As part of our longtime analysis of Wal-Mart, we recently ran a series focused on changes in Wal-Mart’s produce procurement operation. The series included these pieces:
Flaws In Wal-Mart’s Produce-Procurement Thinking
Wal-Mart’s Blind And Costly Focus On FOBs
Wal-Mart Produce Procurement ‘Set-Up For Devastating End’
The End Of The Sam Walton Era At Wal-Mart: Navigating A New Business Model
One producer had a specific take on the matter:
I’m glad to see your (and others) comments regarding Wal-Mart’s spurious claims of reducing FOB’s.
One issue that I didn’t see talked about is the fact that the biggest loser in the equation is the grower. While Wal-Mart’s costs are reduced (whether planned or merely a result of a larger crop), everyone else in the chain charges the same packing, storage, trucking and sales fees as before.
The resulting $1-2 drop in FOB is almost completely absorbed by the grower and would be the difference in a profitable (sustainable) crop. Wal-Mart’s claims to be cutting out the middle man to benefit the customer are misleading at best and will have serious negative impacts on the growing community.
— Rod Farrow
Lamont Fruit Farm, Inc
Waterport, New York
We appreciate Rod’s input and think he has an important point but think that the point needs to be more tightly focused.
The mere fact that Wal-Mart — or any other buyer — may pay less is not automatically money coming out of the grower’s hide. For example, if the cause is a larger crop, the grower will probably have lower costs of production per box of fruit and so a lower price may not be damaging.
In addition, although it is true that many costs are fixed — although sales agencies often work on a commission basis and trucking fluctuates, often in ways unrelated to the price of the fruit — this is the nature of the beast.
A grower can lose a lot of money or make a lot of money depending on markets; a packer charging a fixed fee per box minimizes his risk of losses but also caps his potential for gains.
Rod Farrow’s point, though, is to note the contradiction between Wal-Mart’s self-professed desire to emphasize sustainability and its willingness to put farmers into competition with one another on an auction basis.
This challenges sustainability on at least three levels:
First, one can never make enough specifications to know what short-cuts people will take if they have to do so. Desperate men do desperate things, and it is almost impossible to inspect them enough to make sure the land is treated well, food safety is robust, traceability ensured, workers not abused, etc. The specifications and contractual requirements are fine, but the key to making these things happen is dealing with prosperous organizations that generate sufficient cash flow to pay for these things.
If you are the biggest buyer and you beat an organization down on price, you better ask where the organization will pick up the margin. Of course, a de-facto auction system is specifically designed to avoid asking those questions, or at least to avoid having the close transparent relationship in which those questions would be honestly answered.
This inevitably leads to less sustainable behavior by vendors.
Second, sustainability relies heavily on a willingness to invest for the long term. Replacing all the light bulbs may pay for itself in three years, but if the facility is only needed for the Wal-Mart business and there is no assurance that one will have that business in three months, much less three years, then one will probably not make the investment.
Almost by definition, sustainability requires a long term view. A long term view is incompatible with a rolling auction system.
Third, if you want to be sustainable, you better decide what you want to sustain. One would think that sustaining an agricultural base and family farms would rank high up there. But, in fact, it doesn’t even seem to be a consideration.
That is really Rod Farrow’s point and, on that point, he is clearly correct.
Many thanks to Mr. Farrow for helping us jump start this important discussion.
