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Special Buys, Wal-Mart And
The Meaning Of Loyalty

One very insightful participant in the California tree fruit industry had a different take on the interplay between Wal-Mart and the collapse of Ballantine Produce:

This season is certainly setting up to have all the drama of the next “24” episode. A drama you touched on in your piece titled, Did Wal-Mart Have A Role In Ballantine’s Fall?.

I think there is one piece missing that also involves Wal-Mart. The real crippling element of the Wal-Mart deal may not be their lowering of the contract prices, rather the trading margins that were generated early in the program that covered a myriad of sins in the basic business structure of Ballantine and I might also add Fruit Patch.

Going back to the early Wal-Mart days, here is my take on it. When Wal-Mart first started in produce, they attracted those tree fruit suppliers that had to live by their wits and creativity because they did not have a strong product base to work from.

Their early suppliers were Kings Canyon, Surabian Packing, ITO, Ballantine, and Fruit Patch. At the same time, the blue chip companies — Fowler Packing, HMC, Gerawan — did not need the business and certainly were not going to jump through the retail link hoops etc., of dealing with a newcomer to the retail food world.

As the years passed, Wal-Mart placed greater emphasis on a company’s ability to do vendor-managed replenishment than their ability to grow and reliably deliver product. In our category today, Pandol, Del Monte, C.H. Robinson and Crown Jewels are all vendor co-managed tree fruit suppliers. Fruit Patch and Ballantine saw the potential gross margins that could be generated by selling at the then very attractive Wal-Mart contract prices and buying at the open market prices.

They both opened offices in Bentonville to secure their stake of the DC assignments. And for a number of years, Ballantine and Fruit Patch netted millions by trading on their access to Wal-Mart. I believe this profit opportunity played a role in the sales management changes at Fruit Patch several years ago, and I can only assume was factored in the sale of the business to American Capital.

As special buys came into the picture, this put a dent in the margin potential of the business. As Wal-Mart has been more aggressive in their contract pricing, the risk of taking Wal-Mart contract business, without having the fruit to cover the commitment, not only limited the margin potential but has now created a potentially significant risk should the spot market be higher than the contract market.

Take a year like this where the volumes will be off 20% on peaches and nectarines and 40% on plums, combined with the higher specs imposed by Wal-Mart this year, in the short-term millions of dollars will be lost by those having to cover the opening orders. This will come out of the marketer’s pockets, not their growers. The growers will get the benefit when the orders are filled during the course of the season.

If a company is thin going into the season and takes a big hit on the front end watch out! I would not be surprised to see some out-of-stocks at Wal-Mart on tree fruit.

One positive that we must give Wal-Mart high marks for is loyalty. Just several weeks ago, Ballantine was awarded 11 DC’s and Fruit Patch awarded 10 as in previous years despite suggestions to Wal-Mart of their weakened condition.

These comments are not at all insightful to those close to the tree fruit shipping world.

We appreciate the input but find this analysis raises as many questions as it answers:

Fruit Patch, Ballantine and Trading

As to the specifics of Ballantine and Fruit Patch, it strikes us that they are similar to many of Wal-Mart’s contract vendors in that they have secured produce from a variety of sources. Fruit Patch has its own facility in Dinuba and packs there, but it also has marketing agreements with other packers who pack its brands and does work with a few outside packers with whom it shares portions of its business. We actually understand it picked up an extra 400,000 odd cases “to pack” just in the last month or two.

Although Wal-Mart has tried to steer away from brokers, perhaps foolishly, it has never required its vendors to own 100% of the farms on which its produce is grown. In fact, since the vast majority of growers are surely incapable of being true strategic partners with Wal-Mart and utilizing the Retail Link system to its fullest advantage, requiring vendors to own all the farms the fruit comes from would basically dictate an enormous consolidation of the farming sector.

It is also not clear that a “pure grower” would best meet Wal-Mart’s needs. Part of the responsibility of a contract vendor is to avoid-out-of-stocks. We noted when there were weather problems in the east that those retailers who had contractual relations with specific farmers wound up either being out of stock or doing a lot of work themselves. Those who dealt with more complicated organizations — some might have had growing operations but also represented growers and bought product on the trees or in the fields and had strategic partnerships and importing divisions, somehow managed to mostly keep product flowing.

To say Fruit Patch or Ballantine were “trading on their access” to Wal-Mart sounds pernicious but really is just another way of saying these companies had a satisfied customer that valued things other than fruit production — vendor-managed replenishment, for example — and they were buying product to satisfy the needs of their customer. Remember that no matter who grew the fruit, it was the vendor working with Wal-Mart that had responsibility. The fruit had to be acceptable to Wal-Mart, whose metrics for out-of-stocks, rejections, etc., had to be met, credit had to be provided, etc.

Even saying that these companies opened offices in Bentonville to “secure their stake of DC assignments” sounds evil, but then one thinks about how opening an office secures DC assignments. Isn’t it just as accurate to say that they opened sales offices in Bentonville to give Wal-Mart the best possible service and, as a result of doing so, were given DC assignments?


There is some potential truth in Wal-Mart ‘perhaps running short’, but not likely with peaches, the largest item. There are too many other local regions where Wal-Mart will be sourcing, and we are told that the Carolinas and various Midwestern states have ‘full crops’. The prevalence of ‘buy local’ programs, by Wal-Mart and others, is sufficient to change our calculations on adequacy of supply out of California.

Owning Fruit vs. Buying Fruit

We also question the implication of what our correspondent is claiming regarding the positioning of vendors who own fruit vs. those who buy it. If the spot market is high and a grower has fruit, he would sell it at that high market price. If he doesn’t because he has a contract with Wal-Mart, he is losing that margin just as assuredly as if he were buying the fruit. The only way it would not be a loss would be if later in the season Wal-Mart was to overpay for the fruit in down-markets.

Much of the complaints we have heard about Wal-Mart’s procurement practices, though, is that it is doing the opposite. When spot prices exceed the contract price Wal-Mart demands every box the contract allows… and more. When the contract price exceeds the market, Wal-Mart seems to find ways to buy little or nothing. And there are always ways. For example, the DCs themselves are allowed to buy product directly. Supposedly this is limited to 2% of DC volume, which sounds inconsequential — unless the DC takes the whole 2% in one commodity!

It is true that a company that owns all its farmed land and its packinghouses free and clear without any mortgages — that is well capitalized enough not to need to borrow for pruning and to carry its accounts receivable, not to mention to invest in supply chain initiatives such as traceability, food safety and sustainability — may, in fact, make a “profit” at very low prices and thus avoid the fate of Ballantine Produce. But this “profit” is a chimera as it provides no return on capital. The issue for the industry is how to make a profit sufficient to justify new investment and thus attract new capital to the industry.

The Early Days and Loyalty

This letter reads to us as if one who had not worked hard to help make Wal-Mart a success now wants to set up a justification for getting Wal-Mart business. The bottom line is that 20 years ago, some companies chose to align themselves with Kroger, Safeway, Supervalu/Albertson’s — and some chose to hitch their wagons to the Wal-Mart star.

Choosing to work with Wal-Mart was not without consequence. It was difficult for a Ballantine to get the business of other chains because it was identified as being on Wal-Mart’s side. And, as our correspondent points out, it was a lot of work for very little business.

Of course, our correspondent is correct in pointing out there were reasons why everyone elected to do what they did, but it was a conscious decision, nonetheless, and it is maybe too simplistic to say that the “blue chip” companies didn’t need the business. Chiquita was one of those early suppliers, as was Martori Brothers and many others; these were not small guys who had to “live by their wits.” It might make more sense to call them visionaries who chose to align their companies with a customer they assessed would be a long-term winner.

We can’t get excited about a loyalty that says you still get the business as long as you are as cheap as anyone on the planet.

The other day we ran a piece, Pundit’s Mailbag — Response To Ballantine’s Fall: ‘Just Say No’, which included a letter from a trucker who pointed out that this kind of customer isn’t a customer at all.

There is a business case for loyalty. Four years ago, when one spoke to Wal-Mart vendors, they were fiercely loyal. They didn’t care what anyone said; they were on Wal-Mart’s side. It is not an inconsequential thing in produce to have a supply base passionate about helping a customer win.

Yet, we confess that there is something more. We were brought up to believe that loyalty was a value in and of itself. Back when the family business was based in the old Washington Street Market in Manhattan, the Pundit Poppa once needed a loan. He was turned down everywhere, except one bank said yes and he moved his accounts there.

Some years later, the City of New York moved the market to the Bronx and the Pundit Poppa was an original tenant at the Hunts Point Market. The bank that had given the loan didn’t have a branch in the Bronx. Yet for years thereafter, at his own expense, the Pundit Poppa had a courier take his deposit down to the bank in downtown Manhattan every day. Note: he didn’t ask the bank to pay for the courier or demand the most competitive rate, he just stood by the bank that stood by him when he needed it.

This was an action hard to justify by any business interest. By that time, our family business was larger and well financed and could get a loan from any bank. The only way it made sense was because this was as an authentic expression of personal and corporate integrity; we didn’t forget those who helped get us to where we were.

Maybe it wasn’t a strategy to maximize profits but, then again, you have to ask over what time period you are considering. When the Pundit came to work at the family business, he quickly learned that the loyalty was repaid many times over. We got product, we got export vans, we got trucks, we got consignments, all because the Pundit Poppa was loyal. Or more precisely, because he didn’t begin every day as if the past had never happened — he felt obligations to vendors, employees, customers and others that were never in a written contract.

We never once saw him turn away a friend. He didn’t act this way because it was a brilliant business strategy. He did it because it was the way his father taught him; and it had become his way. Is the Pundit wrong to think that in the gifts heaven has provided, being taught by men such as these was among the most valuable?

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