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Wall Street Over-Analyzes
Wal-Mart Woes

The Wall Street Journal ran a piece entitled Wal-Mart Era Wanes Amid Big Shifts in Retail. The piece is subtitled, Rivals find Strategies To Defeat Low Prices; World Has Changed. The thesis of the article: "The Wal-Mart era, the retailer’s time of overwhelming business and social influence in America, is drawing to a close."

The article is interesting because it goes beyond noting that Wal-Mart has some challenges to claiming that fundamental changes are reducing the influence of Wal-Mart both at retail and on the broader society:

“All retailers have a formula. They grow as far and as fast as they can with that formula,” says Love Goel, a former Fingerhut Cos. executive and now chairman and CEO of Growth Ventures Group, a Minnetonka, Minn.-based private-equity firm that invests in retail businesses. Wal-Mart has outgrown its supercenter recipe, but efforts to win growth from more affluent consumers have fallen flat, he says. “They have hit the wall.”

Wal-Mart declined to make an executive available for an interview and declined to respond to written questions, citing an upcoming meeting with Wall Street analysts.

Business history is littered with companies that grew to enormous size and used their girth to re-arrange the world to fit their strengths. Think International Business Machines Corp. in the mainframe business, General Motors Corp. in autos, or Microsoft Corp. in personal computers. For a time, their success bred an ecosystem that sustained their status. In the 1970s, independent software companies piggybacked on IBM’s mainframes, resulting in greater demand for mainframe computers.

Such orchestration can produce solid growth for decades. But it can also produce corporate blinders. Over time, IBM’s grip on the corporate data center left it unable to anticipate the decentralizing effects of personal computing. GM’s knack at brand creation and frequent model changes left it vulnerable to the incremental quality approach of Japanese auto makers. Microsoft was so busy cramming features into its Windows operating software that it lagged others in the shift to the Internet. Each remains among the top in its industry; yet each has relinquished the role of industry definer — IBM to Intel Corp., GM to Toyota Motor Corp., Microsoft to Google Inc.

Wal-Mart’s great insight was perfecting the so-called “value loop” in retailing. At its most basic, the system works like this: Lower prices generate healthy sales gains and profits. Some of those profits went into further price cuts, generating more sales. The lower the price, the more consumers flocked to Wal-Mart.

But the value loop is beginning to unravel. For 10 years through 2005, Wal-Mart’s sales gains at stores open at least a year averaged 5.2%. So far this year, its comparable-store sales, a measure of market share, is up just 1.3%. The pricing gap between Wal-Mart and rivals has narrowed, and more customers are now choosing convenience over wading through a supercenter.

The piece attempts to identify precisely what has changed that is causing Wal-Mart so much trouble. First the article points to a “more fragmented world” as the problem:

In some ways, Wal-Mart’s loss of clout is a reflection of a more fragmented world. Retailing is a mirror to how we live and work. Big-box stores thrived by selling highly recognizable national brands, which themselves were fed by two phenomena: the growth of mass media and freeways, which encouraged large stores in remote areas. Stores and brands together achieved scale efficiencies that allowed them to overwhelm local chain stores and regional brands.

Then the article points to the Internet as the problem as, supposedly, this makes Wal-Mart’s assortment less impressive:

But the Internet is transforming the retail definition of scale. The once-stunning compilation of 142,000 items found in a Wal-Mart supercenter doesn’t seem so vast alongside the millions of products available on the Internet. At the same time, the cost of creating and sustaining a national brand is rising because of media fragmentation. Niche brands, created by Internet word of mouth, are winning shelf space and sapping profits required to fund big brands’ advertising.

Another possibility is that retailers are opening their own stores:

Manufacturers such as Apple Inc. and Phillips-Van Heusen Corp., lacking the retail distribution or presentation they crave, are opening their own stores. One result is that retail giants hold less sway over their customers — and over their suppliers.

Wiley competitors are another problem:

Grocery-store chains such as Kroger are resurging on sales of prepared or semicooked meals, which people can grab on their way home. Cincinnati-based Kroger projects sales at stores open at least a year will climb between 4% and 5% this year, on top of a 5.3% increase last year.

Thomas Kim, a financial analyst for a St. Louis scrap-metal firm, describes his family as frugal shoppers who check prices on the Internet. But he and his wife most often shop in local retailers. “It’s the convenience factor,” says Mr. Kim. His family avoids supercenters, describing them as too large and too crowded.

When Wal-Mart pushed heavily into consumer electronics earlier this decade, many industry observers expected it to flatten electronics chains. But five years ago, Best Buy Co. began aggressively marketing installation and other services alongside flat-panel TVs and PCs. Last year, Best Buy’s total sales rose 16. Wal-Mart, which has struggled to sell big-ticket HDTVs, has only recently begun selling installation services at a few stores using an outside supplier. It doesn’t break out consumer-electronics sales, but analysts estimate sales last year rose 7.6% to $22.6 billion.

Melissa Morris says Best Buy won her loyalty by gladly accepting a notebook PC return and having trained sales clerks. “I go to a store that specializes or has associates there that know about it,” she says. The Erie, Pa., sales executive refuses to go to Wal-Mart, citing its crowded aisles and hurried atmosphere.

Best Buy and specialty retailer PetSmart Inc., which touts pet grooming and kennel stays, put hard-to-copy services at the forefront of their pitch, says Howard N. Jackson, president of retail advisers HSA Consulting Inc., Knoxville, Tenn. “They realize the best way to win a fight is to make sure you don’t get in one,” he says.

Wal-Mart has long sold prescription drugs, setting up its pharmacy business in 1978. But national drug chains CVS Caremark Corp. and Walgreen Co. reacted by redefining their role and selling basic health services, such as school physicals, diagnostic tests, and flu treatment, alongside drugstore wares. CVS and Walgreen each acquired in-store clinic operations, redefining the pharmacy business as basic health-care centers.

Same-store sales at CVS and Walgreen are running about double that of Wal-Mart this year. Wal-Mart has begun offering leases to clinic operators.

As Wal-Mart becomes less important, this article claims that manufacturers are working more with other retailers:

As Wal-Mart’s influence erodes, so does its allure to manufacturers. Burt P. Flickinger III, managing director of retail consulting firm Strategy Resource Group, says Wal-Mart now takes a back seat to regional grocery and national drug chains when it comes to striking deals.

He says some manufacturers now sell their wares faster at other retailers. “Four of the top 10 consumer-products companies say they can move merchandise faster with Walgreen and CVS,” says Mr. Flickinger, who came up with the estimate from his talks with consumer-products firms. Such retailers have been rewarded with lower costs and better sales gains.

The change is apparent at PepsiCo. Wal-Mart is PepsiCo’s largest customer world-wide, accounting for $3.16 billion in sales of drinks and snack foods. But earlier this year, PepsiCo opted to launch Fuelosophy, a new energy drink, at Whole Foods, a high-end supermarket chain.

“We thought that was the best place to introduce and test it,” says PepsiCo spokesman David DeCecco. Whole Foods customers’ “health and wellness” profile better match that of likely Fuelosophy buyers than Wal-Mart’s, he says. He declined to name which other retailers were considered for the rollout.

In fact suppliers, according to this article, don’t even listen to Wal-Mart anymore:

Wal-Mart’s loss of influence can also be seen in logistics. In 1984, Wal-Mart’s decision to embrace bar-code scanners in its distribution centers and stores helped quash the use of a less-efficient technology then used at Sears, Roebuck & Co. and other retailers.

In 2003, the retailer brashly jumped onto the next big logistics technology, called radio-frequency identification, and mandated big suppliers begin slapping RFID tags on products shipped to its warehouses. Wal-Mart installed tag readers at warehouses and stores, hoping to further automate warehouses and lower inventory costs.

Wal-Mart quietly dropped the mandate earlier this year and refocused its development after suppliers complained of the high costs and lack of a return on their investment in the new technology. While the company says it’s pushing ahead, Wal-Mart says it realigned efforts to focus on areas where the technology offered the most promise, such as assuring vendors’ promotional displays are properly deployed in its stores.

Wal-Mart wasn’t able to demand big suppliers continue investing in a technology that was raising their operating costs, says Ken Rohleder, president of Rohleder Group, a Louisville, Ky., supply-chain consulting firm. “There was a time when they could have dictated anything,” he says.

Though the thesis is intriguing, the article is very weak. For example, although there are studies indicating that this year, for the first time in many, Wal-Mart’s total retail market share will fall slightly as Wal-Mart’s percentage sales growth in the U.S. will be less than the percentage growth of total retail sales, the article doesn’t mention theses studies and offers only very weak anecdotal evidence that Wal-Mart’s share of business is actually declining. In reality Wal-Mart’s market share — on products it sells — is continuing to climb. What small declines there may have been in the share of sales of some big multi-national consumer packaged goods companies that go to Wal-Mart globally is probably explained by Wal-Mart’s decision to sell its operations in Germany and South Korea.

Its analysis of causes is even weaker. No evidence is given that the old trends favoring national brands have suddenly abated. Yes, there is more interest in artisan food, but we are talking about tiny portions of the nation’s expenditures.

Manufacturers have opened stores for a long time and, typically, the ones that do so are higher end and so their independent stores would likely hurt Wal-Mart’s competitors more than Wal-Mart.

The Internet’s vast array of products hardly seems relevant except in very specific areas such as music and books. It is hard to imagine that the Internet has much to do with Wal-Mart’s problems.

Competitors that can’t compete on price do try to compete on other criteria. It would be surprising if they don’t get better at this over time, if for no other reason than that those who are not successful tend to go out of business. Still this is less effectively competing with Wal-Mart than it is effectively avoiding competing with Wal-Mart.

Pepsi’s decision to launch an energy drink at Whole Foods tells us nothing about Wal-Mart’s influence on manufacturers. It speaks to the fact that Wal-Mart doesn’t cover all demographics equally.

And as far as RFID goes — if Wal-Mart requires RFID, every vendor will do RFID. But why should Wal-Mart force vendors to do things that are not currently economical?

We would suggest that Wal-Mart’s problems have three primary causes:

  1. Inconsistency in retail execution. As Wal-Mart has grown, it has reached into worker pools with different attitudes and experiences. Consistency is always a problem at retail but to a much greater extent at Wal-Mart than at Safeway or Kroger. Some of Wal-Mart’s stores are wonderful; some are dirty. Some are stunning in assortment; some are always out of stock. Some seem to hum along; others have interminable waits at the cashiers. Some employees are kind; some are nasty and mean.

    If it wants to succeed, the single thing Wal-Mart should do is focus on consistency of retail execution. The reason the sustainability and Vogue ads and all that stuff are a distraction is because too many Wal-Mart stores do not excel at the basics — and so these other factors, such as corporate image, don’t even have a chance to kick in and woo consumers.
  2. Wal-Mart is starting to get squeezed in the middle. Stores such as Aldi and Supervalu’s SaveMart are making Wal-Mart a second choice for those who live paycheck to paycheck.
  3. Wal-Mart has not learned how to effectively translate its suppliers and customers into an effective political force, so it is not able to open supercenters in many markets where they would be very profitable.

Wal-Mart clearly has issues, and this article diagnoses some correctly. But the causes are simpler than the piece points out. You can read the whole article here.

What Fuels Trend Toward
Convenience Store Concepts?

Carrefour, the world’s second largest retailer after Wal-Mart, announced that it is launching a convenience store concept in Poland under a banner that translates as “5 Minutes.”

Poland itself is a substantial market and so this could turn into a lucrative addition to Carrefour’s already substantial operations there. Just last month Carrefour announced the opening of its 51st hypermarket in Poland.

More directly relevant, though, is that this seems part of a worldwide trend. We’ve chronicled this many times before, including our piece, Small Store Concepts Not Solely A Tesco Idea — Check Out Wellcome’s Express Fresh Model, which was built around Wellcome’s “Express Fresh” banner in Taiwan. Although Kroger does own a convenience store chain, the idea is best represented in the U.S. by Tesco’s imminent opening of its Fresh & Easy Neighborhood Market concept.

Opening of the 51st Carrefour Hypermarket in Cracow — On September 12th, 2007, Carrefour Poland inaugurated a new retail outlet in Cracow. This outlet is Carrefour’s 51st hypermarket in Poland with 2,200 sq.m of sales area.

What is driving this move to small store formats? Five things:

  1. Political difficulty securing sites for large stores. In many parts of certain countries, anyone who proposes a supercenter size store is guaranteed a lawsuit and, at very least, substantial delays in opening.
  2. The lack of availability of large sites in most urban areas. Even if the politics were friendly, there are just not many sites available in the inner suburbs and cities.
  3. High gas prices are causing consumer resistance to the long trip required to go to a more distant, larger store that draws from a larger radius.
  4. As fresh foods have become more important, more consumers need to fill in more frequently. This makes going to larger stores that are further away untenable.
  5. The “green” movement is leading at least some people to want to walk or bicycle to a neighborhood store.

Yet, most conventional supermarkets only draw people from a couple of miles, so how much closer can these smaller markets really be? Especially in our suburbs, where zoning typically separates commercial and residential property, so that the only “strips” where a store can be are on a main road?

Much depends on the degree to which consumers will, in fact, be satisfied with much smaller assortments. As Kroger’s CEO has pointed out, a small store isn’t convenient if it means you have to do a second trip.

There is a lot of indication, though, that many products in conventional supermarkets barely move at all. What we don’t know is how much people value variety and assortment, as a value in and of itself, as opposed to merely having the product they wind up buying.

In other words, not that many people buy red convertible sports cars, but having them in the window does seem to sell a lot of sedans and minivans.

Don’t Ignore Aldi

Sometimes the best way to understand what a chain is doing nationally is to identify the impact it is having locally.

The Cincinnati Enquirer published an article entitled, Aldi’s Big Move: No-frills, Low-Price Stores Appeal to the Affluent, Too, which details how this deep discount chain is operating in Kroger’s hometown:

In a grocery-store market filled with Marketplaces, Supercenters, full-scale organics stores and boutique specialty grocers, plain little Aldi is emerging as a powerful player.

German-owned Aldi has 12 stores across Greater Cincinnati and Northern Kentucky. The chain has a less-is-more approach to grocery shopping, and its stores don’t even have shelves. Instead, shoppers lift their groceries out of boxes still on the wooden pallets that were pulled straight from delivery trucks.

It carries a limited number of national brands, stocking mostly its own private labels.

But, with its distinctive blue signs and small stores served by only one or two check-out clerks, Aldi’s strategy has created a loyal core of customers, a surge in revenues and plans for even more growth in the region.

“Their prices are better,” said Edgar Russell, 43, a Kennedy Heights resident who recently returned to his hometown of Cincinnati from St. Louis. “I think their food is fresher; and usually, you don’t have to wait in a big, long line to shop.”

While budget-conscious shoppers are Aldi’s bread and butter, two new Aldi stores opened in the region last week in more affluent neighborhoods, in Blue Ash and West Chester — an indication the company sees growth opportunities beyond its sweet-spot demographic of low-income shoppers.

One of the stores opened across from West Chester’s tony gated community Wetherington.

“Early on, even 15 years ago, we were definitely in class B real estate market,” said Dan Gavin, divisional vice president who is based in Springfield. “But in the past year we have moved our real estate to Class A sites. All types of incomes like to save money. And we want to be by our competition.”

Martha Kidd, 69, a Mason resident since 1965, is tickled that she will be able to shop closer to home at Aldi because of convenience and to save gasoline.

“We used to travel all the way to Middletown once a week to go to Aldi, and I’m glad I don’t have to do that anymore,” Kidd said. “Their prices are very, very good. And the quality is decent, too.

“I don’t think there’s anything I’ve bought there that isn’t tasty.”

Last week, she filled up a shopping cart with instant potatoes, cheese, shrimp, bread, Danish rolls for her husband, Mexican-style chili beans, chicken strips, a coffee drink, salad dressing, lettuce, peanut butter, canned pears, cereal, cookies, relish, green beans and canned cream corn.

“I had to rest after all that,” she said.

Aldi is not finished expanding in our region with new stores. Gavin said the company is looking in Lebanon, Covington, Alexandria, Milford, Blue Ash and Anderson Township.

“I’ve been to Beechmont Avenue two or three times myself to look,” Gavin said.

Nationally, Gavin said the company plans to open 65 stores in 2007 — employing eight to 10 people at each — and about 100 more stores in 2008. Each store is 16,000 square feet, so that means the company will build and open 2.6 million square feet of retail space every two years — a pace of 110,000 square feet of retail space every month, which is about the equivalent pace of one new Kroger store each month and a Wal-Mart supercenter every two months.

Few grocery markets are immune from Aldi’s encroachment — not even the hometown of grocery titan Kroger.

Even though Kroger rings up about 59 cents of every food dollar spent in Greater Cincinnati, there is still room for competition. Kroger, which has 78 stores in Greater Cincinnati and Northern Kentucky, competes with discounters like Aldi by offering private-label foods created or processed at one or more of the company’s 42 manufacturing plants.

Aldi, on the other hand, has no food plants, limited hours and stores that look more like a miniature warehouse than a corner grocery.

“I run down here to get things I need for the lady I take care of,” said Oakley resident Shawn Pearson, 42, referring to the Aldi in the Avondale Towne Center. “And it’s nice that it’s right down the street.”

Aldi, whose parent company’s name was derived from Albrecht Discount and also owns Trader Joe’s, is dramatically different than grocers such as Kroger or discounters such as Target or Wal-Mart, which sell food as well as household accessories, furniture and other goods.

Because products are in cardboard boxes on pallets instead of shelves, restocking is easier and easier on payroll. There are no free shopping bags, no clerks to bag groceries and no credit cards or checks accepted.

At Aldi, cash is king.

The company says its newest outlets here are flagship stores that offer a broader selection — wine and some perishables, for instance — than what is found at most Aldi stores.

Volume of goods sold is the key to the Aldi approach, said Stephen Moehrle, associate professor of accounting at the University of Missouri-St. Louis.

“They will cut the price and take the margins down further than a popular grocer,” he said. “They can do that because they pay less for real estate, have limited hours and far fewer staff per customer. It’s an example of a very bright business model.”

Aldi is surfing in the wake of Wal-Mart, said one analyst.

“They are feeding off the Wal-Mart and Sam’s Club shopper,” said Al Ferrara, the New York-based partner and retail expert for BDO Seidman LLP, a leading accounting and professional services firm based in Chicago. “For a no-frills customer and from a merchandising standpoint, finding the right real estate is the most important thing Aldi can do.”

Smaller stores mean less capital is tied up in land, bricks and mortar — and that leads to lower prices.

“Many people will pay more money for convenience, but that may not be the case across middle America, where saving $20 is very important,” Ferrara said.

That $20 in savings means a lot to Russell, a Seven Hills High School graduate and Marine Corps veteran who has returned to town to be close to family and to set down roots.

Until he finds a job, he said, he will keep shopping at Aldi. “Financially challenged” is how he describes his plight.

“You can save money here,” Russell said, as he surveyed the store. “You may not be buying Hershey’s chocolate, but the chocolate you will be buying for a kid will taste great, and they’ll love it. They don’t care if it’s Hershey’s or not. They just want the chocolate.”

Some points to note:

  • The flagship stores are carrying more perishables.
  • Some stores are being located in affluent areas.
  • They now are often going for prime real estate, instead of B sites.

Hmm, deep discounts, small footprint, located in neighborhoods that span the demographic spectrum, increased emphasis on fresh, heavy use of private label.

If you cross a Wal-Mart Supercenter with one of Tesco’s Fresh & Easy Neighborhood Markets, do you get an Aldi?

Peri & Sons Talks To Pundit About Ag Chemical Incident

One minute Peri & Sons Farms is celebrating its ability to grow 150 acres of different lettuces in Nevada’s Mason Valley. Next thing you know, the company — reported to be the largest white onion grower in the United States — suddenly finds itself the focus of news reports with headlines, such as Field Gas Irritates 125 Farm Workers and Ag Chemical Incident Sends Nearly 120 to Hospital and 125 Nevada Farm Workers Sickened By Chemical and Chemical Fumes Overcome 130 — Yerington Farm Workers Afflicted.

One of the lessons is how deceptive headlines can be. The 120 people who were “sent to the hospital” were actually sent to a triage center set up in parking lot of a medical center. If the triage center happened to be set up in the parking lot of a high-end spa, we suppose the headline would have read “Ag Chemical Incident Sends Nearly 120 to a Luxury Spa.”

Wanting to both understand the substance of what happened and to draw lessons from the experience for the broader industry, we asked Pundit Investigator and Special Projects Editor Mira Slott to learn more:

Pam Peri
Executive Vice President
Peri & Sons Farms
Tim Cummings
Director of Marketing and Public Relations
Peri & Sons Farms
Russell Wedlake
General Manager and Safety and Training Officer
Silverado Ranch Supply
Ed Foster
Regional Manager
Plant Industry Division
Nevada Department of Agriculture

Q: In addition to food safety, the industry must worry about the safety of workers. According to media reports, farm workers at your company were sickened by an agricultural fumigant used on an adjacent field. Can you tell us what happened?

PAM PERI: I’m happy to explain the situation to you. The most unfortunate part is that it’s been blown completely out of proportion. It’s been a feeding frenzy for people in their ignorance. This really was a minor event that was handled poorly by local management authorities. When the emergency response services came out, they jumped to conclusions. They pulled the trigger calling in ambulances and fire engines, and shutting the roads down. God forbid someone’s house was burning down; all the fire fighters were here.

We’ve had every entity here. We had people from San Francisco’s EPA drive all the way here. It was astounding. We spent the whole morning with the Nevada Department of Agriculture. Chuck Moses, Environmental Compliance Section Chief said we could release to the press that a full investigation had been done and there were absolutely no violations or wrong doing. What they found was that we went beyond the call of duty in every respect and if anything our company has been a model in worker safety. We’re debating whether to do another press release because in some ways it just draws more attention to a small incident that was not newsworthy and leaves us vulnerable to another inaccurate, sensationalized story being published.

Q: What in the press coverage was fallacious or exaggerated?

PAM: I’m so frustrated with the media and the erroneous and misleading coverage that I called the editor of the Reno Gazette Journal to give him a piece of my mind and set the record straight. I said what you write has a gigantic impact on the agriculture industry. We’re deeply disturbed and upset about this situation because of the way it was reported. You confuse consumers. There are environmentalists that don’t have an in-depth understanding of the reality of pesticide application. You get ranting maniacs who don’t know the facts and start firing bullets. We already have people throwing around accusations and trying to hurt our reputation and capitalize on the situation for their own gain, which deeply saddens me.

Our food safety and harvest agricultural practices receive superior ratings from reputable third-party audits, and we were one of the first companies in the U.S. to receive clean food standards certification based on criteria set by Scientific Certification Systems. We use a process called NutriClean as part of our food safety and quality program [Editor’s note: you can read about Nutriclean here.] All our products are tested and certified to be entirely 100 percent pesticide-residue free.

We are a very large user of the guest worker program. All these employees were H2A guest workers legally here. We’ve had all kinds of immigration craziness going on, so that’s an important point to make. When the authorities went to speak with the workers, they all had worker protection cards and proof of all training for chemical exposure. This kind of training certification is not typical. We work hard at implementing the best worker safety procedures and Chuck Moses at the Department of Agriculture commended us for that.

Q: Is it true as reported that the implicated chemical was chloropicrin, a tear gas used as a killing agent in past wars?

PAM: The report about the use of the pesticide in World War One certainly was sensationalist. They could have done an entirely different spin. What they did was grab on to the use of this chemical as a wartime killing agent. This chemical has been used for many, many years as a safe fumigant that dispels very quickly and harmlessly into the atmosphere. It’s a common application, used heavily on strawberries.

TIM CUMMINGS: This wouldn’t have even been a blip on the radar, but for a few factors — Pure ignorance about what goes on in the world of agriculture, communication breakdowns, and basic over-reactions. Some poor decisions resulted in a small problem spiraling out of control.

The reality is chloropicrin was used in war in high concentration gas form for adverse effect. The comparison in the media was simply unfair. It is applied in agriculture as an injection in the ground usually 12 to 15 inches as a liquid form to kill different fungus when crops have been rotated. It is always applied late at night and it dissipates quickly in less than 12 hours.

There are laws that it can’t be used if there’s a temperature inversion. In this case, it was applied a day and a half before. The inversion started after it had been applied. There are protections in the law to deal with adverse weather. This incident was a rare occurrence that no one could have predicted.

For the media to make it look like we were gassing our employees is unconscionable. We follow the law to the letter and so does our applicator. More importantly, as it relates to safety of our employees, the company is beyond reproach, taking a leadership role in this area.

Q: In what ways?

TIM: We are one of the largest H2A guest worker program employers. When you have 1,100 people working on your farms over the years, you will have injuries, but if a medical problem ever arises, we pay for the treatment and take care of the workers and have done this for years since the company’s founding. Employees take a safety training class before they go out in the field. They also have ID cards.

We are dealing with food product and must be extra careful. If you come out to our fields you can see the food safety measures in place. [See photos that accompany this piece]. The first picture above represents some of our employees hand-harvesting in a field. If you look closely, you will find a 500-gallon container of potable drinking water that is in close proximity of our employees at all times. This is an excellent way to make sure that our employees are well hydrated and the water can also be used for emergencies if necessary.

The second picture above is one of our portable washroom facilities. Please notice that there is a soap dispenser, plenty of water for washing and rinsing, paper towels and food sanitizers on every trailer. We have over 100 of these trailer facilities present in the areas where field employees are working and each is maintained and cleaned twice daily. Also please notice that each of these trailers has a full belly plan that is designed specifically to contain anything that may drain from it while on location. These portable washroom trailers are exclusively designed, built and used by Peri & Sons Farms.

Q: How many workers actually became sick from the inversion problem? According to media reports, more than 100 employees were sickened and treated at a medical center.

PAM: The media report was wrong when it said 125 workers were sickened and treated at the medical center. No one was admitted to the hospital. There were some 12 individuals that received an eye wash and had a little bit of respiratory irritation, which completely went away when they got fresh air. They were all back by 1:00 in the field harvesting.

TIM: A triage center was set up outside and workers were told to go home, remove their clothing, take a shower and go back to work. All they needed was fresh air to get it out of their system. The clinic did observe one or two guys for a few hours. For whatever reason, they had other conditions that affected them more strongly. The EPA, OSHA and the Department of Agriculture all came out and said there were no problems here, no rules were broken, no one was injured. It’s aggravating to get negative press when the Department of Ag says we’re a model benchmark as it relates to food safety and employee safety.

Q: Could you give a more detailed account of why you had a problem in the first place? And has anything like this occurred before?

PAM: The problem was a complete fluke due to an unexpected temperature inversion. It’s like controlling lighting. We’ve been in business since 1979 and never had an occurrence like this. This situation was one where Mother Nature affected the way the chemical dissipated. In agriculture, one of the risks is that Mother Nature can play tricks. You can have all the right mechanisms in place and do all the right things.

Q: What are the protocols and regulations?

PAM: The fields where we were using the product were more than a half-mile apart from where product was being harvested. It far exceeded the required distance from the EPA and Department of Agriculture. We use a third-party application company, Silverado Ranch Supply. Russell can tell you more about the process.

RUSSELL WEDLAKE: There are specific regulatory guidelines and detailed application procedures on how deep to go, how far away from residential areas, etc., on the product labels. We’ve been doing this for 11 years and never had problems. I worked with the state department of agriculture, and they said everything we did met or exceeded standards and regulations and the problem was Mother Nature. The state requires a 30-foot buffer between sensitive areas.

If you treat a field within one-quarter mile where people are going to be working, you have to notify the workers and provide water, soap and paper towels in case of accidental exposure. This is standard procedure at Peri & Sons for food safety purposes, so the workers always have these supplies available, even though in this case it wasn’t required. Peri & Sons Farms is one of the leading companies in terms of being proactive in safety and quality.

We actually do the application underground, 12 inches deep, and then it’s covered up with three different pieces of equipment. It slowly changes from liquid to gas and eventually releases out of the soil. It does this at a slow enough rate to mix with the air and dissipate safely. It’s so diluted it’s not even detectable.

We started two days before the inversion, completed application by noon on Tuesday September 25, and the fields we treated were posted to stay out. Workers were taken to the farm at least a half mile away from there to harvest at 7:00 the next morning September 26, and once they had unloaded they started working. Some started noticing itchy eyes and itchy throat and by 7:25, the buses were being loaded and workers removed from the area. There were probably 600 guys out there and 16 to 17 buses.

Some guys were complaining of burning eyes, nose, throat and nausea and were taken to the clinic. We don’t have a hospital here; it’s a medical center. All were looked at and released within a short period of time, but the reports that a hundred or so guys were treated in the clinic is misleading. Almost all were examined outside the clinic in the parking lot; medical staff checked workers’ breathing, their eyes and ears and they were released. Ambulances had been called as a precaution but were never needed.

Q: It’s still not clear to me why the media got it so wrong. Did you communicate with reporters before the articles came out? Why did you wait to issue a press release that clarified all the issues until after the damaging stories went over the wire service?

TIM: The story broke immediately. It’s a local incident so how the heavens did this get to the national media so quickly? And then I find out the guy who runs the emergency response team in our community called media outlets right away. He’s a media hound, and unfortunately he was ignorant of the issues. A television news station decided to use it as its lead report. Adding insult to injury, I had worked there earlier in my career. By the time I called the news media, there were already erroneous reports circulating that people were passing out on the field. No one passed out.

Q: Where did that rumor start?

TIM: We had one worker who was upset and panicked. Somebody from our company hearing the news second-hand called emergency and said people were passing out in the fields. It was a simple breakdown in communication. This has been an agricultural community for 200 years. You’d think emergency teams would know the short-term and long-term effects of these chemicals. For other farms to learn from our experience, be sure emergency teams in your area know what chemicals you use and the remedies.

Q: In a RenoGazette Journal article about the incident, there is a reference to similar incidents that occurred in the Western Nevada region, creating additional sensitivity in this case. I thought this incident was a rarity.

TIM: We saw that and don’t know what they’re talking about. We don’t know of any other incidents. We’re sure there haven’t been any others in our area. I asked Chuck Morris at the Department of Agriculture about this, and he said he didn’t know what this was in reference to and wasn’t familiar with any other incidents. He said that a lot of times these chemicals are being transported in big orange canisters with skull-and-bones warnings and people ask questions.

The Department of Agriculture was fielding phone calls from every news agency asking all kinds of questions that were unrelated to this incident looking for a silver bullet to get a better story. The Reno Gazette attributes the comments about these similar incidents to Ed Foster at the Department of Ag. He might be able to shed more light on this.

ED FOSTER: I was misquoted and tried to rectify that. I had to deal with calls from the EPA on a national level asking about my comments in this article. Here was the crux of it. The bottom line was we were paying close attention to this other exposure in the region this summer. It wasn’t the same fumigant and it had no relation to this incident whatsoever.

It’s difficult with the media here. These smaller media outlets employ one reporter who’s also the dishwasher, bookkeeper and janitor and also trying to get a good story. He’s doing the best job he can in gathering and disseminating information in an entertaining way, and he’s looking for a hook or an angle. Information was coming out fast and furious. I can see how information got misconstrued.

When I think back on this, I got a call from someone at the health department, who we work with on many different issues. She called me to give me a heads up that this kid was doing an article and he was getting information off a scanner (Editor’s note: A radio with access to police, fire and emergency band communications). The fire chief was the instant commander feeding information he was receiving from different sources that was turning out to be wrong.

News came out that there were three unconscious people. There were no unconscious people. It was being reported that 135 people were treated in the hospital for chemical exposure. That was absolute crap. News like that causes pandemonium. Initially eight people were taken from the field and examined. After that, four other people were examined because Peri & Sons was doing the most responsible thing you could do.

I’ve worked my way up in this agency in all different aspects and have dealt extensively with the Peri’s. Speaking as a regulatory officer, they’re a savoir in the Valley. They know what they’re doing. The Peri’s are superstars.

Q: In the end, were you able to clear up misperceptions and get the right information out to the press?

ED: To let people know how news media works, I had an NBC affiliate interview scheduled. The T.V. station was trying to build on this incident and my intention was to control the coverage and get the correct story out. Then a huge immigration story broke and the Peri & Sons incident was put on the backburner. Not one word about it was breathed after the illegal immigrant story took hold. Low and behold, a sweep on illegal immigrants was a more exciting event to cover.

In three weeks, we’ll be issuing a press campaign regarding two programs we have that are very public and very sideways with variables we can’t control involving livestock. We anticipate we’re going to get nailed by the press. We have to get the message out with science and common sense.

Common sense and level heads could have prevented the Peri & Sons incident from turning into complete mayhem.

Q: What other advice can you share with our readers to alleviate such problems in the future?

ED: I’m not an official public relations person, we don’t have funding for this independent function, but I’m in a position to speak with the press. Basically I gave the company line on how I saw this thing unfold. I was getting my information off the Internet, and it was freaky to see the false reports. Cell phone connections aren’t always good in the Valley. We had one inspector that day on site. I wasn’t able to meet directly with people to get first-hand accounts, which would have helped me to better assess the situation. We could have done this better.

PAM: Agriculture companies can avoid this by working more closely with third-party applicators and local emergency teams. If the emergency team had used their head and good judgment and asked what chemical was used, they wouldn’t have had to send all those workers to the hospital when all they needed was fresh air. The emergency response unit created alarm and havoc for no reason.

TIM: At the medical facilities, they didn’t have a translator who could speak Spanish when 50 percent of the community is Spanish-speaking. We need to look at our responsibilities for training emergency response teams and making sure the chain of communication doesn’t break down and then we can curtail the outcome.

Q: In the Associated Press report, it says the company refused questions when contacted by the AP. I’ll read you the exact words: “No comment,” said a man who answered the phone and identified himself only as Nathan. He replied, “not important,” when asked his last name and job title, before hanging up.”

PAM: Part of my frustration with the Reno paper and other reports is that we were contacted for comment but what we said was as soon as we gathered the facts we would issue a press release. We did not want to give out misinformation.

TIM: In one respect, you have to tell employees not to talk to the media. You want one consistent message. We instructed them to direct media questions to me. Nine out of 10 times this would have been sufficient and wouldn’t have led to a problem. We’re farmers; we work. We didn’t know until one-and-a-half hours after that the story went national. In the age of the Internet and advanced technology, news travels fast. We got a call from a friend alerting us that we were breaking a story, but unfortunately in this day and age especially, you can’t count on that.

Our press release was sent out sometime after. I submitted it on September 26 after we had a moment to gather the appropriate information. All information was accurate but at that point very basic. This probably would have been much more effective if it had been released earlier in the day but, of course, hindsight is 20/20, and I have learned my lesson.

We actually had clients on site, a big wholesaler in the Midwest. They left here saying what occurred with the media was a joke. They toured the farm and operations all day long and increased their business with us. They thought the reaction was ridiculous, almost a laughing matter. Anyone who was here couldn’t understand what all the fuss was about. That’s why we try to get people to come out, visit our farm and observe our operations, see how we differentiate from our competition, get the personal touch and feel the passion for what we are doing.

Q: Unfortunately, due to the media coverage of this problem, many consumers haven’t had the benefit your guest customers did of seeing the greater picture in order to put this particular incident in perspective What can be done about that?

TIM: If you sell fresh produce, it’s important to have a crisis plan in place. One lesson was more communication from our management. We needed to provide the right information to avoid such a frenzy. All we had to do was put the workers on buses and get them out for fresh air. We need to take some responsibility for that.

RUSSELL: David (Peri), Pam, the lead guy who does the field work and I have discussed scheduling fumigations around harvesting. If there’s a field on a ranch any time close to harvest, we’ll hold off. We don’t want this to happen. No one does.

TIM: After we harvest, we start preparing the earth for the next harvest season. At that time they do fumigant applications. When we have four or five onion fields close to each other, and three or four are harvested, an application could conceivably be close to a field where we are still harvesting. From now on, the timeframe they’ll wait to apply will be expanded as an additional precaution.

RUSSELL: We’ve done some training with the local fire department and emergency services. We’ve discussed getting together with the authorities, the sheriff, emergency response team, and the fire department to go over the procedures, so they’re educated and no longer unsure of what to do if a problem occurs. And they feel more comfortable around the products we’re using and understand the proper response.

TIM: The produce industry needs to do a better job of protecting ourselves. A lot of farms do excellent food safety and employee safety, but the whole industry needs to invest the money. We have one full time employee overseeing food safety and Pam working constantly on food safety and employee safety. The company commits huge financial investments. In the end, responsibility comes down to the produce buyers. They need to require strong and specific food safety programs from their vendors — truly audited by third parties they can trust.

You have to feel sorry for the Peri family. What a mess. Yet the lessons for the broader industry are also clear. There is little point in blaming the media. You can pretty much expect the consumer media to zoom in on the most provocative part of the story. The fact that the gas had been used in war as an instrument of chemical warfare was certainly attention-getting.

Hysteria and overstatement fill a vacuum, and so everyone has to be prepared to communicate the truth, promptly and in context. Also the interview reveals some excellent specific points, such as the need to educate emergency workers on each chemical and how to deal with exposure as well as the importance of having emergency staff that can speak the language of the workers.By the way, if we ever succeed in getting the pathogen issue behind us, we can expect a shift in attention toward pesticide usage and, especially, the effect of pesticides on farm workers.

Many thanks to Pam, Tim, Russell and Ed for sharing their story with the industry and thus giving us all a lesson on the importance of emergency planning and reminding us that we cannot expect that others — rescue workers, the media, etc., — will have an understanding of agriculture unless we make it our job to educate them.

United Fresh Offers
Crisis Training Course

If you read about the Peri & Sons Farms situation in horror, and break out in a cold sweat knowing your own organization isn’t properly prepared to deal with a recall or other crisis that requires dealing with the media, then, quick, call United Fresh.

The association is offering Training for a Recall, Communicating Under Fire:

The United Fresh Research & Education Foundation is offering a new, hands-on educational course, “Training for Recall, Communicating Under Fire.” This two-day training program will focus on helping you understand the fundamentals of a product recall, including your rights and responsibilities, the role of the FDA, how to limit your liability and manage customer expectations. In addition, we’ll take an in-depth look at how to build a customized communication plan in the event of a recall, and how to effectively communicate to the industry, customers, consumers and the media.

At the very least your produce recall team should include management, technical staff and your marketing/communications staff. If a product recall is not properly handled by your entire recall team, it can quickly turn into a crisis situation. This course is designed for everyone on your produce recall team. It will combine recall protocols and communication management principles to ensure that both your technical food safety staff and communication and marketing staff know how to work together effectively and efficiently in a product recall situation.

In addition to the two-day training course, United Fresh is offering a customized media training session. This media training course prepares you for the stresses of a real-life interview, so you know what to expect when it really happens. Our communication experts will teach you how to deliver your messages while being aggressively interviewed under the heat of the camera lights. Take what you learn and apply it to phone interviews, radio interviews and other crisis communication situations.

This kind of training should be part of every company’s food safety program. You can get more information right here.

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