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Perishable Pundit
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Fax: 561-994-1610



Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur

Tesco Under Attack From Waitrose In U.K. As U.S. Rollout Imminent Real Estate Key In Both Markets

As Tesco prepares to open in the U.S. it is interesting to note what its competitors have to say about Tesco in the United Kingdom. Mark Price, the CEO of upscale rival Waitrose has spoken out clearly urging the U.K. government to restrain Tesco’s marketing power and, particularly, to restrict Tesco’s practice of “land banking” in which it buys up lots and buildings thus effectively precluding others from opening stores. This piece from The Telegraph is headlined Curb Growth of Tesco, Demands Waitrose Boss:

Tesco, the country’s largest supermarket chain, has come under heavy fire with rival Waitrose accusing it of being anti-competitive and of aggressively using its vast wealth to keep rivals out of the market.

Mark Price, Waitrose’s chief executive, said he is calling on the Competition Commission to prevent the UK from becoming “Tescoland”.

The Waitrose boss predicted that unless action was taken the country’s high street grocery industry could, in just 25 years from now, consist of just Tesco and Asda.

Mr Price said he feared the retail environment would be very different in years to come, unless the Competition Commission moved to curb the growth of Tesco.

The commission is expected to report the results of its groceries inquiry later this month.

Tesco is reported to have said that it is confident the commission will determine that there is sufficient choice in the grocery market.

The attack from the Waitrose chief comes only a week after market research analysts CACI revealed that Tesco was the most dominant supermarket in 81 of the UK’s 121 postcode areas.

It was followed by Asda which had the largest market share in 19 postcodes.

Last week Tesco unveiled group sales up 9.2 per cent to £24.7 billion, with pre-tax profits up 18 per cent to £1.29 billion for the half-year to August 15. Mr Price told trade magazine The Grocer that Tesco was against competition and used its vast cash reserves to keep other retailers out of the market.

“They are so aggressive and will buy everything to keep out the competition” he said.

“Waitrose, and all the other retailers, often go head to head with them over property, but they have such deep pockets. It is a challenge because there is so little property out there. Tesco has more in its land-bank than Waitrose has trading space.”

Mr Price said he feared the market could be whittled down to just two major players if something was not done to prevent the march of Tesco.

“In 20 to 25 years’ time, I wouldn’t be surprised if it was just Tesco and Asda in the market. I think the Competition Commission needs to do something to stop this turning into Tescoland. The commission needs to realize what is happening.

“The Government should also be concerned about how vulnerable the country would be if all our food was controlled by one retailer.

“They say customers want choice and are choosing Tesco, but people will go to the store that’s most convenient, so if there is a Tesco on every corner, that’s where they will go.”

Mr Price said Tesco also made lives hard for smaller rivals by using its might to sell products below cost.

A spokesman for Tesco said: “Waitrose should know full well it is a very competitive market out there. More than 94 per cent of the population has access to three or more supermarkets. There is plenty of choice out there.”

Normally we are skeptical whenever competitors ask for government help. But the degree to which Tesco uses real estate as part of a retailing strategy is striking. In fact, we have questioned whether Tesco is actually a great operator at all when you take real estate out of the equation. In a piece we ran back in April entitled A Closer Look At Tesco’s Finances we questioned whether, properly restated to exclude returns on owned real estate, Tesco actually makes much money at all:

Tesco CEO Terry Leahy was reported by Reuters as explaining his position this way:

“Tesco has a lot of property, but it is important to remember property ownership is an integral part of retailing and Tesco will always have a majority of its space as owned space.”

Actually, owning real estate is an excellent way for retailers to report earnings that appear sterling but are actually not providing an adequate return on deployed capital.

In retailing the relevant capital being deployed is not what a building cost 30 years ago or its depreciated basis; it is what the building could be sold for today.

As part of its annual report, Tesco announced that after some large joint ventures that transferred over 10 billion pounds sterling of property to ventures with the British Airways Pension Fund and The British Land Company PLC, Tesco still has real estate, mostly individual stores, worth 28 billion pounds sterling.

Here is the rub: The entire profit of the Tesco organization was just reported, before tax, at 2,653,000,000 pounds sterling. All else being equal, this means that if Tesco sold all the real estate and the new owners leased it back to Tesco on a net, net, net basis (meaning Tesco still had to pay the real estate taxes, insurance, maintenance, etc.) and demanded a 10% return on their investment, Tesco would lose money.

If the investors were content to make a 5% return on their money, Tesco would see its profits plummet by more than 50%. And all this assumes that Tesco’s report on the value of its property is accurate. Possibly, a true liquidation, without regard to lease terms for Tesco, would realize even higher values.

However one figures it, the mighty Tesco has an operating business that crucially depends on billions of dollars in real estate deployed at sub-par returns.

Of course Tesco doesn’t have any real estate in the U.S. and thus has to buy or lease at market terms. This means that even if Tesco were equally successful in operating in the U.S. as it is in Britain, its profits in the U.S. would be dramatically lower.

The truth is that although the FTC has been busy imagining an important anti-competitive issue is the merger of Whole Foods and Wild Oats — in fact like Ahab pursuing the great white whale, they are still trying to undo this now completed merger — the FTC could more usefully devote its time to looking into supermarket real estate disposition.

It is common for supermarkets that have closed stores to refuse to sell, lease or sub-lease the properties without restrictive covenants precluding the sale of food from the property or the use of the property as a supermarket.

In many cases valuable properties sit empty, supermarkets having calculated it cheaper to pay rent on closed space than to allow a competitor to open.

These policies directly limit competition and hit especially hard the ethnic minorities that would be likely to open competitive independent stores.

If the FTC wants to challenge policies in the supermarket industry that restrict retail competition, this would be a good place to start.

Meat Incident Illustrates Danger Of Slacking Standards And Oversight

As we bring to a close our Single Step Award series, which recognizes the efforts of key industry leaders to boost food safety following the spinach crisis of late 2006, and as the industry congratulates itself on the expansion of the California Marketing Agreement to cover Arizona, the industry would do very well to pay close attention to the food safety problems with hamburger.

We have dealt with this issue recently right here. Now The New York Times ran a piece entitled, Many Red Flags Preceded a Recall of Hamburger:

Five years ago, the government demanded more stringent safeguards against contamination because of a deadly form of the germ E. coli. …

Two years ago, after an 8-year-old girl in Albany County, N.Y., was sickened by Topps ground beef, the Agriculture Department scrutinized the Elizabeth plant and found relatively few problems. But since then, the department said, Topps cut its microbial testing on finished ground beef from once a month to three times a year, a level the department considers inadequate.

Federal investigators said they had recently learned that the company failed to require adequate testing on the raw beef it bought from its domestic suppliers, and it sometimes mixed tested and untested meat in its grinding machines.

The Agriculture Department acknowledged that its safety inspectors, who were in the Topps plant for an hour or two each day, never cited the company for these problems….

Perhaps the biggest question is why government inspectors did not catch the Topps problems as they were occurring, and whether inspectors in other plants around the country have missed similar problems.

Not only is the government beginning special assessments of meat plants to try to figure that out, but it plans additional training for meat inspectors to be sure they understand the safety plans — and how to hold companies to them.

Dr. Raymond said, “We are going to do this survey to find out if we just had a couple of plants that had fallen apart or if we’ve got a bigger problem.”

Note there already exists for meat the mandatory, uniform, federal food safety regulation that United and PMA have called for in the produce industry.

Next time someone tells you that the California Marketing Agreement guarantees things are being done to spec because there are government inspectors that come around every once in awhile, note that in the Topps meat recall the government inspectors were in the plant EVERY SINGLE DAY!

We’ve been hearing from many knowledgeable sources that the metrics as they exist cannot be executed by many farmers — much less future, presumably tougher metrics.

And this makes sense. Farming ability, like other abilities, probably falls along a bell curve. How can every single farmer do a great job with something so tough?

Yet we are not hearing about farmers failing and being thrown out of the program.

It is unlikely this means that 100% of the producers are performing well 100% of the time.

The industry better start thinking about how we can make sure that The New York Times doesn’t, one day, after a company has a food safety incident, run an article saying that the CMA acknowledged its government safety inspectors never cited the company for its violations.

Full Service Floral
Often Falls Short

Want to know why full service floral so often fails to realize its potential? How about because it is rarely full service?

The Jr. Pundit, Primo — aka William — turned six this past Friday and we had a shindig with all his friends on Sunday. The party was built around a Karaoke theme and the kids got to perform and receive DVDs of their performance. Mrs. Pundit took care of the extensive preparations that are involved when you invite 60 six-year-olds plus their siblings plus each one brings along at least one and sometimes two parents.

Almost everything was delivered except for a few items that the Pundit got the job of picking up at our hometown favorite grocer. Among these were a bunch of mylar and specialty balloons.

What actually happened was we bought all the balloons at the same supermarket during the week, but the store had no mechanism for holding them and having them blown up with helium and waiting for us to pick up right before the party.

So we were forced to buy the balloons early, then return to the store on Sunday and wait while they blew them up.

The store has a nice floral desk next to the greeting cards. But there was no one working at the desk. We hung around awhile and nobody came. There was no phone or other mechanism on the desk to call a clerk. So we went up to the service desk and explained our need. Next thing you know there was a public address announcement stating that “Help needed in floral. Produce should send someone to floral.”

We wondered in an age of cell phones, blackberries and beepers why the tranquility of the shoppers needed to be disturbed with our request, but thanked the service desk and went to wait in floral. Eventually an assistant produce manager showed up and apologized pointing out that floral was part of produce in this store, though it was the exact opposite corner of the store — floral is in the front right of the store and produce in the back left. He made his opinion that he wished floral had nothing to do with produce quite well known.

The fellow started blowing up balloons, which he had done before, but he got stumped when it came time to blow up some Mickey Mouse specialty balloons. These are life-size Mickey Mouse balloons that have weights on their feet so as to stand erect. They are complicated as one has to blow them up in several places and tape back various parts.

The store has no procedure to train personnel on these things, so our assistant produce manager struggled; he eventually called over the service manager who also had no training and they struggled together.

The three of us guys tried to figure this out and it was explained to me that the women, who typically work in floral, probably would know how to do it.

We sort of got it done — though we are not certain Mickey was really looking as spiffy as he should. It took a lot of time and cost the store more in staff time than they made selling the balloons.

Some questions raised:

  • A full service floral department should either be open or closed. One could put a sign on a department — the way Wal-Mart does on optometry or the way many stores do on pharmacy — with specific hours. But it is bad to pretend to offer a service whenever the store is open that the store is not prepared to actually offer.
  • We were trying to blow up these balloons on Sunday, which is typically one of the top days of the week for sales. Why wouldn’t this full service counter be staffed? It makes us think that the staffing is being driven by something other than consumer convenience. In fact, we would say that one of the great advantages of supermarket floral operations is that they are open on Sundays, evenings, holidays — when many floral shops are closed. These are precisely the opportunities for a supermarket to staff up and seize a competitive advantage.
  • Can’t we manage a telephone or intercom at a floral counter that one can pick up and get help?
  • If we are going to seize the attention of everyone in a store, shouldn’t it be for something more generally applicable than that produce should send someone to floral? Can’t we have our own silent communication network set up between our own staff?
  • If a new product comes in — be it a new exotic tasting mango from India or a new Mickey Mouse balloon — shouldn’t we introduce it to our staff and make sure they know how to do whatever they may be called upon to do with that product, such as answer questions or learn how to blow one up?

Due to the delays, we were running late. But the deli was all ready with our platters of chicken fingers and fresh fruit.

By the way, we actually find the kids prefer the chicken fingers from Whole Foods, but we specifically didn’t go there because we knew we had to pick up the balloons — so full service floral boosted the deli and produce business that day.

Bakery managed to incorrectly spell “Will” and when called on it, tried to fix it by picking the colored writing off the cake without actually refrosting the cake and then rewriting. Only an executive decision by the Pundit to write “WILL” in all capital letters allowed us to cover up the mistake.

Bryan Silbermann, President of the Produce Marketing Association, and the Pundit recently had an exchange about floral in the Pundit’s sister publication, PRODUCE BUSINESS, and you can read it here.

Pundit’s Mailbag —
Wal-Mart’s Path Of Decreased Store-Level Execution

Our piece, Wal-Mart Tightens Quality Specs, which followed up on our piece, High Lettuce Prices Strain Supplier Relations With Wal-Mart — which dealt with topics raised in our piece, Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company from a few months ago — has brought forth many industry comments. All seem to agree on our main point: That Wal-Mart’s quality problems have nothing to do with procurement and everything to do with store level execution.

We ended our last piece by saying:

The produce executives in Bentonville have total control over procurement and almost no control over store level hiring, staffing levels and training. So if top executives lean on produce to get better quality, they wind up pushing the procurement button, but it’s the store level execution button that needs a work-out.

One Wal-Mart vendor responded this way:

“…store level execution button that needs a work-out…” is an understatement!

The breakdown in produce quality is between the DC and the customer: mostly the store level itself.

Wal-Mart’s poor performance in the produce department is not a consequence of poor vendor quality “IN” at the front door of the DC’s. Wal-Mart demands US #1 quality levels on arrival on all items.

I personally recall being re-aligned to a DC and having an entire load of Iceberg lettuce rejected only to have it be Federally Inspected the next day at another dock, receiving a US #1 rating. I was then told it didn’t meet Wal-Mart’s “standard for salability,” which translated to, ‘Don’t bring it back.’ They were flexing their muscle and we came to a mutual understanding.

Conversations with other Wal-Mart vendors continually confirm it takes an act of Congress to get a “Quality Exception” below US #1 authorized by corporate managers in Bentonville regardless of floods, hurricanes, heat waves, rain, hail, freeze, fires, etc.

The internal view is that any quality-exception authorization is an invitation to failure, and the “powers-that-be” won’t put their necks on the line 99% of the time because privately they know systemwide the stores can’t be trusted to merchandise the product as needed and limit “markdowns”… Wal-Mart’s term for how to handle/move non-stellar produce and/or account for shrink.

The growing perception by consumers about the decline of Wal-Mart’s produce image I believe can be traced back to about 4 or 5 years ago when, coincidently, after about a year or so of significant RPC usage, as a method to improve overall bottom line numbers, Wal-Mart made the decision to reduce the number of “associates” (i.e. less salaries/benefits) in various departments.

The effect of this was painfully evident in the produce department. The expanding use and proposed efficiency of RPC’s supposedly showed that the same volume of produce could be moved through supercenters while eliminating what appears to be at least 50% of the produce staff.

The ‘ease’ of using RPC’s to replace/refill empty spaces on the shelves supposedly allowed 1 associate to do the work of 2 or 3 in the same time. What has been lost in Wal-Mart’s produce departments is the attention to detail shown by other retailers, which is needed with perishable items to make fruits and vegetables desirable to the consumer.

It is simple to eliminate associates from the paper goods or canned goods section as a can of soup is a can of soup. A shortage of man hours may just mean an empty shelf. Produce, however, requires attention. By Wal-Mart taking out the TLC needed for success in the produce department, many locations have become just slight improvements over weekend flea markets (note — not weekend “Farmers Markets”!).

If Wal-Mart wants to move back to a place of dominance in the produce business, as they were racing toward 4 to 5 years ago, corporate executives at Wal-Mart need to be willing now to step back, actually be honest with themselves, and make the first corrections at home — at store level in the produce departments where the visual desirability of produce is what gets the $$ out of customers’ pockets and into the register.

As a child, if I did something wrong, to correct my lack of judgment or inappropriate actions, my grandma used to say, “lie to me, but don’t lie to yourself”. A hard lesson to follow that was sometimes slow in coming but worth it in the long run.

Wal-Mart executives bluntly stated the truth years ago. The Saturday meetings in Bentonville, Sam’s flying from store to store. They were all expressions of this truth: Pay attention to the store level details and instead of everyone up and down the ladder always doing a C-Y-A, your eventual answer to the share holders will be: “you’re welcome”.

A perceptive letter. And one filled with business lessons for everyone. Because all businesses tend to departmentalize, it is common for complaints to go to the obvious party — not necessarily the real party.

So if Eduardo Castro-Wright, President and Chief Executive Officer of the Wal-Mart Stores division, is unhappy with the quality of clothing sold in the stores, he probably tells the person in charge of clothing to do something about it. And that makes sense.

However, the people in charge of produce don’t have control over the levers needed to fix the problem. They can’t decide to hire more employees in each store or dictate who gets hired or require them to come to Bentonville for training before touching any produce.

So, instead they put enormous effort and pay great expense to make tiny incremental advances in the quality of produce procurement, while the real problems at store level fester.

Of course, Wal-Mart has made some attempts to improve store-level execution. In response to a letter from Keith Anderson of Management Ventures, we wrote a piece entitled, Pundit’s Mailbag — Wal-Mart’s Market Managers, which dealt with the creation of a “Market Manager” position and, as we explained, each market manager had a Market Grocery Manager to help. The goal was to execute programs at individual stores. But, as we explained, there were real problems:

The first problem is that very few of these merchandisers are really experts at merchandising a full range of food. A break down might go something like this:

  • 25% of them are very good and really make a difference
  • 25% of them are horrible and should be doing something else for a living
  • 50% of them mirror their background. For example, if the MGM was formerly a bakery manager, then he or she is very good in the bakery but only marginal in produce.

In other words, the bulk of these MGMs are severely limited in the contribution they can really make.

The second problem, and probably the bigger issue, is that though, theoretically, the MGMs are there to help the stores “run the play” or, put another way, they are there to help store and departmental managers execute the corporate merchandising plan, in actuality, the MGMs serve at the whim of the Market Manager and this fragmentation of authority has caused there to be less uniformity in execution.

This is quite significant because anyone who visits as many Wal-Marts as the Pundit does knows instantly that the biggest problem with Wal-Mart is that they offer an inconsistent presentation to the consumer.

The “Achilles heel” of Wal-Mart right now is inconsistency in retail execution.

Now one solution would be to go in the direction today’s correspondent suggests — increase staffing in produce and increase the expertise available to the produce department. For example, every Market Manager could have a specific Market Produce Manager. If Wal-Mart was willing to hire experienced produce merchandisers for every 10 stores and give them authority to require staff training and certain staff levels, it probably would make a big difference. It would also cost a lot of money.

We wonder if the whole concept shouldn’t be re-thought. We’ve thought a great deal about Wal-Mart’s deli operation, including here and here, and questioned whether the whole idea of service deli really makes sense in the Wal-Mart concept.

Perhaps, much as Wal-Mart went with case-ready meat, maybe it needs to go with “case-ready produce” — in other words, although it may go against Lee Scott’s focus on reducing packaging, maybe Wal-Mart’s produce department should look like the produce department of Marks & Spencer and most British stores where almost everything is in a clamshell or a bag.

Everything will come in perfectly labeled by suppliers with country of origin, organic status, etc., clearly indicated on the package and, literally, the kid who puts out packages of underwear will be fully qualified to put out packages of nectarines.

True the popular perception is that Americans like the farm stand look of bulk produce, but one should never be certain on these things. In this age of food safety concerns, perhaps Wal-Mart could subtly promote that the produce is never touched by human hands — at least at the store.

The efficiency of handling evenly packaged items and the ability to not require expensive expertise in produce merchandising might even allow for lower price points.

In any case, the status quo is not working at store level, so Wal-Mart confronts a fork in the road; do they increase staffing, training and hire more produce expertise or should Wal-Mart reengineer the department so that it can produce a more acceptable outcome without these increased inputs.

In any case, more stringent metrics at procurement are unlikely to make much difference.

Many thanks to our correspondent for his thoughtful letter.

Pundit’s Mailbag — Should PMA Facilitate Meetings During Program Times?

We’ve been discussing the PMA convention and started off with a piece that asked a question: PMA Analysis — Does Houston Merit A Permanent Place In The PMA Rotation?

PMA’s Attendance Just Shy Of 16,000 focused on attendance. We then published a letter from Peter Dessak, Vice President of Six L’s Packing Company, that explained that his experience with a hotel room out in the Galleria area — or “the boondocks” as he put it — was that it increased costs and took up time. We incorporated that letter into a piece entitled, Pundit’s Mailbag — PMA Needs To Factor Bus Time And Taxi Costs Into Convention City Choice.

Then we wrote Pundit’s Mailbag — Selling Versus Learning At PMA which included a letter from Jack Vessey, Vice President and Marketing Director of Vessey & Company pointing out that being in California has a special value for the industry because the increased attendance of California growers creates educational opportunities for the marketing end of the business. This piece also focused on an occasional disconnect between many exhibitors who are focused on selling and some attendees interested mostly in learning.

Today’s letter comes from an executive with one of the largest buy-side organizations in the trade:

As a resident out in the boondocks (Galleria) I’d echo yours and other comments. In town just three days, I spent $265 on cab fare. It was time consuming, expensive and inconvenient.

One other observation — the lack of meeting space available to sit and meet with people. During the morning sessions on Sunday I was trying to meet with a supplier and there wasn’t any space. The Hilton lobby was packed, and the tiny PMA reception area tables were all full.

Meeting rooms weren’t available as sessions were underway, and as I do not have an exhibitor badge I could not go with him to his booth to use that space.

The reality is people pick and choose among the programming, and schedule meetings that are in conflict with the PMA educational sessions (not just exhibit hours). PMA needs to provide a venue for people to meet and gather, and not have to leave the convention center. Otherwise, just as you said, we’re getting offsite and it’s easier to stay away than to make a (in this case lengthy) trek back.

We have several more letters to run but it is pretty clear from the feedback we have been getting that PMA would be well advised to adopt as a criteria for accepting a city into its rotation — not only exhibit hall size and hotel room numbers, but a compact area for lodging and entertaining.

Our writer’s second point, the desire for more meeting space, is more problematic. There is a constant battle at PMA to try and get people to not schedule events during times that would conflict with PMA activities.

Although the ban doesn’t apply to private meetings and conversations, any event organizer will be hesitant to encourage competition by, say, promoting the availability and use of conference rooms during the convention functions.

Yet, for many, maybe most, the private meetings are a crucial part of the event and there simply are not enough hours when no PMA function is going on to squeeze them all in. Our correspondent is correct in saying that not accommodating people who want to have meetings is very dangerous because if those key buyers are taken offsite, it is not always easy to get them back.

Are there any options? A few thoughts:

  • Exhibitors pay a lot of money to exhibit, perhaps we could set up a system that would deliver extra value. If they trekked up to the registration desk exhibitors could already get anyone a pre-show pass just by explaining the person was going to be setting up the booth. Maybe we should set up a person with a computer right in front of an entrance and formalize a system where an exhibitor can invite a person into their booth for a meeting even during off hours. There are security issues but by tying a guest to a host, we might be able to ameliorate many of those.
  • Could we promote Monday as “Meeting Monday” — attendance is poor on Monday, especially many of the top executives leave early. Is it possible that we could promote “Meeting Monday” and offer free meeting rooms, AV, refreshments, etc. to those who want to schedule meetings and business review sessions? Perhaps we could close up the day with a Colin Powell caliber speaker or name entertainment. Could we persuade people to stay through Monday by making it such a day? Would this allow higher participation to events earlier in the show?
  • The biggest concern raised by this letter, was not raised by the writer. As an industry our real concern is that a buyer of this status doesn’t find enough of value in the breakout sessions that he decides to tell his vendors that the workshop time is off limits. This key buyer was at the Pundit’s workshop on Friday regarding Corporate Social Responsibility so the right speaker and topic can attract the attendance of key buyers. Perhaps because most of the attendees are always going to be sell side, we’ve allowed too heavy a slant on workshops to the general audience. Maybe we need more niche programs that provide profound value to particular industry segments. We’ve now restructured the schedule of the show — should we take another look at the content? In the end we certainly can’t force people to attend events they don’t find valuable.

When PMA or any organization wants people to attend its events, but the people ask for meeting rooms instead, what can an event organizer do?

Well the saying is “Vox populi, vox Dei” or “The voice of the people, is the voice of God.” But it has also been said that the obligation of a leader is to follow that voice shrewdly.

Which means that we have to accommodate but we have to recognize that we must maintain the integrity of the event or nobody would be there to go to a meeting to begin with.

Many thanks to our correspondent for raising such an important issue.

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