SAN DIEGO -- With few exceptions, produce is still the preferred way retailers demonstrate their commitment to freshness, quality and variety. But changes in the industry -- consolidation, technology and better-educated consumers -- demand that operators change the way they source and sell their product mix.
According to Bruce Peterson, vice president of perishables for Wal-Mart, Bentonville, Ark., the challenge retailers face is how to gear their products to the area they're selling to.
"The real key, for not only a company like ours, but as you see this consolidation happening, is [how] these companies leverage their size, yet at the same time tailor their merchandising mix to what's going on geographically," he said. "Marketing [in] California is very different than New York, which is very different than Florida."
Jim Donald, president and chief executive officer of Carteret, N.J.-based Pathmark Stores, said that all of its new stores are being designed around the produce department, which sets the "ambiance" of the store.
"As we look at the shifting demographics, produce is really the driving factor for Pathmark as we embark on a new expansion plan," he said. "We're putting produce in our stores right at the front, featuring it in a power aisle."
Donald, Peterson and others made the comments just prior to the announcement that Zaandam, Netherlands-based Ahold would acquire Pathmark (see Ahold's New Level, SN, March 29, 1999), at a panel discussion on produce's future at the United Fresh Fruit and Vegetable Association Convention and Exposition here.
Donald said that produce has always been very profitable for the chain, with sales ranging from 7% to 9% of total-store sales. He compared that to an industry average of about 6% to 11%, but noted that the figures are "all predicated on how well the other departments do."
Fruits and vegetables are an even bigger player in the food-service industry. According to Frank Guidara, president and CEO of Santa Monica, Calif.-based Wolfgang Puck Food Co., produce is a major ingredient in three different types of cafes, traditional, grand and express; a line of frozen entrees; a line of 10 soups; and fresh-meals units located inside Encino, Calif.-based Gelson's Markets and Byerly's, Edina, Minn..
"[Produce] is a big part of our business as we continue to stress freshness, wholesomeness and organic," he said.
Guidara noted that, while produce in retail chains typically represents less than 12% of the food-cost dollar, his company ranks it at about 18% to 20%. It is such a large component of the menu that Puck has found it advantageous to source from a single procurer, who in turn works with grower/shippers to receive products at fixed cost.
"We can now, whether it's in Orlando or Denver, or the State of Washington, maintain cost," he said, adding that its three biggest produce needs are hearts of Romaine, salad mix and garlic.
The need to nurture good relations with reliable growers is becoming more evident as supermarket chains expand outward, the panelists agreed. Unlike the past, the contact between retailers and shipper/growers is continuing to strengthen because retailers are looking for more and more commodity items to fill their shelves.
"I think you're seeing a lot of sophisticated retailers turning to the food-service example and saying, 'Look, this isn't so much an issue about price, this is an issue of consistency,' " said Peterson. "That's why you're going to see a lot more contracting or extended-pricing formulas going on, because as companies get bigger and bigger, their appetite for daily replenishment of that shelf is important."
He noted, however, that industry consolidation will not necessarily freeze out smaller suppliers. Rather, the merger-and-acquisition activity will encourage some grower/shippers to diversify.
"You're going to see consolidation to the point where you have a large percentage of it controlled by fewer players," he said. "But, you still have this other group of the industry that's going to be very fragmented. Companies are either getting very, very big or very, very specialized."
He said that even though about 50% of the supermarket business -- worth $460 billion -- is controlled by about 15 players at this time, there is still another 50% out there to supply.
"[The industry] is not moving in the same direction as the car business, the airline business or the top three players in discount that control about 85%," said Peterson.
Pathmark's Donald agreed that the fragmentation occurring in the second 50% of the retail industry right now presents the opportunity for retailers and suppliers to develop specialized programs that better target the retail sale.
"Individual relationships between growers and shippers and retailers are going to be very important as those common strategies develop into a merchandising theme," he said.
In addition, Donald pointed to the fact that consolidation is a common phenomenon that has already affected Europe. Like the European counterparts, he said, U.S. retailers must also react accordingly.
"There are efficiencies out there that are going to have to take place in order to compete in the new millennium," said Donald. "What these large companies are doing [is] trying to take advantage of these new efficiencies and really be able to deliver a better product to the customer.
"Three to five years ago, the Top 5 chains did 24% of the total food business. In two or three more years, the Top 5 chains will do 50% of the total business. Overseas, the Top 5 chains are doing 78% to 82%. So, it's going to happen," he said.
In the face of consolidation, technology is proving to be even more important for retailer survival, specifically in the areas of communication and information.
Peterson said that the Internet now allows retailers to access vast amounts of information quickly. But, he added, they must first learn how to make it work for them.
"The problem becomes, 'Is it presented in such a fashion that I can make an intelligent decision?' " he said, noting that the consolidation of information sources themselves is causing "fewer and fewer people making bigger and bigger decisions."
Technology can open a new level of efficiency between retailers and suppliers by way of digital imagery. For example, a specific shipment can be accepted or rejected prior to actual delivery, eliminating an entire cost segment from the distribution channel.
But, some panelists pointed out that technology is not a cure-all, specifically in the area of quality assurance.
Questioning how viewing a 35mm picture depicting a case of apples on a computer screen could guarantee produce integrity 100%, Donald explained how Pathmark discovered the effect that food safety issues have on consumers.
"There's no question in our minds where food safety ranks on our consumers' minds," said Donald, noting that Pathmark's sales volume went up 5% in its New York state units after it was ranked as the cleanest supermarket in Westchester, Putnam and Rockland counties.
"Once you convince Mr. and Mrs. Consumer that your chain is clean, that foods are just in tip-top shape, you're going to drive your business."
To that end, technological advances are improving food safety by using case coding, which allows items violating health standards to be efficiently traced back to their origins.
Another advantage provided by new technologies is improved quality and manageable quantities provided by growers implementing controlled-atmosphere growing facilities.
"Food safety in technology isn't necessarily a matter of communication," said Peterson, adding that many retailers are turning to biotechnology.
The Internet is also being considered a consumer-direct selling tool, with the possibility that consumers will one day accept the idea of purchasing on-line.
"The way the retail business is going, the Internet is going to be a huge part of food retailing, just as it is in books and music and clothing," said Donald, eluding to the fact that billions of dollars were spent purchasing these items over the Internet during the holidays.
"Everybody says that if you can't see it, smell it, touch it, you're not going to be able to buy it, like produce or any perishable item. But I don't think that's necessarily true," he said.
His feeling is that customers will one day wake up to the fact that shopping on-line allows them to save valuable time.
"I think the time-starved customer is going to eventually say, 'I am going to take a chance, I am going to go ahead and order all this perishable stuff over the Internet and let's see what happens,' " he said. "And, once they do that, and once they're pleased with it, you won't get them into a store again."
Marketing produce via the Internet has already become a working model in a number of larger cities including New York and Chicago. But, those cities enjoy a densely populated customer base, which makes delivery easier.
"There's a large density of people, first of all, which makes the distribution part of it work," said Peterson. "The other issue is personal security. The people in cities are oftentimes reluctant to go out as frequently as they may do otherwise."
With the debate over whether consumers are ready to purchase produce over the Internet far from over, Peterson said that his experiences with Internet retailing at Wal-Mart have led him to believe that they are in fact ready.
"We have a touchy, feely business," he said. "But one of the things we find that happens is that people trust certain names, whether it be the brand of a product or whether it be a retailer brand."
For example, he said that if a consumer has a positive experience shopping at a Pathmark store and then logs onto Pathmark's Internet site, the consumer's confidence in the store and the store's name will instill the confidence to order fresh produce over the Web.
"I think the thought that technology is going to somehow drive the human touch out of the business isn't really the case," said Peterson.