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Vendors Beware As Wal-Mart
Alters Course On Procurement

We’ve long tried to understand Wal-Mart, and recently the collapse of Ballantine Produce has led to a reassessment of the impact Wal-Mart may be having on the supply base:

  1. Did Wal-Mart Have A Role In Ballantine’s Fall?
  2. Pundit’s Mailbag — Mike Stuart Of FFVA Speaks Out On Ballantine And Buyer/Seller Relations
  3. Another Sea Change At Wal-Mart
  4. Pundit’s Mailbag — Response To Ballantine’s Fall: ‘Just Say No’
  5. Special Buys, Wal-Mart And The Meaning Of Loyalty
  6. Pundit’s Mailbag — Wal-Mart’s Nature
  7. Wal-Mart’s Current Behavior
  8. Pundit’s Mailbag — Fruit Patch Speaks Out

As Wal-Mart came to develop its produce procurement system, it was a brave band of brothers in the early years, vendors willing to experiment and improvise, that made it happen. Now that system is in flux and many fear for the supply base… and for Wal-Mart. This old-timer who wrote to us recently accepts the critique of Wal-Mart but also warns the supply base that they can’t change the customers; they can only change themselves:

As usual, more good stuff in today’s “Pundit”. Having been involved with Wal-Mart for many years, I thought I might offer a few additional comments:

1. The author of the letter you printed, in your piece Wal-Mart’s Current Behavior, was exactly correct. Wal-Mart doesn’t understand a couple of things: they don’t understand how fragmented the produce industry is. They think buying tomatoes is the same thing as buying TV’s from Visio or apparel from Starter. And it isn’t.

The author correctly identified the hundreds, if not thousands, of support people in the supplier network that enable Wal-Mart to do what it does.

Many much smaller retailers have discovered how difficult it can be just to buy sweet corn for a summer promotion or sweet potatoes for Thanksgiving, with all of the regionality and fragmentation in this industry.

On more than one occasion, Wal-Mart has tried to hit up shippers for problems that resulted from Wal-Mart’s own replenishment staff. Shippers both smart and courageous have told them to go pound sand, but doubtless there are many other suppliers, less courageous and often less knowledgeable about how retailers think, that are getting hammered for that type of thing and are afraid to fight back.

And now everyone in the supply chain should get scared, because it will get WORSE! Remember that Wal-Mart is going through a food “transformation” (read: reorganization). The “buyer” will now be further removed from replenishment, pricing and product location. You think things are “interesting” now? Hold on to your horses!

2. It is just tragic how Wal-Mart is approaching contracts. What is the point of a “contract” with a 50-case minimum? That’s just ridiculous. Here was the way Bruce Peterson explained his plan when he set up Wal-Mart’s produce contracting practices. A process you wrote about earlier.

Wal-Mart tried hard to contract about 80% of its projected weekly needs. When product got tight, Wal-Mart would raise the retail price to slow movement down to the 80%. In other words, Wal-Mart would contract for enough product that through price adjustments it could reduce demand sufficiently that, barring acts of God and non-performance by a vendor, it never would have to pay above contract price.

If the market got sloppy, Wal-Mart still bought the 80% of anticipated volume it had contracted for, but would also buy in additional product at a reduced price, averaged the 2 costs, lowered the retail accordingly, and blew the product out.

This was a win-win-win for everyone. The supplier still had a significant amount of his product being sold at the higher contract cost, Wal-Mart took huge volumes off the market, which kept the market from totally tanking, and Wal-Mart was able to increase sales, while the customer got a great in-store experience.

To be truthful, this concept was not always easy to execute perfectly, especially as volume grew. The whole key to the plan was to keep inventories really tight. AND THAT’S WHY THE REPLENISHMENT NETWORK WAS SO IMPORTANT!

Wal-Mart was actually a supplier’s dream. This giant retailer could “turn on a dime” as it had no ad lids! Wal-Mart also paid its bills and you could cash the check! And, crucially, Wal-Mart never negotiated a contract that was below the cost of production.

Now again, truth be told, Wal-Mart was made up of human beings, often operating under great pressure and, surprise, surprise, it was NEVER perfect at this. But the concept was clear; it was communicated to both Wal-Mart staff and vendors. So many were so proud to be part of this project that, I have to say, seeing it all now, it really breaks my heart to see what they are doing. For the sake of Wal-Mart and its vendors I hope it works, but it is hard to see how in can.

3. My last comment (for now!) is in regard to something you wrote today. You pointed out that there was a time “…when Wal-Mart CEOs believed, as they once did, that Wal-Mart needs its vendors more than the vendors need Wal-Mart.”

It was Wal-Mart CEO Lee Scott who said that at a supplier summit. I heard him with my own ears, and, even if they don’t believe it anymore in Bentonville, it has never been truer.

Wal-Mart is very large now, perhaps 25% of the retail food business. What would happen if suppliers just chose to stop selling Wal-Mart? Suppose they did something really radical, say…. for instance…. like NOT SELLING PRODUCT BELOW COSTS!

In fact there is a lesson here in dealing with all large retailers — Kroger, Safeway, SuperValu, Costco, many more. Many shippers have and have had in the past all kinds of deals including rebate arrangement with many retailers that were and are fob-MINUS! That really makes very little sense.

You have been focused on Ballantine and Wal-Mart and, it is certainly true, as your letter from Mike Stuart of the Florida Fruit and Vegetable Association pointed out, that the pressure from retailers is immense.

Still, pressure is not exactly the same as coercion and in that sense blaming Wal-Mart — or any other retailer — is just half the story. Take the case of Ballantine (and others) — What kind of business model is it to sell product below cost? And here’s the problem for the industry: all it takes is for 1 grower to do that, and here’s what you’ll hear from the buyer: “Why should I pay you “X”, when I can buy the product for “Y” ( X-minus) from so and so?”

This starts a chain reaction. Frankly, many top executives, including those at Ballantine, took and take the position that “ I’m a fighter and will hang in as long as it takes.” It’s a “last man standing” mentality, that you’ve written about before, that just kills the entire industry.

Now some grower/shippers have become large enough and diverse enough that they can “take the hit” for a season in order to gain market share. And then couple all of that with the “market mentality” of individual growers, and you see a train wreck. But again, go back to my original statement. What would happen if large, quality grower/shippers would just say no to Wal-Mart and retailers in general, enough is enough. You want quality, in volume, at reasonable costs, with account resources? Well this is what it will cost!

Go back to the concept that Wal-Mart is 25% of the retail market. WHERE WILL THEY GET THE PRODUCT?

Honestly, if I had to identify Bruce’s biggest fear during all his time at Wal-Mart, it was that a quality supplier would opt to leave. What would happen, for instance, if Chiquita, Dole, and Del Monte quit selling Wal-Mart bananas? Where do you get 2 ships of bananas from every week?

Oh, you can get bananas, but they will be low quality.

Grower/shippers are content to get “bent over” by Wal-Mart and other big retailers until more and more of them go broke, consolidate, or otherwise disappear.

Bruce Peterson has been giving speeches to grower groups all over the country and he explains it clearly: The problem with today’s grower/shippers is that they want to apply business models that were effective in the 70’s, 80’s, and 90’s to today’s business climate. And as someone pointed out in different circumstances, “ someone moved the cheese”.

I think it’s fair and reasonable to point out what Wal-Mart and other large retailers are doing. But at some point, suppliers need to quit “whining” and begin to rethink their “go to market” strategies. This includes what they grow, how much they grow, who their customers are, and what they are willing (and can afford) to do. If you listen to Bruce, though, he doesn’t believe this will happen strategically or intellectually. Instead the winnowing out will be, in his term, DARWINIAN!

We appreciate the letter and suppose we can wish for a better outcome but, truth be told, when has there ever been a great commercial battle that has been decided on a basis that was otherwise than Darwinian?

And it is always the one weak competitor that ruins the market for everyone else.

We suspect that exhortations to producers to have a stiffer spine are not likely to prove productive.

Some producers have refused to sign contracts that they thought were losers. But, mostly, this has been with row crops where the growers could lose less money by not planting than by signing one-sided contracts.

When it comes to fruit on the trees, so much money has been sunk, there is at least the possibility of increasing cash flow or reducing losses by selling even at a price that doesn’t cover all expenses.

And, of course, there is a whole other issue, which is that many vendors have assumed the contracts would be used fairly and not manipulated so that they become one-sided documents. Often the price in the contract is fine. It is the way Wal-Mart decides not to buy under the contract when markets are weak and demand every box they can demand when prices are strong that is the problem.

Yet this is nothing new either.

When the Pundit was cutting his eye teeth in the business, he was sent by the Pundit Poppa down to Puerto Rico to study under the tutelage of one of the Pundit uncles, Sydney Prevor, who had long run the firm’s Puerto Rican affairs.

We imported many items, potatoes prominent among them, and we would sell them to small wholesalers who had slots at the Mercado.

One customer was a little bigger than the rest and he could order, in advance, a full trailer. In exchange for doing so, he wanted a discount. So each week we gave him an offer, he accepted it and we had a contract for the week.

Yet, a youthful Pundit learned about contracting from this customer. For it turned out that when the ship would arrive, if the market price was below the contract price, our customer would speedily come to get his trailer of potatoes and, in fact, would always have a story as to why he needed a few pallets extra at the same price this week.

Yet when the contract price was above the market, he never came for his potatoes. We would call him and there was always a reason why he needed it cheaper this week.

In time Uncle Sydney advised our customer that a contract with him was no contract at all and told him we would no longer give him a price in advance and he was welcome to buy at market from us every week.

Little did we understand that the mighty Wal-Mart in its behavior would come to mirror our Puerto Rican potato customer.

Now we could refuse to contract when the contract was a sham because our business did not depend on this one guy. When Bruce Peterson was running produce for Wal-Mart, he had a rule that Wal-Mart should never account for more than 25% of any supplier’s business. He developed that rule because Wal-Mart had a policy that Wal-Mart should never account for 30% of anyone’s business. So the 25% kept vendors from getting too close to the limit.

It is fair to say that every single vendor Bruce Peterson ever did business with heard him give this message: “Never put yourself in a position that you can’t walk away from Wal-Mart — or, for that matter, any other customer.”

This was advice both wise and sincere — and also mostly ignored. This is not because vendors were foolish; it was because of the realities of the situation.

First, if you got typed as one of the companies “helping Wal-Mart,” it wasn’t as if Kroger and Safeway were going to beat down the doors to buy from you. Sure if they needed you they used you but, the good steady business went to their own teams — vendors who were strongly encouraged not to work with Wal-Mart.

Second, even giant produce companies are tiny compared to the big CPG companies such as Procter & Gamble. Wal-Mart was growing so quickly that few had the capacity — both financial and managerial capacity — to grow at four times the rate of Wal-Mart and thus keep their Wal-Mart business both growing at Wal-Mart’s rate of expansion and keep the Wal-Mart business at a steady 25% of business. Most had their hands full keeping up with Wal-Mart.

Third, as Wal-Mart grew, it was grabbing market share which left it very difficult to pick up market share from the non-Wal-Mart segment of the industry. Now, if Wal-Mart’s market share is about 25%, it would be mathematically impossible for Wal-Mart’s vendors to stay at 25% unless every producer in the country was a Wal-Mart vendor or unless the vendors have lots of unrelated businesses.

So most vendors decided to take their chances. This was and is very dangerous. Fleming doesn’t exist anymore because it took too much business from K-Mart. Yet for most produce companies it was a risk worth taking and, in fact, worked out very well for many.

It seems that the bottom line is this: Wal-Mart is changing the way it approaches vendor relations. This is not a shock, we have written about it for years. Many of the changes are objectionable to the vendor community but it is a free country and Wal-Mart is allowed to make its own vendor policies.

So Wal-Mart vendors have to be mindful that they now live in a much more adversarial world than they entered into years ago when first dealing with Wal-Mart. Bruce Peterson sincerely believed that a vibrant vendor community was in Wal-Mart’s interest. His successors don’t seem to think about that subject at all. So vendors need to beware and not rely on goodwill to make a contract work.

We would encourage Wal-Mart not to press too hard. As we have written before Wal-Mart has interests in ensuring food safety, traceability, sustainability and other supply chain matters. If it squeezes the profit out of the system, there won’t be the capital available to ensure Wal-Mart’s interests in these matters are fulfilled.

We also suspect, as we mentioned here that government will not just stand aside and let Wal-Mart capture 50% of the food retailing business in America. At some point, the government will move to split up Wal-Mart, and Wal-Mart will wish it had many passionate allies all across the country, people like farmers who could testify as to how important Wal-Mart is to the prosperity of the farm economy.

But if all the farmers went broke or live on a shoe string — who will be there to speak on Wal-Mart’s behalf?

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