Produce has always been an important component of any supermarket, for a number of good reasons. It's one of the few categories supermarkets can use to walk that fine line between quality and price. With few exceptions, prices have remained relatively stable over the past decades for the vast majority of commodity items. Even increases have come slowly. The department is also ideal for making a good first impression on shoppers, particularly in this era of fresh foods, when clean aisles and smart-looking product displays of variety and color are the criteria by which stores are judged.
And, margins are pretty good, and getting better. The department is among the most profitable of all the fresh categories, and a place where retailers can really flex their pricing strategies. According to the most recent FreshTrack survey sponsored by the Produce Marketing Association, whose convention and exposition is this week in Anaheim, Calif., researchers from Cornell University found that produce's average share of company profits was just under 21%, substantially higher than the level of the department's 12.8% contribution to retail sales.
That's why today, produce represents Big Business for retailers. There's tremendous pressure building from below, because today's consumers are coming into the store looking for brand names, new varieties, ethnic specialties and organics. These goods aren't always sourced around the corner. Demand has forced buyers to set up global supply networks and year-round sourcing schedules.
There's also pressure from above: A lot of the back-room operations are undergoing a massive upgrade, incorporating technologies gleaned from the tide of consolidation. The objective of any merger and acquisition is to become more profitable, and retail executives are mandating their associates to adopt a new generation of operating software.
The upshot of all this is that retailers are now amassing a tremendous amount of power over grower/shippers -- the vast majority of whom are still smaller, family-run businesses. We hear a lot about the idea of partnerships in the produce industry, but the level of distress voiced by the supply end seems to indicate that the other side has the upper hand right now.
The two principle sources of agita -- trade practices and technology -- can certainly be seen as more favorable to retailers. Suppliers are grudgingly paying the slotting and related promotional fees that have followed brand names, such as those on bagged salad mixes, into produce. Business-to-business Web sites make their money by charging the grower/shippers a percentage of the sale. Little by little, packers complain they're being squeezed like an 80 size Valencia -- out of existence.
That's been happening on the retail side for the past three years. This last series of mergers and acquisitions has certainly shortened my list of contacts, whether they worked for independent, regional or national retailers. The fundamental truth about consolidation is that it eventually shakes out the entire supply chain. The fact that it started on the receiving end is irrelevant. Now it's poised to change the supply side of the business. That's a painful prospect for many grower/shippers, especially the smaller, underfunded ones, who may soon find themselves absorbed by larger suppliers, or liquidating their assets. It's already happening.
This next phase is necessary, and is ultimately a good thing, because the changes on the supply side will restore the balance of power currently favoring retailers.
Then, everyone will be able to work together as equals again to sell more fruits and vegetables to consumers -- the one aspect of this business that hasn't changed.