We received an avalanche of letters related to our piece, Did Wal-Mart Have A Role In Ballantine’s Fall? We thought this one raised an interesting point:
Very astute observations in your article (Did Wal-Mart Have A Role In Ballantine’s Fall), but it really gets down to Economics 101 and the classic business decision of when you “Just Say No” to a business relationship. Of course, once you say no and win the battle (if they come back) do you lose the war by selling to them again?
The situation is not unique to the produce industry. I fight the same battles every day. And there are many more culprits than Wal-Mart. When trucks are tight, shippers and receivers are quick to accept every one of my trucks and I am careful to adhere to spot market rates. But as soon as trucks loosen up, I am asked to match rates from carriers and brokers that were nowhere to be found in the tight truck market.
A customer that will throw you under the bus for a very small percentage is no customer at all, and in my opinion should be treated as the root problem rather than a customer “on vacation.”
In other words, don’t reward their ethics by accepting them back as a customer. Give that price break they are so hungry for to their competitor. Just say no.
— JC Cook
Alas the question is, “Who will say yes?”
Philosophically we agree with our correspondent. Producers are responsible for the deals they enter into, and they are foolish if they enter into deals that will not be profitable.
This spring we did a little tour with ex-Wal-Mart executive Bruce Peterson speaking at several schools and before some associations. Bruce would tell a story of how he was once presenting an analysis of what market conditions would be in the coming year for a particular crop. Producers in one region bitterly protested as the market price would be far below production costs for that particular region.
Bruce explained that he was merely transmitting information about what market prices would be and strongly advised the producers in that region not to plant that crop if it would not be profitable.
Yet they did plant and they did lose money, and that is bad because business should not be a habit. A business has to respond to price signals.
That being said, this is easier to do in theory than in practice. Sometimes there are a lot of sunk costs as with tree fruit. There are whole industries such as commercial aviation that have not made one penny since the dawn of the industry. Why? The sunk costs are so great that it always pays to discount so that one can cover the variable costs. So a giant airplane is purchased, the airport and gates, etc., were already built, the pilots and flight attendants are on the plane, the marginal cost of carrying an additional passenger is a little fuel and, maybe, a bag of peanuts and a soda. So discounting to fill seats seems smart and this is what “yield management” is all about — airlines trying to find a way to keep all their full-fare passengers paying full fare while selling the other seats at a discount. Inevitably, though, if there is a lot of capacity and everyone tries to yield-manage; there will be a lot of cheap seats sold.
With a crop like tree fruit, the trees were planted, pruned and tended, sometimes the fruit is already picked and packed — so, like in aviation, one will probably get discounting. In fact, the savior of both aviation and tree fruit may be the banks. If the banks refuse to finance more planes or more peach trees, capacity falls and the industry can be profitable but, often, only temporarily until those profits entice more investment.
What we liked best about JC’s letter, though, is his vote for loyalty in business. That is the way the Pundit was brought up and it is the lack of loyalty that seems to grate so much among those really angry at Wal-Mart.
Last season, we are told the grape buyer at Wal-Mart elected to begin a conversation with the grape vendors by announcing that the buyer never wanted to hear the name of Bruce Peterson again. Bruce, of course, was the architect of Wal-Mart’s produce operation, taking it over when it had only seven stores.
We always wonder why people say things like that. We don’t see how it could help them or Wal-Mart but, more broadly, it was kind of like asking, “What have you done for me lately?” If when Wal-Mart business was very difficult and profits were slim, some vendors jumped through hoops to help Wal-Mart build its produce program. Is it crazy to think those vendors maybe shouldn’t have to be the cheapest person on earth to get the business?
Don’t companies thrive if they have vendors that care, and didn’t these folks show a willingness to do things to help Wal-Mart that others wouldn’t do? And shouldn’t that count for something?
Many thanks to JC Cook and Riolo Transportation for helping the industry think through such an issue.