We have spent loads of electrons writing extensively about Tesco’s Fresh & Easy. We have profiled Safeway’s small format store here and here, and we reflected on Wal-Mart’s Marketside concept in many places, including here and here… all this analysis has left open one question: Do American consumers want to shop in small format stores?
We know that specialized small format stores can succeed. Aldi, with its economy-focus, attracts shoppers and so does Trader Joe’s, with its foodie riff. It is quite an unproven concept whether consumers who today are shopping at Safeway, Kroger or Supervalu banners, or regional powerhouses, such as Publix and HEB, want to switch to much smaller stores.
Of course, it is always possible that supermarkets will simply deliver consumers into the hands of these waiting rivals.
The basic argument against small stores is that they are inherently not convenient. They may seem convenient in that consumers can shop them quickly but their limited assortments leave consumers wanting products available at the supermarket. This transforms a visit to the limited-assortment stores into an extra trip and makes it inconvenient. It is too easy for consumers to decide to skip the small format store and just go to the supermarket where the consumers can get all the products they want to buy.
Now we have argued that Fresh & Easy needlessly compounded this problem by devoting its precious shelf space to private label items, and so we thought Wal-Mart did a better job with its Marketside concept by focusing on well known brands. Still, a smaller format almost inevitably means fewer items, fewer brands, fewer sizes and, in general, fewer choices. As a result, although we can see these “general interest” small format stores succeeding in urban areas where the competition doesn’t have 60,000 square feet and people don’t drive, we have trouble seeing Americans abandoning their large stores in suburbia to shop in these venues.
Unless, of course, the supermarkets voluntarily give up their assortment advantage — and we are starting to get a sense that this is precisely what is happening in this economic climate.
Ahold has been going down this road for some time, calling the strategy its Value Improvement Program — and it has been quite successful:
The most significant area of focus for our value repositioning strategy is in the Stop & Shop and Giant-Landover banners. Previously announced as the Value Improvement Program (VIP), this program has the most impact on the company’s overall financial results in the near-term.
VIP contains all the elements of repositioning, as Ahold’s needed to improve identical sales growth at both Stop & Shop and Giant-Landover. These elements are being applied to both businesses in the following manner:
• Improving product and service offering: We are enhancing our offering across all categories. In terms of product improvement, we have already simplified our produce offering. This has allowed us to enhance freshness by reducing transit and warehousing time in our supply chain. We will continue to make similar improvements on a category-by-category basis during the coming months. In terms of service improvement, we are also working on modifications to our store layout and check-out areas to simplify the customer shopping experience and place a greater emphasis on convenience.
• Improving price positioning: We are rolling out a program to lower prices across a wide range of items. Promotional activity will continue, but will focus on a more targeted group of products. Prices are already being lowered as part of a major repositioning of our produce prices that began in September, and further price reductions will continue throughout 2007. In addition, we are simplifying our pricing architecture to manage this element more effectively.
• Reducing costs: We are implementing a comprehensive program to reduce costs across Stop & Shop and Giant-Landover over the next 24 months.
You can read about Ahold’s growth strategy here. There are many elements to this strategy but two of the key elements are these:
• Providing the best choice. Ahold operating companies plan to excel in fresh foods by improving quality, selection and presentation. They are significantly increasing their selection of innovative private label products at a variety of price and quality levels. We will also improve and expand the existing general merchandise assortment.
• Making shopping easy. Each operating company is simplifying their overall assortment with the goal of making shopping easier. They are also providing more convenience-focused products and services and enhancing the overall customer experience to make shopping more convenient. Format development is an important tool in achieving this. The operating companies are improving existing store formats and developing new format concepts using different layouts, assortments, sizes and service models.
Put another way, the plan involves first “rationalizing” SKUs by reducing assortment; in produce this has been carried out and is explained this way:
“In terms of product improvement, we have already simplified our produce offering. This has allowed us to enhance freshness by reducing transit and warehousing time in our supply chain.”
In other words, carry fewer produce items, focus marketing and merchandising capacity on the remainders and increase velocity of sales… which establishes a virtuous circle in which faster sales result in fresher product, which leads to more sales, ad infinitum.
The other half of the plan is to expand its private label offering:
“Throughout the store, you’ll see that the presence of private label has grown,” says Michael Sherman, senior director of sourcing for Ahold USA. “That’s a big part of our strategy — to make our private label presence shine even greater than it already does.”
Though this doesn’t seem to have had much implication in produce, it certainly affects the overall assortment of the store.
Now it is very hard to argue with success. When last month Ahold announced its 3rd quarter earnings, there was notable improvement in same-store sales for Giant-Landover, Giant-Carlisle and Stop & Shop. In fact, it was Ahold’s American results that excited the market, as results in Europe for Albert Heijn and the Central Europe stores were growing weaker while US results were growing stronger.
The Citi Investment Research Retail Food Retail Team, working out of London, put its assessment this way:
Retail margin of 4.7% better than our 4.3% forecast, tipping point reached — Clean retail EBIT of €276m was above consensus, driven by a very robust performance from both the US divisions. This is the first time in a very long time in which the Stop & Shop / Giant-Landover margins have improved year-on-year, which suggests that the Value Improvement Program has now reached an inflexion point from both a sales and margin perspective.
FY08 retail margin guidance unchanged at 4.8 — 5.3% — We had thought Ahold might narrow the range of its guidance, and possibly lower the bottom end. A reiteration is extremely encouraging, especially considering that the company could legitimately have lowered guidance on the back of currency and that consensus before today was for 4.7%, i.e., for Ahold to miss.
Implications for 4Q08 — Achieving the top end of guidance looks implausible, but to hit the bottom end of the range, Ahold will have to deliver a flat margin year-on-year in 4Q. This is slightly more stretching than it sounds given Ahold is unlikely to repeat the blowout Dutch margin from 4Q07. This strongly suggests that Ahold is confident on its US margin development in 4Q08.
Injection of confidence, shares should react very positively — Today’s numbers suggest the US business has reached a crucial turning point in margins as well as sales. We would expect earnings upgrades — amplified by the stronger US$ — given that consensus was below guidance before today. As food inflation declines in 2009 we expect Ahold to be one of the better placed companies in the sector, given that it is now taking market share in the US.
With an assessment like that — “now reached an inflexion point from both a sales and margin perspective” — Ahold has obviously achieved a lot.
To some extent it got a bit lucky — luck is perhaps the most useful business tool out there — in that it had decided to focus on value and then the country fell into a recession.
And, indeed, with its northeast strength, which means it is a region with relatively few Walmart supercenters, Ahold may have hit upon a winning formula if it can provide better value than competitors in its region.
Still this leaves two related questions for Ahold:
Is this positioning something that will hurt Ahold when the recession starts to end? For the sake of short term prosperity, is Ahold putting itself in a long term strategic box?
Wal-Mart is sure to build more Supercenters in Ahold country, and one doubts that the Value Improvement Program will position Ahold to really compete on price.
The reduction in assortment and increased emphasis on private label reduces costs and boosts margins today. The value proposition also appeals to today’s consumer, but isn’t that broader assortment precisely what is necessary to differentiate from Wal-Mart and, of course, compete effectively against limited assortment small format stores?
Is Ahold setting itself up for a pincer movement where Wal-Mart rolls out both Supercenters and Marketside stores and Ahold finds itself without the value proposition to beat the supercenter and without the variety to defeat Marketside?
At least Ahold operates in many real-estate-restrained markets, where expansion by competitors is quite difficult. These concerns apply nationally, except even more so.
A reputation for bounty and variety may not be the winning card in a year when the focus may be on value. But reputations are easier to lose than to win back, and retailers who decide to reposition themselves as value-based retailers may find that positioning turns on them quickly as new competitors enter the market or the economy starts to turn.
We memorialized the passing of industry veteran Tip Murphy with a piece entitled, Tribute to Tip Murphy, and friends of Tip got together with the PMA Foundation for Industry Talent and formed a committee:
Tip served on the board of directors of PMA from 2005 to 2007 and the PMA Foundation for Industry Talent established the Tip Murphy Legacy Fund.
The official announcement of the fund will come at the PMA convention during the Saturday Morning General session where Tip will be honored. The gist was described by PMAFIT In a press release:
The goal of the fund is to build a permanent endowment of $250,000 by 2012 to fund scholarships in perpetuity, according to PMA FIT Executive Director Cindy Seel. A limited number of scholarships will be granted while the endowment is being raised.
Scholarships will enable recipients’ participation at current and future PMA and foundation leadership development programs, such as PMA’s annual Leadership Symposium. Scholarship applications will be reviewed by an advisory board now being established.
The Pundit was honored to be asked to serve on the advisory board along with Todd Melton of Chiquita, Scott Owens of Paramount Citrus, Bruce Peterson of Naturipe Farms, Bill Schuler of Castellini Company, Bob Spence of Ready Pac and Dick Spezzano of Spezzano Consulting Services. Tip’s widow, Gretchen, will be involved as well, and Dan’l Mackey Almy of DMA Solutions and the PMA FIT staff, especially PMA FIT’s Executive Director, Cindy Seel, have facilitated the effort.
Foundational grants were received from Castellini, Chiquita, Naturipe Farms, Paramount Citrus and Ready Pac.
Then the PMA Foundation for Industry Talent, which is the home of the newly established Tip Murphy Legacy Fund, made a call for scholarships applications, which we detailed in a piece entitled, Scholarships Available To Industry Through Tip Murphy Legacy Fund:
Recognizing that strong leaders drive the future of the produce industry, the Tip Murphy Scholarship for Leadership Excellence (TMSLE) supports emerging leaders by advancing their careers through development of leadership skills and is funded by the generous donations of supporters of the Tip Murphy Legacy Fund. The fund was created in 2008 to honor the life and career of Tip Murphy, a beloved 15 year veteran of the produce industry.
This new program covers the cost of registration and associated hotel expenses to ONE of a growing number of PMA and Foundation leadership events, including:
● Leadership Symposium
● Fresh Summit International Convention & Expo
● Produce Solutions Conference
● Foodservice Conference
For the 2009 year, one scholarship will be awarded.
Now we are pleased to announce that the ballots have been tallied, there were no hanging chads, and the committee has selected a candidate who demonstrates both how large and how small the produce industry is.
The winner of the very first Tip Murphy Scholarship for Leadership Excellence is Michael Engeman of La Manna Group Australia.
The fact that Michael hails from Melbourne demonstrates that, literally, people will travel half way across the world to attend high quality PMA events. Of course, Michael expressed concerns that mirror, almost perfectly, those of the PMA Foundation for Industry Talent:
I believe that people are such an important part of our industry, and with our aging population the industry needs to develop more effective ways of attracting and retaining them.
My leadership philosophy is empowering members within your team to get the best from within. By empowering members within your team you encourage them to ‘stretch’ themselves to achieve greater results which in turn will help the business achieve greater results also. As a younger, developing leader I need to fully understand my limitations and adapt my strengths and the strengths of others to achieve even greater things again.
One of my short term career goals is to undertake more external study to grow my knowledge in leadership. By gaining more knowledge on leadership from within the industry and also through selected mentors, I will eventually achieve my longer term goal of being able to successfully manage a separate business unit or stand alone business for LaManna or MG Marketing. I understand these goals are not easily achieved and will get harder as I eventually start having a family with whom I will also want to spend more time with.
However, the motivation that keeps me on track to achieving these goals is understanding there is more to learn everyday in and outside the food industry that will at some stage assist me in being one of the greater leaders within our industry. I also draw motivation from some of the current industry leaders who have helped change eating fresh food for the better, namely Rob Robson and Michael Simonetta.
Rob Robson was the first person from outside North America to serve on the Executive Committee of PMA — a point we profiled here. We also spoke with Rob about his own company, OneHarvest, right here.
Michael Simonetta is the founding Chairman of PMA’s Australia-New Zealand Country Council, which we highlighted here. We also discussed Michael’s company, Perfection Fresh Australia, with Michael right here.
Michael Engeman was a formidable candidate. With 15 years in the industry, he worked for Tip’s old company, Chiquita, for a decade, then Harvest Company, Tasfresh and, currently La Manna, where he is a Banana Category Manager.
He had the enthusiastic support of his Chief Executive Officer, Bernard Treacy:
Michael has now completed his first year in the LaManna Group and I have had the pleasure of seeing him establish himself in the role of National Category Manager for bananas with overall account responsibility for our largest customer. Michael also serves as a member of the senior leadership team for the group.
This past year has seen Michael grow in his professional capacity, and younger members of the group look to him for guidance and direction, which directly reflects on his manner and future leadership potential. During this year Michael has established strong relationships with his senior peers. He has challenged a number of paradigms in the business and led a key supply chain change with our key account.
It gives me pleasure to support Michael’s application for the Tip Murphy Scholarship. Not only is he a worthy recipient, he will also be an ambassador for other young produce professionals in the international market place.
Of course, if the fact that the award-winner of a PMA scholarship is an Aussie shows what a big world this produce industry has become, the fact that Michael’s CEO worked closely with Tip shows how small the industry is:
I am personally privileged to recommend Michael in honor of Tip’s leadership legacy. I worked with Tip over 7 years at Chiquita. During that time he mentored, challenged and critiqued my personal development. I am in no doubt that I have been enriched through Tip’s friendship and I am grateful for his tireless patience and commitment to leadership.
Bernard had joined Chiquita in 1998 in the United Kingdom and moved to Chiquita’s Cincinnati headquarters in 2000, where he worked in the marketing group leading category management initiatives… which meant that he spent a lot of time with Tip visiting customers and planning sales calls.
Then Bernie had a duel reporting role in the supply chain, which reported directly to Tip.
Finally, Bernie led the Wal-Mart team that was reporting to Tip.
Here is how Bernie explained the relationship:
“I had an office immediately next to Tip and spent many days with him eating shrimp stir fry for lunch followed by Starbucks in the afternoon.
Tip’s daughter Meagan also baby sat for us on occasion.
Tip was a great mate… we regularly talked by telephone long distance once I moved to Australia. I read your kind words with interest after we lost our dear friend.”
Michael acknowledged this connection, explaining:
“It would also be a special honour to receive this scholarship because it is endowed in honor of Tip Murphy, with whom my CEO worked and whom he called a friend. He also held Tip Murphy in the highest regard.”
Initially Michael was torn between events:
The event that I would most like to attend would be either the Leadership Symposium or Produce Solutions Conference 2009. After doing some research into the speakers, it would be great to hear what their thoughts are on topics that affect our industry. One of the more interesting topics would be the “empowering business culture” and/or “leveraging the individual strengths of a multi-generational talent pool.”
Both events are terrific but, in the end, Michael selected The Leadership Symposium, which will be held January 14 — 16, 2009 in Dallas, Texas.
We just profiled the event in our piece, PMA FIT Kicks Off New Year With Leadership Symposium, where we pointed out that this unique event — presented as a result of a partnership between the PMA Foundation for Industry Talent, Cornell University and PRODUCE BUSINESS magazine — offers a curriculum designed by Professor Edward McLaughlin, a world renowned authority on marketing and the Robert G. Tobin Professor of Marketing at Cornell.
It seems to us that if Michael is prepared to cross the Pacific Ocean and half of North America to attend the event, he is telling us a little something about the value of this program. There are still seats left, so why don’t we greet Michael with a full house?
You can learn about the speakers at this link.
Here is the schedule.
The back story is compelling.
The Leadership Symposium will be held January 14-16, 2009, at the Omni Dallas Park West in Dallas, Texas. Full information can be found here.
Registration is right here.
Michael, congratulations to you and to La Manna on winning this prestigious scholarship. We hope everyone else who entered will try again next year; this is just the first of many scholarships to come in Tip’s honor.
And Michael, we know many will want to extend a welcome to you in Dallas. Let us seize this moment to offer to buy you a drink in Tip’s honor. LSU is playing basketball against South Carolina on January 14th. We’ll just have to persuade a Texas bartender to find the channel. We suspect your CEO will understand.
As our economic woes continue, many are making the mistake of seeing the restriction of credit as an anomaly… as a symptom of the credit crisis… as something that if markets were functioning normally would not happen. Perhaps, however, it is the loose credit standards of recent years that should be viewed as an anomaly. What now seems horribly strict is really just a return to prudent lending standards.
In fact what is really happening is that the distinction between equity and debt is being reestablished.
An article entitled Riverfront Tower in Jeopardy in Crain’s Chicago Business details how the developers of a proposed tower are having trouble getting as much bank financing to build it as they would prefer:
Hines Interests L.P. is struggling to finance a $536-million skyscraper proposed for a site along the Chicago River, as the credit crisis delays one of the city’s biggest developments and saps potential profits on the 52-story tower.
Houston-based Hines’ troubles show the depths of the financial crisis, which is threatening a project that until recent months would have been seen as a safe bet by lenders. Hines is one of the largest real estate firms in the nation, and its office tower would be anchored by two trophy tenants: investment bank William Blair & Co. LLC and law firm Baker & McKenzie LLP. …
Hines soon may face a painful choice: The developer could move forward, investing more of its own money in a project that ultimately may not be worth the massive risk. Or it could kill the project, writing off millions of dollars in costs and paying an equally high price in damage to its reputation.
So is this all about collapsing credit markets being unable to supply needed funds? The article explains that the banks want more equity put in the project:
A Hines joint venture needs a $328-million construction loan, but a group of four banks has committed only $200 million so far, sources say. The banks won’t lend any more without another $30 million in equity, contributed either by outside investors or Hines, which controls a nearly $23-billion real estate portfolio. But the Hines venture already has pledged $128 million in equity, along with an $80-million mezzanine loan from an affiliate, Hines Real Estate Investment Trust Inc. Pumping in more equity would saddle Hines with a greater share of the risk at a time when commercial real estate prices are falling.
Now we don’t have access to all the details, particularly of the lease terms that the anchor tenants have signed, but it looks like the bank’s expectation of more equity is prudent. Although Hines has secured two marquee tenants, they are taking, combined, between 590,000 and 640,000 square feet of a 1.1 million square foot building.
Typically these launch tenants may receive concessions as, to some extent, the building is being built on the strength of their credit. So we don’t know how valuable the building actually would be if it opened and was unable to lease the vacant space.
In other words, if Hines had leases on 100% of the space with a diverse group of AAA-rated tenants who had all signed 30-year leases and the leases were all triple-net leases (meaning the tenants cover taxes, insurance and maintenance), with the rent adequate to cover the self-liquidating 30-year commercial mortgage, we suspect the banks would be happy to fund the building, probably with much less equity than is being put in now. This is because there would be almost no risk and the risk that exists — the default of one or more of the tenants, overruns on construction costs, etc. — could be insured against.
Traditional banking is, at its core, a low-profit business. People who worked in banks were not traditionally paid very much. Banks were not in the business of taking any risk — they couldn’t be because their margins were so small — they had to live on the spread between what they would pay depositors for funds and what the bank could charge borrowers.
There is no question that the financial markets have changed, as the article goes on to point out:
The financial markets have changed radically since June 2007, when construction started on the last downtown office tower, a 1.1-million-square-foot building at 155 N. Wacker Drive by developer John Buck Co. Chicago-based Buck borrowed nearly 79% of the project’s estimated cost and had less than 24% of the building leased. Hines may be able to borrow only 56% even though Blair, Baker and a third tenant have agreed to lease 60% of the proposed building.
It is, however, lending such as that which should be seen as an aberration, not today’s more conservative standards. Jesse Eisinger, writing in Condé Nast Portfolio explains what happened to credit standards in commercial real estate:
Here’s what we know about what happened in commercial real estate: Lending standards fell, starkly. Or as I prefer to see it, they were thrown out of the 60th-floor window of that gleaming office tower in downtown Atlanta/Phoenix/New York/San Francisco/insert your city here. The gap between the cost of debt servicing and the cash actually being generated by the buildings narrowed.
What’s more, it used to be that banks made loans for no more than 80 percent of the value of a property to ensure a healthy cushion of protection, but by the early part of 2007, loans were sometimes made for 120 percent of a property’s value. Who would be so crazy as to lend more than a property is worth? Anyone who believes in perpetual-motion machines — that is, that rents and underlying property values must always go up.
Now, of course, Hines is not asking for 80% of the cost of a commercial building. However the value of a building is determined not by its cost but by its rent roll. Because Hines has failed to fill up the building with long term leases by credit worthy tenants the value of the building is uncertain, there is enormous risk.
So what is the alternative? Does the economy just stop? Do we stop building things? Not at all. The alternative is to stop hiding risk or pretending it doesn’t exist. There is real risk but also tremendous upside potential. Gerald D. Hines, the founder and chairman of Hines L.P., was a well-known Houston developer but became famous for his innovative approach to sharing risk:
Gerald Hines learned caution in the boom-bust real estate market of Houston, where he landed in 1950 after graduating from Purdue University with an engineering degree. A U.S. Steel worker’s son, born in Gary, Indiana, he later worked in the mills.
He began dabbling in real estate in Houston in the 1950s and by the late 1960s was one of the city’s biggest developers. Back then it was considered foolish, if not wimpish, to share a project with investors; like other developers, Hines borrowed to build and kept any profits for himself. He began to reconsider after risking his entire net worth, about $5 million, to build the Houston Galleria mall and a 50-story office tower at the same time. “That was crazy,” Hines says. “I said I’d never do that again.”
Rather than borrow, Hines recruited equity investors such as European pension funds and the investment office of Kuwait. He usually invests enough to own 10% to 30% of the property, plus, as manager, the firm gets an additional 20% of any sale profit. But he largely eliminates the risk that a project’s failure will jeopardize his other assets.
In other words, banks are not there to take risk. Banks do not get the upside of a deal; they work on a fixed interest rate, so they can’t pay for the downside of a deal. That is the place of equity that gets both the win and the loss.
Whether it is a big commercial skyscraper, as in the Hines project, or a single family home whose buyer would like a mortgage, it is the distinction between debt and equity — between those who get the upside and those that do not — that needs to be re-established if we are to come out of current economic doldrums having built a sound base for future economic expansion.
In our piece — Can Whole Foods Survive Prolonged Economic Downturn? — we raised the issue of how Whole Foods could deal with a predictable cash squeeze, and we layed out several options. As it happens, the company decided to bring in an investor, as we explained in a piece entitled, Whole Foods Exercises Pundit ‘Option Two’ And Sells Preferred Stock.
In this piece, however, we raised the possibility of a sale:
Perhaps Whole Foods could sell itself to another retailer better able to carry it through the recession.
Which retailer would this be? Well it would be a logical play for any of the big three:
Tesco has had interest before but found it pricey. The new lower share price would give it an instant footprint across North America and allow it to roll its money-losing Fresh & Easy division into a new consolidated North American Tesco division. This would confuse the numbers and save Tesco from ever really accounting for the losses Fresh & Easy will accumulate.
Carrefour would value a North American division to diversify its revenue and profit sources. With the Whole Foods footprint and infrastructure, Carrefour could try to open many different formats.
Crazy as it sounds, it would also be a perfect fit for Wal-Mart. Very little customer overlap, different positioning in the mind of the consumer. There is a real risk of culture clash, but if Wal-Mart could convince Mackey to stay and run it as a separate division it would be a winner. Wal-Mart’s enemies would be thrown into fits of cognitive dissonance.
We received a number of responses including this one:
Just wanted to let you know how much I enjoy your column and appreciate your insights and provocations.
Your idea about Wal-Mart buying Whole Foods is a good one — at least for making people think.
What you could have also mentioned is how, in produce and other perishables, Wal-Mart operates very differently than in the rest of their operations, with quality and consistency taking a front seat and low prices kept in the back seat.
That said, I’d ultimately expect that the culture clash would make it untenable. It’s not just that the cultures are different, but that each organization’s success comes, in part, from a very deeply embedded and distinctive culture.
Keep dishing out more great food for thought.
— Wayne Davis
Executive Vice President and Co-Founder
Well, yes, Wayne is right… it was a bit of a thought experiment, in German a Gedankenexperiment. We actually suspect a Wal-Mart buyout of Whole Foods wouldn’t work because the employees would run away. If you read any of the blogs that Whole Foods employees post on for their own discussions, you know that many are very passionate on social issues and work for Whole Foods as a result of their personal belief system.
This would not be comparable to Unilever’s purchase of Ben & Jerry’s, which was a controversial acquisition as it was unclear if Unilever would allow Ben & Jerry’s to maintain its distinctive culture. But other than a generalized hostility to “big business,” there was no specific animosity against Unilever.
In contrast you might say that Whole Foods has defined itself against Wal-Mart and, certainly, many of its employees consider Wal-Mart downright evil. So it would really take quite a tight-wire act for Wal-Mart to buy Whole Foods and keep it as anything resembling the Whole Foods of today.
So we agree with Wayne on this point and, certainly, thank him for his kind words about the Pundit. We do, however, confess that Wayne’s reference to the “rest of their operations” leaves us in a bit of a quandary.
We have written quite extensively on Wal-Mart. When it comes to quality of procured items, we don’t think an insistence on quality and consistency is confined to perishables. Vendors who try to sell mundane items to Wal-Mart — T-shirts, underwear, socks, etc. — tell us that they have to undergo quite rigorous testing to ensure their products don’t fall apart at the seams, shrink excessively, etc.
Of course, demanding high quality doesn’t stop buyers from seeking low prices. Although at one point in time Lee Scott, the retiring CEO of Wal-Mart, believed that the vendor community was more important to Wal-Mart than Wal-Mart was to the vendor community. With time, Mr. Scott seems to have changed his mind.
Wayne may not have experienced this because Backyard Beauties, a million square foot facility in Maine that provides locally grown tomatoes produced to world-class standards, really has very little in the way of direct competition. We suspect that if there were two other million square foot of world class greenhouse facilities in Maine, Wal-Mart’s search for high quality would not preclude it from bargaining aggressively to get the price down.
When it comes to issues of corporate culture, we are not certain we agree that Wal-Mart any longer has a “deeply embedded and distinctive culture.” It did once, but almost everyone hired by Sam Walton is now gone. It was just the other day that Wal-Mart was advertising in Vogue, and principles that built that company such as Every Day Low Price (EDLP) have been replaced by ambiguous terms such as EDLP PLUS.
We don’t necessarily see this as all bad. The focus on sustainability and social goals may well have been necessary parts of adjusting to a new environment and a new scale of operation. The decision to base executives outside of Bentonville may have been inevitable with international growth. Still, this year, with value all the rage, Wal-Mart is running back to its roots, but we see no indication of great conviction. If the trend was away from value and toward organic, our sense is that the executive team would pivot on a dime.
This may be to their credit. Flexibility in meeting the changing needs of consumers may serve a retailer well, but we are not certain flexibility is really a culture. Over 18 months ago, we realized that Wal-Mart was changing. As we wrote at the time:
What is interesting is that now there is no one with any historical connection to Wal-Mart’s heritage in any major responsible position in Merchandising, Marketing or Operations. No one hired by Sam Walton, no one steeped in the Wal-Mart culture.
Now, having bright people approaching problems without historical baggage might not be a bad thing, but it is a very different thing.
Change has always been a part of the evolution of Wal-Mart. You don’t grow to be the biggest retailer in the world, operating different formats on different continents without being willing to change.
But, up till very recently, change was built on the cultural foundation that had established the company and seen it through to achieve such great success. So as new ideas were evolving, there were always individuals in these key areas that acted as a “conscience” and provided an “institutional memory” that connected the future to the past.
Of course, one can always argue that radical change was needed, but Wall Street and the vendor community have both failed to fully absorb how dramatic the change has been in the way Wal-Mart has been transformed on a cultural, core value level.
We entitled the piece, Wal-Mart: The Name On The Door Is The Same; The Thoughts Inside Are Very Different.
Today we would say that Wal-Mart’s executives stand a bit chastened. The Vogue and George era did not produce success, and Wal-Mart’s failure in changing its reputation has actually positioned the company to succeed well now, during tough economic times.
What culture will evolve as a new CEO assumes his place is a very open question.
The good news for Wayne Davis and Backyard Beauties is that under almost any culture, Wal-Mart, Whole Foods and, indeed, virtually every major New England retailer will still want those high quality greenhouse-grown Maine tomatoes that Wayne and Backyard Beauties produce so well.
Many thanks to both Wayne and Backyard Beauties for the kind words about the Pundit and for assisting the industry in our own Gedankenexperiment on this subject.
How ought we to consider the turmoil around us? With stock markets collapsing, unemployment climbing, ancient Bombay under siege by terrorists, pirates ascendant off the coast of Somalia, Iran working on nuclear weapons, danger seems everywhere.
One way of looking at the situation is sent in by one of our correspondents who earlier sent in a quote that became the focus of a piece we entitled, Perishable Thoughts — Youth, Experience And The Subprime Crisis. That piece spoke to an attitude toward hiring that focused on integrity and motivation rather than traditional criteria such as experience.
Now Richard Aust with LiquidPress Company, which is a Lake Forest, California-based cold aseptic bottling technology consulting and implementation organization, sends along a quote speaking not just at how we ought to look at new employees but, perhaps, suggesting a way to look at the world in times of turmoil:
“For the man sound in body and serene in mind there is no such thing as bad weather; every sky has its beauty, and the storms which whip the blood do but make it pulse more vigorously.”
— George Gissing
The Private Papers of Henry Ryecroft
By George Gissing,
introduction by Paul Elmer More
Published by Boni and Liveright, New York
The quote can be viewed/purchased in the original:
The Private Papers of Henry Ryecroft
By George Gissing
In a sense it is a rather odd line coming from George Gissing. A prolific writer, with 23 books plus multiple stories and other writings, Gissing became well-known for writing about the gritty reality of life in the slums of London.
When he wrote about other subjects, he often dealt with miserable people from the lower middle class wrestling with the social problems of the day. Other times he presented a very realistic autobiographical portrait of the life of a not very successful writer in the late 1800s.
In general the books are suffused with gloom, so such an optimistic take seems odd.
Gissing’s personal life indicates he was capable of seeing beyond social convention, and in women, at least, he found a parallel for the notion that “every sky has its beauty.”
Gissing married a prostitute and, though it ended badly, as she was an alcoholic and occasionally slipped back into her old profession, Gissing picked up his second wife off the street. This ended badly as well, and Gissing ultimately married a French woman after being diagnosed with the emphysema that would kill him at age 46.
Gissing went somewhat mad; writing many letters about the supposed horrors of French cooking. He waxed poetically about English food, which seems to have become a neurotic fascination for him. He explained that merely thinking of an English potato would make him “frantic with homesickness.”
His final completed book, Will Warburton, has a grocer as its hero. The grocer, however, loses all his money and thus is shamed by the middle class mores of the day.
This shame was something Gissing always carried with him. He had been a bright student bound for academia when he was caught stealing money from his fellow students to help the prostitute who would become his first wife. He was sent to jail for a month and then shipped off to America.
Although in later years Gissing became friends with notable people such as H.G. Wells, he was always carrying the secret of his imprisonment for a common crime, and the weight of that secret weighs down all his writing.
Still, many a writer can’t live the advice their characters can speak, and this quote seems useful. We have, after all, little choice but to accept that we live in tumultuous times.
Rather than being despondent, one answer is to try to find the good in every situation. Although, of course, there are individuals who experience real suffering, for many a shift in focus away from buying and getting may result in an increased focus on home, on family, on faith and friendship. Put another way, all is not lost and there is beauty even in this sky.
Gissing’s other point was that if one is engaged, then the problems of society can be invigorating as they give one an opportunity to be a part of the solution. It reminds one of Winston Churchill speaking of days far darker than those we face today:
“Do not let us speak of darker days; let us rather speak of sterner days. These are not dark days: these are the greatest days — the greatest days our country has ever lived; and we must all thank God that we have been allowed, each of us according to our stations, to play a part in making these days memorable in the history of our race.”
From time to time we have been attacked, as with these letters here and here for writing about issues beyond the immediate purview of the industry. We can, and do, argue that things are related and these broader issues have direct impact on the trade. Yet, it is also true that this is our way of trying to make a difference; we have a pulpit and we think it would be a shame — and maybe a sin — to waste it.
Perhaps it is worth noting that all of us have a circle of influence, which means that all of us can make a difference.
Many thanks to Richard Aust and LiquidPress Company for helping us think through this important matter.