Our extensive coverage of Tesco has mostly focused on its attempts to establish its American operation known as Fresh & Easy.
Although the litany of problems Tesco has had in trying to establish this operation is long, we have been told, time and again by players in the British food retailing that we should never underestimate Tesco. As one Pundit pal put it:“They will seem like a complete failure, perhaps on the verge of closing, then you will turn around and Tesco will be whipping every American chain and a success like you can’t believe.”
We doubted it but it was easy to say why a Brit might think that way. For almost two decades, Tesco has known little but success. After all, it was not Tesco but Sainsbury’s that was the iconic British retailer. Tesco beat Sainsbury’s in hand-to-hand combat in 1995 when, for the first time, Tesco became the Number One food retailer in the United Kingdom.
Now, however, there is a sense in the UK that Sainsbury’s — which recently announced both very strong sales and, more of a threat to Tesco, the raising of almost three quarters of a billion dollars to expand — is a renewed threat to Tesco in its home base.
The Telegraph in London ran a story titled, Sainsbury’s v Tesco: The Rumble in the Supermarket Aisles, and subtitled Sainsbury’s Stunned the City Last Week With its Strong Sales and Aggressive Expansion Plans. So is Tesco’s Supermarket Crown Finally Slipping?:
Seasoned supermarket watchers talked of the tide turning. After a decade and a half of Tesco’s dominance, power among the big grocers appears to be subtly shifting. It was 1995 when Tesco did the unthinkable and overtook Sainsbury’s as the UK’s biggest grocer after a massive growth spurt. Tesco and its chief executive Sir Terry Leahy have not looked back since. But after 14 years of dominance, is Tesco now on the back foot while Sainsbury’s is on the front foot?
“A pendulum takes quite a long time to swing and when it does it tends to stay in its new position for a long time. It has been a magnificent 15 years of progress that Tesco has put together; confidence breeds confidence and momentum breeds momentum. But it just feels as though the momentum has started to switch to Sainsbury’s,” said Jonathan Pritchard, analyst at Oriel Securities.
“It is premature to say that Tesco’s crown is slipping — it’s lead is so dramatic — but there is definitely positive momentum at Sainsbury’s and negative momentum at Tesco,” he said.
A long-time former Tesco executive gives his take on the situation. “It is fascinating. Sainsbury’s is doing to Tesco what Tesco did to Sainsbury’s in the early 1990s,” he said.
There are a lot of reasons why Sainsbury’s is doing better. As it explains in the article, its store locations are in areas less depressed than the north of England, and Sainsbury’s is a tad more upscale than Tesco so those looking to trade down from the carriage-trade UK retailers — Marks & Spencer and Waitrose — would find Sainsbury’s more congenial.
But it is not just Sainsbury’s… Morrisons, which includes the old Safeway stores, has been gaining on Tesco. ASDA, Wal-Mart’s subsidiary, has been gaining on Tesco, plus the so-called “hard-discounters,” though slowing recently as efforts by Tesco and others to offer “value lines” take root, have been gaining market share for some time.
We went to visit a Sainsbury’s store in Beckton in East London. It was originally a Savacentre — an early supercenter concept that was a joint venture between Sainsbury’s and British Home Stores. The joint venture ended in 1999, and the store was basically a Sainsbury’s supermarket with a large back room. Then Sainsbury’s remodeled completely, opening a store that was strikingly reminiscent of a Target Supercenter.
Although we feared the timing might not be great for a push into non-foods, the store, to our American sensibilities, was such a joy to shop compared to the Tesco stores we visited… we thought it might succeed. Perhaps we were correct.
Sainsbury’s fall offers a warning to all businesses. It was a well managed company by the Sainsbury family until the mid 1990s. At the end, the family pushed margins too high.
Subsequent management teams were not particularly innovative, but the big problem was they were focused on maintaining profits and to keep those profits they were consistently willing to lose market share.
Then a disaster occurred from 2002 to 2004 when already high pricing collided with a technological snafu that caused lots of out-of-stocks as the company attempted a major logistics change that went awry.
The current CEO — who had worked for both ASDA and Marks & Spencer — has improved price image — although reality is still unclear — and product availability is much improved. Performance has been very strong, especially because, with its more up-market positioning, it was expected to be hurt by the recession more than Tesco was.
But there has been a price paid in keeping margins tight. Tesco has often reiterated its intention to keep margins at 6%, and its margins now are about 6.1%. Sainsbury’s earns only 3.3%, though the comparison is not precisely fair because Sainsbury’s leases many stores whereas Tesco owns many more of its stores free and clear.
Still, the more important story may be that Tesco’s attempts to maintain 6% margins are not appropriate in this environment, and that doing so costs Tesco market share, as Sainsbury’s has learned, market share, once lost, is not easy to get back.
An industry luminary suggested we consider the following issue:
The FDA has said it is going to begin surveillance to determine retail compliance for COOL, seven years after the legislation was enacted. Here’s my question:
Is there any evidence COOL has done anything except add cost to the system? Are consumers now better informed? And if informed, do they act on the information?
Many domestic producers felt that if people knew where their products came from, they would prefer domestic product. Any evidence of that? Do you get the idea that I already know the answer!
Those who argued against COOL said that all it would do is add cost because product origin has very little to do with purchase decisions at the point of purchase. And that continues to be the case.
This shows the foolishness of how the government legislates in areas they know little about. It also shows a major flaw in process. Energy is spent in passing a law, but little effort spent to study whether the law achieved its intended purpose or if there were any unintended effects from the law.
We wrote quite a bit about country-of-origin labeling when it was still under negotiation, including a cover story in Pundit sister publication, PRODUCE BUSINESS, entitled Country-Of-Origin-Labeling: Nothing Cool About It . We were more than a little skeptical.
Basically the problem was that producers who were advocating for the program had a goal that was not likely to be realized. These producers believed that consumers, if made knowledgeable as to the origin of their produce, would in significant numbers decline to purchase foreign-produced produce and, instead, buy produce of the USA.
We knew of no reason to think that was true before passage and conversations with retailers have indicated no such effect after the implementation of COOL.
Yes, of course, when surveyed, consumers would make the politically correct noise about wanting to know where their food comes from but when it comes to behavior, the effect just isn’t there. Bryan Silbermann, President of the Produce Marketing Association, and the Pundit had an exchange on this subject in Pundit sister publication, PRODUCE BUSINESS.
Our correspondent looks at the history here and raises a big problem with our public policy efforts. All too often, what is wanted is simply a victory of some sort: A law enacted, a regulation approved. Whether those laws or regulations ever accomplish what they were sold as going to accomplish is virtually irrelevant and rarely followed up on.
Of course, this is not only an issue that involves the government. We raised the issue here of whether PBH was achieving its self-professed goal of increasing consumption? We have asked here whether the newly proposed generic promotion order is being proposed in such a way that there would be real metrics available for judging its success or failure?
We are probably going to have to live with COOL, but the process that produced it is deeply troubled. We should try very hard to find a better way.
Our extensive coverage of the dispute between Jim Nolan, Theresa Nolan and their company, The Nolan Network, with Ocean Spray has now reached a new point.
As we explained here, a jury had awarded the Nolans damages of one million dollars. Now, Judge Robert C. Rufo has determined that the judgment should be doubled to $2 million.
In addition, interest on the judgment must be paid from December 16, 2003, and Ocean Spray must also pay hundreds of thousands of dollars in attorney’s fees.
Although it is likely Ocean Spray will appeal, it is hard to imagine a more sweeping statement as to the justice of the claims presented by the Nolans.
Considering the difference in resources between the Nolans and mighty Ocean Spray, comparisons to the story of David and Goliath are inevitable. That the righteous may prevail is a dream embedded deep in the Judeo/Christian ethic and, indeed, in Western civilization:
And all this assembly shall know that the LORD saveth not with sword and spear: for the battle is the LORD’s, and he will give you into our hands.
And it came to pass, when the Philistine arose, and came and drew nigh to meet David, that David hasted, and ran toward the army to meet the Philistine.
And David put his hand in his bag, and took thence a stone, and slang it, and smote the Philistine in his forehead, that the stone sunk into his forehead; and he fell upon his face to the earth.
So David prevailed over the Philistine with a sling and with a stone, and smote the Philistine, and slew him; but there was no sword in the hand of David.
• 1 Samuel.17
As Theresa Nolan awaits a possible appeal from Ocean Spray’s attorneys on the latest award of $2 million, plus interest going back to 2003 and payment of legal fees, one of the more intriguing questions has been whether USDA will elect to start an investigation or, in fact, if it has already started such an investigation.
We’ve been arguing that there is a prima facie case for a violation of the PACA laws. Now some members of the legal community are starting to pick up on our assessment.
Richard Goldfarb, a Harvard attorney with Stoel Rives LLP, wrote a piece entitled Nolan v. Ocean Spray Verdict: The PACA Angle in his firm’s Food Liability Law Blog:
Jim Prevor, the author of the Perishable Pundit blog and a man who has probably forgotten more about the produce industry and its practices than many will learn in a lifetime, has been blogging constantly about the lawsuit brought by Theresa Nolan, her company The Nolan Network and her late husband Jim against Ocean Spray Cranberries, Inc. On May 30, he reported that a jury in Plymouth, Massachusetts, home of Ocean Spray, had brought in a $1 million verdict against Ocean Spray and in favor of the Nolans.
The lawsuit involved marketing practices with fresh cranberries, a minor part of Ocean Spray’s business compared to, say, cranberry juice cocktail. The background to the case is discussed at length in an article by Bill Martin in Jim Prevor’s other publication, Produce Business. As far as I can tell from the news reports, the actual allegation in the lawsuit was a violation of Chapter 93A of the Massachusetts General Laws, This broadly prohibits unfair or deceptive acts or practices in trade or commerce. I’m not a Massachusetts lawyer, but I did a stint as a law clerk for the Massachusetts Appeals Court and my recollection is that Chapter 93A was considerably stronger in application and interpretation than many other states’ mini-FTC Acts, particularly since a private right of action is included essentially without limit.
The core of the allegations related to alleged differential pricing afforded by Ocean Spray to Costco and H.E. Butt in 2000 and 2002, respectively. How this eventually led to the Nolans’ claim is too complicated to discuss here. I am more interested, however, in a suggestion Jim Prevor makes in some of his columns on the case, that the alleged differential pricing and the way it was dealt with might have violated PACA, the Perishable Agricultural Commodities Act.
A key allegation is that C&S Wholesale Grocers, which supplied fresh cranberries to BJ’s Wholesale Club, a competitor of Costco, was told by Ocean Spray, upon complaining about the price advantage allegedly given Costco, “to claim some cranberries it would receive from Ocean Spray were of poor quality and to take a discount from the Ocean Spray invoice.”
If true, there are ways that such treatment could violate PACA or violate the duties that Ocean Spray owed to its growers.
PACA is best-known for creating a statutory trust in favor of unpaid growers of perishable agricultural commodities. It also, however, requires people who deal in those commodities to account accurately for all transactions in those commodities. Thus, the allegation that a buyer was told, in essence, to make a claim that certain cranberries were of lesser quality than they actually were raises the issue of whether some of Ocean Spray’s growers were provided reports on their cranberries that inaccurately represented their quality (if not, one wonders how the auditors would have missed it, since they would have presumably had to match the returns from the pools that included the sales to C&S against the payments from C&S). It’s a reasonable question, though nothing that has occurred to date appears to have answered it.
It is conceivable, of course, that the matter was settled internally without publicity, or that the growers involved considered the issue too small to litigate. Anyone handling fruit or vegetables within PACA’s ambit, though, must be aware that any form of inaccurate reporting can violate the statute.
We appreciate Mr. Goldfarb’s kind words; we had first come across his firm when the Pundit was invited to speak at an exceptional conference entitled “Who’s Minding the Store — the Current State of Food Safety and “How It Can Be Improved.” The conference functioned as a continuing legal education program at Seattle University School of Law and was co-sponsored by Marler Clark, the famed plaintiff’s attorney on food safety issues and Stoel Rives, which typically did work for defendants.
Mr. Goldfarb zooms in on the legal point precisely: If Ocean Spray received claims for “poor quality” and it knew or should have known that these claims were false; its allowing of the claims to “settle” another unrelated matter could have easily resulted in growers receiving incorrect accountings.
Although, as Mr. Goldfarb points out, the matter could have been settled privately or be too small to litigate, it is Mr. Goldfarb’s last line that is most telling:“Anyone handling fruit or vegetables within PACA’s ambit, though, must be aware that any form of inaccurate reporting can violate the statute.”
Under the PACA the wronged party does not have to litigate; in fact, there doesn’t even have to be a damaged party. Many years ago, the Pundit’s family came perilously close to losing our PACA license because it was discovered in a routine audit that we had unintentionally overpaid a grower!
To the PACA, overpaying or underpaying was irrelevant; the law required an accurate accounting, which we had failed to deliver.
We wonder if Ocean Spray did better?
Once again, thanks to Richard Goldfarb and Stoel Rives LLP for picking up on the matter.
In our piece, Vendors Beware As Wal-Mart Alters Course On Procurement, we included a little story on how the Pundit learned about contracting in the produce industry:
When the Pundit was cutting his eye teeth in the business, he was sent by the Pundit Poppa down to Puerto Rico to study under the tutelage of one of the Pundit uncles, Sydney Prevor, who had long run the firm’s Puerto Rican affairs.
We imported many items, potatoes prominent among them, and we would sell them to small wholesalers who had slots at the Mercado.
One customer was a little bigger than the rest and he could order, in advance, a full trailer. In exchange for doing so, he wanted a discount. So each week we gave him an offer, he accepted it and we had a contract for the week.
Yet, a youthful Pundit learned about contracting from this customer. For it turned out that when the ship would arrive, if the market price was below the contract price, our customer would speedily come to get his trailer of potatoes and, in fact, would always have a story as to why he needed a few pallets extra at the same price this week.
Yet when the contract price was above the market, he never came for his potatoes. We would call him and there was always a reason why he needed it cheaper this week.
In time Uncle Sydney advised our customer that a contract with him was no contract at all and told him we would no longer give him a price in advance and he was welcome to buy at market from us every week.
Little did we understand that the mighty Wal-Mart in its behavior would come to mirror our Puerto Rican potato customer.
This anecdote brought a letter:
I am in the natural and organic food business and I get your Perishable Pundit and wanted to send a note to say I think your columns are great.
Continue to spill ink and burn electrons on Tesco and Wal-Mart — your insight and analysis are “right on.”
I have been in the natural food business since 1978, but I tell anyone who will listen — and those that don’t listen — that I really learned the grocery business while working at an independent supermarket in the, ahem, late 1960s/early 1970s… so I really like the parenthetical comments you throw in about where your family sent you to learn the business (this week: Puerto Rico)…and loved your story about the potato guy…
Ok, enough praise in one email.
Keep up the good work
— Gary Cohen
We appreciate the kind words. It is true that we were very fortunate to grow up in a family not only involved in the industry but in so many facets of the industry: Import, export, wholesale, retail, growing, restaurants. It gave us an unusually broad perspective.
Yet, we would have to say that we really learned the most at retail. Being right there at the point where consumers intersect with the product taught us a great deal. We remember the old 3-lb. baskets of mushrooms, and it was our job to pull them from the cooler and open them so customers could buy.
It was really a fascinating study in consumer behavior. Every time we brought out a new basket, the customers, excited to see the fresh product and noting the beautiful while mushrooms, would immediately buy. Depending on how many customers were in the store we sometimes had to open two or three or more 3-lb. baskets.
Each time, though, there was a last basket and the customers would buy a pound-and-a-half and we would put the rest of the basket on the shelf.
Sales would slow significantly and there was always a question mark: Should we leave that basket out there, hoping to sell that last pound and thus reduce our shrink, or do we bring out new baskets and maximize sales.
In the end, our math found that selling more was more important than reducing shrink. We were often tempted, however, to take the mushrooms in the back room, combine a few baskets and come out with “new” mushrooms that were really repacked. In many cases, we thought it was the theater of bringing out the fresh mushrooms, more than any actual product quality advantage, that enticed consumers.
Today, we would think it would be good to constantly bring out new mushrooms and sell the open baskets to the deli for use as a cooked product in prepared foods. But, of course, we now have pre-packed mushrooms. They probably take better care of the product and are easier to handle but they offer less romance.
Consumers liked our theater in bringing out those old baskets and opening them before their eyes to reveal fresh mushrooms. They liked having a produce guy to talk to, but labor is expensive and pre-packaged mushrooms more efficient to display. There is a gain there, but some loss as well.
To our minds, the growth in packaging and decline in seasonality are mixed blessings for the produce department.
Many thanks Gary Cohen and Natural Value for this nice letter.
Our piece, Got Produce? Schnuck’s Mike O’Brien Tries To Add “Balance,” brought this commentary from a principal at a search firm focused on food, agribusiness and the life sciences:
Regarding this quote from the letter Mike O’Brien submitted to the Perishable Pundit:
“I don’t know for a fact whether PBH has impacted produce consumption because I don’t know what the results would have been had they not been around.”
With all due respect, it sounds like the government telling you they can’t show the benefit of their expensive and burdensome regulation, but who knows what the situation would be without it?
— Fred Medero
Kincannon & Reed
We appreciate Mr. Medero’s weighing in on the issue and, indeed, we think he points to a key issue regarding any consideration of a generic promotion order for fresh produce: If it was to pass, how would we evaluate whether it was a success or a failure?
To us, Mike O’Brien’s comment deserves praise for its candor. Neither Mike, nor anyone else, can state definitively if the work and money spent by the Produce for Better Health Foundation has increased consumption because there is no control group, not exposed to PBH, to compare against.
Now whether this lack of ability to ascertain success or failure leads one to say, “keep going,” or “cancel the program,” seems to be mostly a matter of personal disposition.
To us, the past is the past… the bigger issue is what are we doing to ensure that this much larger generic promotion program is created in such a way that success or failure can be verified.
To put it another way, if it were to pass and then in three years or five years we had to vote to renew the program or cancel the program, on what basis would we determine if the program had succeeded or failed?
Part of our disappointment at the proposal for a new generic promotion program is that it provides no metrics for any future evaluation.
In fact, as Mr. Medero’s letter alludes to, the future is very predictable: When the time comes to vote to renew the generic promotion program, the advocates will urge a ‘yes’ vote. They will do this no matter what the state of consumption. If consumption has gone up, they will claim, without any evidence, that it was their program that brought about the increase in consumption.
Should consumption be flat or have fallen, the advocates will claim, once again without any evidence, that the situation would have been much worse without their program.
This is not a very business-like approach to an expenditure that over the next five years would involve $150 million!
At an absolute minimum, we need good studies done of what consumption can be expected to be in the absence of a generic plan and then we need legitimate, third-party academic projection of how this plan is expected to alter these numbers.
If the projections don’t show improvement sufficient to justify the program, that is an excellent reason not to proceed with the program.
If the program proceeds, at least we will have established metrics against which its success or failure can be assessed.
Many thanks to Fred Medero and Kincannon & Reed for helping us think through this important issue.