandy ‘lait cru’ Camembert and the common supermarket variety made with pasteurised milk is like the difference between vintage wine and a mass-produced “vin de table.”

“Camembert does not exist unless it is made with untreated milk. ‘Lait cru’ is what gives the richness, the taste, the originality. If you heat the milk, you’ll still have a cheese, but it won’t be Camembert,” said Roger.

We can’t know if the motivation is a sudden fastidiousness on food safety from these two large companies or a desire to seek a commercial advantage by changing the regulations to include heat-treated or non-filtered milk.

Here though is the key point: True raw milk Camembert is sold every day in Europe, yet no one who hasn’t left America has ever eaten it — it is illegal to sell here because it is aged less than 60 days.

Is our culture so risk-adverse that because of a tiny risk we want to deny Americans the right to eat foods that are common in Europe? Does this make sense?




Pundit’s Mailbag —
Immigration As An Economic Issue

With the immigration compromise on life support and Lou Dobbs saying Give it a rest, Mr. President, we received a letter on immigration from Rick Eastes of Rixx International Marketing Co., in which he draws to our attention an article in the Economistentitled Guests vs Gatecrashers.

The piece is subtitled, The uncomfortable economics of immigration reform, and the first two paragraphs go like this:

HOW much of a jerk do you have to be to oppose immigration? That question is mischievously posed, and ingeniously answered, in a recent post on “YouNotSneaky”, an economics blog.

The blog’s author points out that a low-skilled worker can make $9.34 an hour in America, compared with just $2.56 in Mexico. He also assumes that migrants depress the wages of low-skilled Americans by 5% — a widely cited estimate. Thus Mexican workers gain dramatically by moving north, whereas low-skilled Americans lose out slightly at worst. To justify opposing immigration, the blog concludes, you must attach at least 20 times more weight to the well being of a native-born American than to a Mexican.

Rick encourages us to read the complete article and sends along these thoughts:

This Economist article is a good expression of the immigration issue as “economic” and how scarce labor resources stretch to meet economic demands.

The final part of the article makes a critical point. As the ‘comprehensive’ immigration legislation is now to be presented, it will cost more to administer in total economic terms than the true short-term costs to society — and still will not likely effect the movement of labor regardless.

Many of our legislators need to drop the ‘racist rhetoric’ about “English only” and start examining how capital and resources are being allocated. There are virtually no incentives to keep manufacturing jobs in-country allowing corporate profits (and their taxes) to escape to China and other low wage economies. The reality is that work performed by labor, legal or illegal, in the United States generates income, profits, and tax revenues which aid the total US economy in the aggregate.

I suggest that our legislators need to learn to ‘follow the money’ in coming up with an immigration policy that can work and be sustained in the future.

— Richard A. Eastes
Rixx Intl. Marketing Co. Inc.
Visalia, California

The article end that Rick refers to runs like this:

In the short term the fiscal burden imposed by illegal immigrants may outweigh the economic gains they bring. In other words, the average native-born American has a higher pre-tax income thanks to the country’s “broken” border, but his post-tax income may be slightly lower. All told, Mr. Hanson thinks that illegal immigration might cost native-born residents some 0.07% of GDP.

But that net cost, if it exists at all, is clearly less than the price of keeping illegal workers out. Since 2001 Congress has more than doubled the amount of money spent on securing the borders and enforcing immigration laws. Mr. Bush’s 2008 budget proposes spending $13 billion, or 0.1% of GDP. The senators’ plans would be even more expensive. A needlessly cumbersome guest-worker plan and a costly war on gatecrashers are bad ideas — even if you don’t give a fig for the welfare of would-be migrants.

The Economist piece is an interesting one but strikes us as avoiding the issue as Americans would see it. Sure, one consideration is economics, and whether, financially, immigration increases or decreases the income of Americans that are here today.

The blog referenced in the Economist article takes it one step further and says that, morally, we ought to allow immigration because the economic benefit to the immigrant is so much greater than the cost to existing citizens.

Even assuming the economics are correct — and they are hotly contested — it is a complicated moral issue. The issue revolves around what ethicists would call “the relevant moral community” — in other words what group should we be concerned about?

If we proved that 20 poor children would be better off if you adopted them, but your current children would be worse off, even if the total well being of the world was improved by your adopting these children, should you adopt the children?

Many of us would think it grotesque to do so because we would think that “the relevant moral community” is your own family. That is who you are responsible for; that is who you should be thinking about in making decisions.

Equally, it is unclear to what degree the well being of non-citizens should be included in calculations regarding immigration to America.

The closing point of the article — that restrictions on immigration are expensive and possibly more than the cost of taking care of immigrants — is intriguing. Certainly some people oppose immigration or wish to restrict immigration because they fear an economic burden being imposed on our society by immigrants. This provides a useful counterbalance to that thought process.

Yet all this, even if true, seems to be avoiding an important point. In New York City, a common housing option is a co-op. In a co-op one doesn’t actually buy a unit as one does in a condo. One buys shares in an entity that owns the whole building. When one goes to buy someone’s unit, what one is actually buying is the shares the seller owns.

The co-op board must approve all buyers and can turn them down for any reason or no reason at all. A co-op board does not have to explain its reasoning. The members just vote yes or no. This means that people may get turned down because of their race, religion or other factor.

Yet we allow it. Why? Because in buying into a co-op one is really being accepted into a partnership, and we accept that people are allowed to select their partners. So an Italian guy can want to be business partners with an Italian guy just because he feels more comfortable, and that is considered OK.

In a democracy, when we open the doors for immigration, we are not just accepting economic inputs like capital or labor. We are in a very real sense accepting partners in the running of our country.

Rick’s mention of “English Only” is instructive because imagine Americans are presented this choice:

Option 1: Your income over the next 30 years will increase 2% a year and the U.S. will remain much as it is today in terms of spoken language.

Option 2: Your income over the next 30 years will increase 3% a year and the U.S. will be a society where Spanish is the most commonly spoken language.

Surely there are many, many Americans who would forego added income to maintain the kind of country they are comfortable in.

Still others would argue that the math is wrong, that economic growth is impossible without political stability, and a bi-furcated country is less likely to provide that stability.

In any case, this is why guest worker programs are politically appealing; they provide a way to get needed labor without having to make someone your “partner” in running the country.

Of course, the core issue blocking an immigration compromise is the lack of credibility of the U.S. government. If we do have a guest worker program and the guest worker doesn’t show up to leave the country, will anybody look for him?

Although conservatives have opposed the compromise bill, there is much in it for conservatives to like. Because the government has no credibility on these issues, however, the Republican base isn’t paying attention.

Until this should change, any “grand compromise” is going to be very difficult to pass.

Many thanks to Rick for passing on this thought-provoking article.

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