Our piece, Tree Fruit Industry In Turmoil, prompted Steve Kenfield, Vice President of Sales and Marketing for HMC Group Marketing, Inc., Kingsburg, California, to send a note, which we incorporated into a piece entitled, Pundit’s Mailbag — Reshuffling The Tree Fruit Industry, which brought a torrent of objections.
One former tree fruit farmer, still active in the industry, put his objections this way:
I read with interest Mr. Kenfield’s analysis of the plight of the tree fruit industry. I was surprised with his brazen advertisement for HMC and their “commitment” to quality. This appeared to me to be a shameless free advertisement given the widespread distribution of your fine newsletter.
I would suggest that a major part of the problem which Mr. Kenfield glossed over was the retailers raising retail prices to well over the $2/lb mark. This in effect has been the root cause for reducing consumption as this cost level moves tree fruit from a core purchase item to that of a luxury item, very similar to blueberries and raspberries. Consumers now are faced with a shrinking food budget and $2/lb does not establish a reasonably priced food choice for the consumer. Not when they can now look outside the produce isle for other budget-stretching choices.
This inflation in the produce isle can be directly linked to shrinking profits for retailers in the center of the store and have forced profits to be drawn more heavily from the perishable sections. While a $2/lb retail on peaches returns a whopping $40 per case to the retail store, the farmers can expect the FOB price of a $14/carton to translate into a farm gate price of $6.60/ctn, or 33 cents per lb.
This disparity has created a huge pressure on producers that are unable to recoup even their production costs, while they sit by and have been forced to watch their fruit being sold at luxury prices on the retail stand and driving consumers to other choices, thus reducing consumption. California Tree Fruit Agreement research, as well as anecdotal evidence, has shown a dramatic increase in consumer satisfaction, a point that Mr. Kenfield overlooks in his letter.
So producers are faced with a marketing climate that has not a lot of upside. Consumers are definitely paying their fair share for California stone fruit, and they have become quite loyal to this product, yet farmers continue to suffer with farm gate prices that are similar to those of 15 or 20 years ago when adjusted for inflation.
The system is definitely broken.
While much of Mr. Kenfield’s thoughts are valid, I was disturbed by his shameless plug for HMC’s commitment to quality hidden in his explanation of the current industry woes. Most of the tree fruit farmers that I come in contact with on a daily basis are all concerned about producing a quality product that will make consumers happy with their purchase.
It is not just large vertically integrated mega farms that have this feeling as Mr. Kenfield highlights, but most California stone fruit producers.
We appreciate the kind words about the Pundit and certainly understand the sentiment being expressed, but we would have a slightly different take on Steve’s letter. Although we are very fortunate here at the Pundit to have numerous correspondents who write generously out of a desire to see industry improvement, it is also true that many who participate in this dialog both want to help the industry and believe that what they or their company is doing is in service to that desire.
Steve had the courage to state his case and to sign his name. He may be right or he may be wrong, but he has put out there his take on things for public analysis and debate. That is a contribution to the industry.
When we reach the substance of the argument, our correspondent today makes two points:
- The root cause of the industry problem is excessive retail prices on stone fruit.
- Most tree fruit farmers of all sizes — not just vertically integrated organizations — want to create a quality product that will please consumers.
When it comes to pricing, all producers of all crops have always complained about the gap between farm gate receipts and retail prices charged to consumers. We remember 20 years ago going to workshops where the likes of Bob DiPiazza, then at Dominick’s, and Dick Spezzano, then at Von’s, attempted to carefully explain to the grower base what went into retail pricing. The gist of the talks: The product is the cheapest element in the pricing equation. Real estate, labor, transportation, insurance, electricity, advertising, on and on, are the big costs, so even substantial reductions in the cost of goods resulted in relatively small reductions in prices paid by consumers.
Beyond this point, it is also true that the interest of retailers is not simply selling more stuff; it is making more money. Now proving that reducing retail prices will result in better retail profits is much more difficult than one might think. Look at how daunting the math is: If a retail chain reduces its gross profit on an item by 50%, it needs 100% increases in its sales to come up with the same gross profit. That is not easy to accomplish — especially on a sustained basis.
Yet even that doesn’t prove the point. Handling fruit is expensive. If sales go up 100%, the store will need more labor and space devoted to tree fruit, so even a 100% increase in sales will not compensate for a 50% reduction in gross profit.
Then, of course, there is an opportunity cost to the retailer. Very likely these massive increases in sales may mean fewer sales of some other item. If sales of tree fruit double but grape sales collapse, the retailer’s profit may go down.
Our correspondent gives an assessment that retailers need to make more on perishables because they are losing sales on core grocery items to Wal-Mart and club stores. Fair enough, but what is the alternative? Surely stores can only make money on things they sell. If history has conspired to shift purchases of paper plates to non-supermarket concepts, the stores will devote more space to perishables; perishables will account for a higher percentage of sales and, yes, will have to produce more profits.
Besides, there is another way of looking at this. If stone fruit is so exceptionally profitable, then retailers have exceptional incentives to devote space to it, promote it and, in general, boost tree fruit sales. It is not obvious that the tree fruit industry would benefit from reducing that incentive.
That our correspondent speaks up on behalf of the desire of growers of all sizes to produce consumer-pleasing fruit is heartening. Unfortunately, we are not sure it is relevant. Steve Kenfield’s letter did not accuse non-big-5 producers of being evil or of wanting to sell bad quality fruit. Instead Steve was making a different point.
It is a point that we have heard before in relationship to food safety. Way back in the midst of the spinach crisis, we ran a letter under the title, Pundit’s Mailbag — Grower/Shipper Calls Buyer-Led Food Safety Initiative Hollow Call To Action, and it contained these lines:
It is the buyer that can truly force change by committing to align its supply chain with like-minded suppliers. Take a look at Nogales — ground zero of lateral trading. It is amazing how many of the companies who signed on to the letter rely on brokers who have no control over or interest in the core elements of food safety.
Food safety is like flavor; to successfully deliver it you must have commitment and control in an aligned supply chain. The commitment required is to hold food safety (or flavor) as a core value. The control can only be asset-based. The parties involved must have control over the assets necessary to execute daily. These assets are obvious from the shipper standpoint, and from the buyer side it is control over the PO’s.
Very often we see good intentions at the VP level vaporize by the time the buyer goes to work.
Trade associations and governmental regulations are not structurally positioned to deliver the commitment or control to raise the bar. Many commodity promotion boards are well aware of the consumer challenge, and they speak to the trade and the consumer as a producer promising to deliver solutions. As a marketing order, however, these groups can influence standards but clearly cannot do what is necessary to solve the consumer challenge.
At best, they have the commitment and control to deliver like a coop… defined by the least capable member, in reality they operate at the lowest common denominator.
Even in industries where there were players who controlled the assets and worked at the commitment, they could not address the eating quality challenge without the retailer.
There must be an aligned supply chain to solve these challenges. When the end is clear and the relationship is right, higher quality (safer food) can be achieved and total costs can be lowered, but only if we get out of the bid-ask environment where these elements are not valued.
To our mind, this is the point: Achieving food safety… or achieving flavor… is not a matter of desire; it is a matter of money. If the person with the PO doesn’t care enough to constrain his purchases to those that accomplish these tasks, it is difficult to justify accomplishing them. We don’t read Steve’s letter as beating up on small growers; we read it as saying that the more closely aligned that grower is with a purchase order that specifies flavor, the more likely it is that flavor will be the outcome.
As it happens we received another letter on this topic from a frequent Pundit correspondent, also disagreeing with Steve Kenfield, but for a different reason:
I appreciate the dialog around the California treefruit industry. No question there are issues that have been well discussed in the postings I read in the Perishable Pundit recently. Steve Kenfield and I are well acquainted and have worked in complementary capacities in both the California and Chilean fruit industries.
However, I disagree that vertically integrated business models will be the ones best suited to adapt to the realities we find ourselves in going into the 2009 season and beyond. By the most liberal of estimates of the volume controlled by the top 5 grower-packer-shippers, they control perhaps 35% of the industry’s total 50 million 25 lb. box equivalent volume. That leaves 65% of the industry that are integrated at different levels and layers, but not necessarily ill-equipped to produce premium varieties, packed in industry demanded packaging, to the ultimate level of food safety.
The reality is that the economies of scale for treefruit are dramatically different even from other tree crops. Techniques for pruning, thinning, harvesting may be as efficient in some instances for a 40-acre grower in many varieties as it is for a 2000-acre grower on a per acre basis. There are hundreds of varieties of peaches, plums and nectarines grown in California, and every one is ‘different’.
However, when it comes to post-harvest handling — from the segregation-of-system approach, fruit from various ‘sustainability’ farming standards (including organic), and the dramatic proliferation of pack styles, PLUs and clamshells required from our domestic and export customers — the combinations may run to 50 [control points] or more to meet our buyers’ requirements. Certainly there is a need to aggregate fruit from growers who are efficient farmers but do not have the capital or the volume in all varieties to individually have their own distinct go-to-market strategies.
Our company, Fruit Patch, is a major treefruit packer with a full range of commodities and varieties with volume equal to the “big 5” to which Steve Kenfield refers. However, in our case, we are attempting to give our multiple individual grower base the facility to get their fruit to market in as efficient a manner as any vertically integrated grower-packer-shipper.
Certainly, there is still more industry consolidation that is likely to occur even before the first fruits are harvested in 2009 and in years to come. However, there still are companies like ours who are in a position to aggregate the best varieties, farmed economically by efficient and knowledgeable growers, and then add the post-harvest services of packaging, sales, and marketing services our growers deserve while offering a smooth go-to-market strategy that is seamless to our domestic and export buyer clientele.
There currently may be too many ‘sellers’ in the market that are contributing to inefficiencies in the marketplace. However, the majority of the fruit grown is grown by individuals who are good at what they do. What they need is better service to allow them the benefits of those who control large blocks of fruit. With the hundreds of unique varieties the industry manages during the season, there are still efficient ways to get them to market without thinking ‘only’ a major vertically integrated grower-packer-shipper has all the answers for the trade.
— Rick Eastes
Vice President Sales & Marketing
Fruit Patch Inc.
Rick is claiming that unique attributes of the tree fruit industry — particularly the many variants of fruit and pack — make it difficult for even a ‘big 5’ company to be as perfectly aligned as it might like. Rick speaks up for the ability of his company, Fruit Patch, to “…give our multiple individual grower base the facility to get their fruit to market in as efficient a manner as any vertically integrated grower-packer-shipper.”
As Rick explains: “There currently may be too many ‘sellers’ in the market that are contributing to inefficiencies in the marketplace. However, the majority of the fruit grown is grown by individuals who are good at what they do. What they need is better service to allow them the benefits of those who control large blocks of fruit.”
So there we have two models: Steve arguing for a grand consolidation so control will rest with fewer, larger, players. Rick arguing for the provision of services to turn independent growers into superstars.
These are not intellectual decisions… the winner is chosen not by a vote of experts but by the rigors of the marketplace. We just hope the winner is clear before everyone goes broke!
Many thanks to Steve Kenfield, Rick Eastes and our other correspondents for helping the industry think through such a difficult question.