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More Wal-Mart Straight
Talk: Standards Will Drop

We’ve written a great deal about Wal-Mart. Yet some readers think we need to write more bluntly. This comment comes from an important supplier of grapes and tree fruit to many retailers:

Everyone just beats around the bush about Wal-Mart. Under Bruce Peterson, and a ‘fair sustainable pricing policy,’ Wal-Mart tended to get the best produce. Many companies ‘graded up’, especially with an item such as table grapes, because the vendor got a good value and secure pricing (not always the highest in the spot market, but the average was good, and the contract meant something).

As soon as Wal-Mart went to the ‘bid process’ and contract prices were no longer ‘contract’ if the market dipped, and suppliers were forced de facto to lower prices below contract or see their orders cut back, or cancelled, most table grape shippers started packing to the ‘letter of the specifications’, and quality delivered to Wal-Mart dropped dramatically. I lived it.

The result was that the ‘velocity’ of sales then dropped at retail, and again it became the suppliers’ ‘fault’, not the Wal-Mart’s ‘buy for less’ mandate.

There is no free lunch. Buyers pay for quality. Perhaps it is not as noticeable in potatoes or onions or packaged salads, but with table grapes there is, almost every day, usually a minimum $4 per box difference for the exact same 18- or 19-pound box weight of grapes — and sometimes the market spread is much greater than that.

If Wal-Mart continues to try to take the margin out of its suppliers’ profits, the first thing to happen is suppliers will choose to meet ONLY the specs — or less, in tight markets. Some suppliers will de facto ‘under cut’ the standards and risk rejection rather than give up tens of thousands of dollars on multiple purchases against a ‘contract’. In tight markets, shipping below the standard becomes ‘acceptable’ with many shippers who feel their relationship with Wal-Mart has been unfairly compromised by unfair policies.

I am thoroughly convinced that the ‘lead paint’ issues on Chinese-made toys was a direct result of Wal-Mart’s screwing their Chinese suppliers to the point they felt that they must ‘cheat’ on the standards to make a profit. As a mentor of mine once said, ‘you cannot make the sewer run up hill forever; at some point you are going to get your feet wet and you are not going to like it.”

We’ve written previously that one of the consequences of Wal-Mart’s changes would be that vendors — who previously supplied product beyond the required specification because they had 365-days-a-year obligations and sometimes were short the product that met minimum requirements — would find themselves in this situation much less frequently with short term arrangements.

This letter is going beyond that and pointing out that every day vendors have options in how they grade product, who they send which item to and many other aspects of the delivery of quality.

It is exceedingly difficult in any industry such as produce, where quality varies with the most recent rain, to set specifications in such a way that one gets the right stuff.

If one sets specs for only the best product, sometimes one will get no product at all, because it is not available. Other times one will pay a very high premium, yet a lower standard will mean that one often leaves better quality product on the table.

One can always experiment with specification setting but, for the most part, the answer comes down to two things:

First, working closely and consistently with certain vendors so that they come to know what a particular buyer’s needs really are. Is the customer the type who buys tomatoes for salsa or for slicing to go on sandwiches? Are they value hunters? Or do they want what they want at any price? What is a deal to this consumer?

Second, becoming the preferred customer. The one who always gets the stuff a little better than what he ordered, the one who gets taken care of when supplies are tight, the one that the vendor considers crucial to make happy.

It is a funny thing with produce, the guy who gets the lowest price doesn’t always get the best deal.

Yet for an organization such as Wal-Mart, connecting the dots is very difficult. It is unlikely that if out-of-stocks go up or if velocity of sales goes down, that the head of supercenters or Wal-Mart USA — both very distant from produce procurement — will ever come to think that this is because of a procurement switch to a quasi-auction system — especially because no one internally has any incentive to let them know!

It is certainly true that ten years from now if apple prices are up, nobody internally will say that because Wal-Mart shifted to an auction-like system, bankers were insecure about there being a ready customer for the fruit, so didn’t finance the plantings, so volume went down and prices up.

And frankly, even if someone made these connections, nobody would care. In these large organizations everything is often about the personal career goals and compensation programs of individuals. This, as much as anything, explains why Wall Street did what it did as a lead up to the financial crisis. It may also explain why Wal-Mart is driven by short-term considerations. Nobody’s pay and position is determined by what the situation will be with pears in 2019.

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