SMOOTH OPERATOR

ROBERT VOSBURGH

Fresh foods can be a tough sell: They're time- and temperature-sensitive; sourcing can be spotty; and pricing is a delicate task. Yet Wal-Mart has been able to adapt its general merchandise and grocery supply chain to accept these finicky products -- and make money doing it.

Indeed, Wal-Mart's move into fresh foods ushered in a new era of efficiency that changed the way perishables are sourced, transported and merchandised in-store. Each component of the strategy is focused on reducing costs throughout the supply chain by utilizing cutting-edge technologies, materials and systems. Combined with an aggressive growth blueprint, the retailer has used those operating protocols to set the pace for the rest of the industry.

To be sure, Wal-Mart's fresh merchandising is not in the least bit sexy; there are no panoramic murals or European market touches to the decor. But the departments are clean, well-organized and there is enough variety to support interest. Signage is all price-driven. Consumers get what they want, when they want, at a price they like. And it keeps them coming back.

"Consumers know today if you say 'Wal-Mart,' low prices automatically come to mind," noted Ron Pelger, a former retailer and founder of Ronprocon, a Reno, Nev.-based consulting firm that specializes in produce merchandising.

Wal-Mart, with more than 1,180 supercenters, 36 Neighborhood Markets and 515 Sam's Clubs in operation in the United States, pioneered widespread use of returnable plastic containers and case-ready packaging. These two fresh-foods initiatives, in turn, have compelled traditional retailers to sit up and modernize themselves. Wal-Mart's decision to embrace these concepts early on, with a scientific eye, helped them implement their fresh programs in a way that allowed for an easy transition that did not alienate consumers.

The whole process was facilitated by assuming a proactive approach to suppliers. According to Steve Lutz, executive vice president, Perishables Group, East Wenatchee, Wash., the philosophy represented a new attitude in retailer-vendor relations.

"I don't see the level of data-sharing and cooperation across the board like I do with people who work with Wal-Mart, in terms of access to information, the ability to get data to support decision-making. It's because Wal-Mart is willing to bring in and make partners of their vendors," Lutz said. "And I think that's the key differentiation -- Wal-Mart not only buys product, it also buys brainpower."

Lutz, whose firm has worked with suppliers holding Wal-Mart contracts, said that the giant retailer differs from more traditional-thinking operators in that it acknowledges vendors' inherent subjectivity in crunching numbers, yet remains willing to let suppliers develop sales execution plans.

"Wal-Mart approaches it by saying, 'We recognize you have a bias because you are a vendor, but we trust you will make that bias work in our favor. And we will hold you accountable."'

In fresh foods, Wal-Mart had to find a way to move perishable items through its distribution network using a system that had, up until then, always handled durable nonfoods and shelf-stable grocery products.

"They're a pioneer in terms of moving entire product lines into the store," said Huston Keith, principal of Keymark Associates, a Marietta, Ga.-based consulting firm for the meat industry. Keith noted that case-ready meat currently comprises 15% to 20% of the total meat market, with Wal-Mart taking a substantial share of that figure. The retailer was also willing to jump in with a different package than what consumers were used to seeing, which accelerated the development of modified-atmosphere packaging and the use of lidded trays. Until unionizing problems in 2000 compelled the retailer to switch wholly to case-ready meat lines, most other retailers were only using the technology -- developed in the 1960s -- on an intermittent basis, Keith said.

"A lot of other chains like Kroger have had case-ready programs only in certain areas or specific commodities like ground beef, and then there's a number of chains that have used case-ready product selectively as fill-in," he said. "Wal-Mart was more integrated and systematic about it. They stepped forward and said, 'This is what we're going to do.' And they started setting up the entire distribution plan and contacting suppliers to supply the whole chain."

The use of returnable plastic containers in the produce department came about as the retailer searched for the best way to protect produce as it moved through the chain's hard-goods system. In-store, the plastic mesh boxes promote a clean, efficient image. The RPCs, in black and green, are used throughout the dry displays and wet racks. As one of the leading users of RPCs, Wal-Mart puts them to maximum use. Mobile merchandisers, their color matching that of the RPCs, hold up to 16 individual containers. Most typically, they are set in a four-by-four pattern. The laden racks are then paired with endcap units to form a series of four themed islands, each topped with clear price-centered signage.

RPCs are also adapted for use directly on the floor, decorated with a hand-printed sign reading, "Fresh! Farmer's Market Produce." Here, the "bin" appearance is achieved by stacking standard RPCs and overfilling the structure with product, allowing the produce to spill over into connected containers. Produce sold this way includes naval oranges, Fuji apples and bagged white potatoes.

The boxes are also used for the category's No. 1 seller, bananas, as well as in the stores' wet racks, which form a back "wall" to the produce department. According to officials SN spoke to during a store visit, more than 80% of produce items arrive from the distribution center in RPCs, though they may not be merchandised on the floor in them. Product inside the racks is often single-layered, wherever possible, to minimize bruising.

The boxes help fulfill the retailer's goals on several levels, according to industry observers. First, Wal-Mart's closed-loop system has generated cost savings since the RPCs are sanitized and returned to the field.

"Some retailers like Wal-Mart see RPCs as more environmentally friendly [than corrugated cardboard]," said Pelger. "They're faster and more efficient, and they look fine on euro-tables. Labor is also simplified, because store employees just put it out."

Pelger added that the labor situation in retail has become a critical component in debating the merits of produce containers, since roughly 75% of store associates are part-timers.

"And if you're relying on them to run your store, you don't have time to re-package and trim product in the back room," he said.

RPCs may help Wal-Mart get product from the field to the shelf in the most efficient manner, but that process doesn't mean a whole lot to the consumer -- ancillary programs like signage do, however.

"The signs in their stores are very well thought-out," said Pelger. "They're disciplined and always have the same consistent message. They're not sloppy."

One typical Wal-Mart fresh-foods sign reads, "Save Even More!" And in produce, the message is even more critical since, with the exception of grand openings and the like, the retailer does not put any produce items on ad. Rather, the idea is to sell food items via the in-store shopping experience. In produce, this is somewhat simplified by the fact that it is the first fresh-foods department customers enter once they pass through the store vestibule.

Signage promoting price is bolstered by top-name brands, particularly in the perimeter departments where the retailer has yet to make its own impression. Here, Wal-Mart executives have opted to let established brands do the talking, and in the process they bring with them a reputation for higher quality and consistency. The trend is readily apparent throughout produce, deli and in the meat department, with names ranging from Sara Lee to Dole to Tyson.

In the meat department, self-service reigns with a large selection of case-ready product. The extent of the case-ready selection stems from controversy. It was in 2000 during a labor-organizing effort that the company announced its decision to launch an extensive case-ready program that would eliminate the need for meatcutters. While some stores have a service case, the vast majority rely on major packing houses shipping case-ready packages of primal cuts and value-added product.

Seafood is also largely sold prepackaged from self-service cases at Wal-Mart stores. Those units offering service are usually confined to selling the top six or seven most popular items, such as frozen shrimp, salmon, catfish and flounder. Industry observers and competing retailers said this is a prime example of how traditional supermarkets can hone a marketing strategy that effectively minimizes the price differential that is a thrust of the Wal-Mart blueprint.

"Wal-Mart is good at what they sell, but they're limited because of the way they work distribution," one Midwestern fresh-foods retailer told SN. "We're more flexible and can take advantage of special offers that require us to jump in and move the product out while it's fresh and available, especially in categories like seafood and produce. Wal-Mart has trouble doing that because their supply-and-distribution model is designed to handle all products pretty much the same way. It prevents them from making exceptions."

The perishables director said his stores offer 15 varieties of fresh service seafood on most days, such as lobster, scallops and orange roughy, that go beyond Wal-Mart's limited menu. The retailer uses variety to remind consumers that Wal-Mart is not an end-all to shopping.

"Our service associates in all our service departments -- not just seafood -- remind ourcustomers that our prices might be a little higher in some cases than Wal-Mart's. But look at what you're getting for that money. For some, price is the only thing they consider. But we try to stress the value of our foods -- 'Look at what you're getting for your dollar' -- that sort of approach."

To be sure, retailers large and small have been using Wal-Mart as the stick by which they measure their own performance. Most recently, Safeway, Pleasanton, Calif., cited Wal-Mart several times in discussing initiatives in its own perishables departments during a conference call with the investment community.

"We already have a good lead over conventional operators and Wal-Mart now, but that lead is not big enough for us to stand out," said Rick Dreiling, executive vice president of marketing and manufacturing. "So we're reviewing product specifications on all merchandise shipped because we want nothing less than the best quality, and we're checking products repeatedly -- from the field to the warehouse, at the warehouse and from warehouse to the stores -- to assure quality."

In produce, Dreiling said Safeway is striving for better selection, adding more theater to its store-level presentation and "maintaining standards every moment of every day."

In meat, he said the quality of Safeway meats is better than Wal-Mart "and slightly better than conventional competition, but not where we want it to be."

Lutz of the Perishables Group said talk of category development remains the key to competitive differentiation. But putting words into practice requires more than just discussing how Wal-Mart sells fresh foods so successfully.

"A lot of the category management, category development-type activities that are being implemented in fresh markets are really being driven by organizations trying to copy what Wal-Mart has been doing," said Lutz. "The challenge is that they're trying to copy it from a data standpoint only. It's not just data; it's a corporate philosophy."