FRESH PERSPECT VE

ELLIOT ZWIEBACH

Wholesalers are realizing more and more that perishables can be a key differentiator for their customers, and many have taken steps recently to enhance their offerings in those departments, particularly produce.

“Nothing is more impactful than a beautiful display of produce in a grocery store,” Carl Morley, vice president of fresh foods at Associated Grocers, Seattle, told SN. “Whether high-end, low-end or in the middle, produce is always beautiful, and that's what is driving the business.”

As consumers put more demand on retailers for high-quality perishables, “we recognize there's an opportunity there for us to provide those solutions to our members,” said Dan Murphy, senior vice president of perishables and retail support services for Unified Western Grocers, Los Angeles.

“The center of the store is shrinking, with a lot of business going to the Targets, Costcos and Wal-Marts of the world, and consumers are looking more toward the supermarket's peri-meter for fresh solutions. As wholesalers, we need to protect the retailers' volume by making as many perishables as possible available, because that's what helps differentiate their stores from the standpoint of quality, merchandising and variety.”

Gary Gionnette, chief operating officer for W. Newell & Co., the produce distribution arm of Supervalu, offered a similar assessment. “As consumer demand for fresh produce has continued to increase, produce has become a key competitive difference as well as a growth area for retailers.”

According to Bryan Silbermann, president of the Produce Marketing Association, Newark, Del., “The more high tech life gets, the more the need arises for high touch, and nothing has the high-touch appeal that produce has. Produce appeals to one's sense of where food comes from, and it's one of the only products in the store that truly looks the same as when it was picked.”

The public's growing interest in organics has increased the potential market for produce, Silbermann added. “Produce sales have been accelerating for the past 10 years or so, and the growth in organics has helped accelerate it further in the last five.”

Dick Spezzano, principal at Spezzano Consulting Services, Monrovia, Calif., said he sees no end to the potential growth of produce sales. “Distribution has moved from about 10.2% in 2000 to an average of 11.5% in 2006, so it's growing at a rate of roughly 20 basis points a year, which means it's going up about 1% every five years — and I don't see any top-side.”

Wholesalers are responding to opportunities to grow the business in a variety of ways:

Getting Fresh Again

For Unified Western Grocers, the decision to get back into produce distribution was an easy one.

“As freshness started to come back as a major retail factor, Unified recognized it had a gaping hole to fill because it was clear that's where the growth in the business is,” one West Coast observer told SN.

“All the information available says produce is the No. 1 reason, aside from location, that customers shop at a store,” Murphy said, “and that's part of the reason we're getting back into produce distribution in Southern California.”

Unified got out of produce distribution in the mid-1990s when its largest retail customer — which accounted for nearly 25% of the cooperative's produce volume — sold his business. “That was before the growth of the Hispanic retailer, and it didn't make economic sense at that time for Unified to stay in the produce business, so it converted the warehouse to additional grocery distribution because it needed the space,” the observer said.

Another Unified member took over the wholesaler's Southern California produce distribution business and ran it for himself and other retailers until he retired, “and that's when we decided to get back in,” Murphy said.

Unified eased back into produce distribution in 2004 with a brokerage program for high-volume commodities; it subsequently leased a warehouse and began distributing produce to a number of its members in Southern California while continuing to distribute in the Pacific Northwest and to use a third-party distributor in Northern California.

Under the brokerage program, Unified arranges for members to buy truckloads of high-volume commodities, then negotiates a price with growers, who ship the products on pallets directly to the retail stores. By not shipping products into a warehouse, the process reduces the delivery time by at least two days, Murphy pointed out, “which means the merchandise at the stores is fresher.”

To accommodate the needs of smaller members who cannot buy full truckloads and to be able to offer members lower tonnage items, Unified opted to get back into produce distribution last September when it leased a 65,000-square-foot warehouse a few miles from its headquarters and stocked it with approximately 300 stockkeeping units — an item count Murphy said will approach 800 as Unified adds more stores.

“This program is just starting to get legs,” he said.

About 60% of Unified's produce business is done on a brokerage basis, and 40% is through the warehouse, Murphy pointed out.

He declined to pinpoint Unified's produce volume but said the potential is “well over $300 million.” He said he expects Unified to reach that level within a couple of years.

Segregating Produce

At Nash Finch, the impetus to restructure its distribution business came from the desire to do a better job serving its independent customers at a time it believes many of its wholesale competitors are focused more on corporate retail, Alex Covington, chief executive officer, told SN in November.

“I think there's an opportunity for us to raise the bar in terms of execution and logistics,” he said. “We can step in and fill a need that hasn't been filled for independents in the last few years.”

Nash Finch's plan is to divide its distribution business into three sub-brands — produce, meat and Center Store — in order to do a better job in each, Covington explained. “When you are trying to distribute all categories, different priorities get in the way of doing each individual category right,” he said.

“What we plan to do is un-bundle [each category] so the methodology we are using to distribute produce will allow us to deliver it fresh, just as the methodology we are using in Center Store will allow us to be more efficient.”

Covington said the company hopes to have the program in place by the end of this year.

Spezzano of Spezzano Consulting said the move to separate produce distribution from other categories marks a change in industry thinking. “Some companies are beginning to recognize they may not have done a good job in some perishables in terms of servicing their customers, and Supervalu was one of the first to do something about it with W. Newell,” he said.

“Giving W. Newell & Co. its own identity allows us to establish and sustain our reputation as leaders in the produce distribution business,” Gionnette explained, “and it's our way of showing customers how serious we are about this business by creating a better business model for providing fresher produce faster and with a greater selection.”

Supervalu created the new company in 2005 at a 155,000-square-foot regional distribution center in Champaign, Ill., where the company was able to aggregate shipments from four other centers in surrounding areas. The facility has the capacity for up to 3,000 items — about four times greater than the capacity of a typical distribution center, Gionnette said.

Consolidating volume into a single facility is resulting in faster product turnover, he noted. “Our goal is to turn product around within one day of arrival, which is two to three days faster than the industry average.

“It also allows us to focus on offering greater variety, improved freshness and quality and better service, which we believe combine to assist retailers in differentiating themselves through their produce departments.” He declined to indicate how much volume has grown since W. Newell was established.

While the business started small, “it's grown significantly,” Spezzano said. “It's operating way above expectations, everyone is really pleased with its performance, and it's continuing to grow.”

United Natural Foods also distributes produce through a separate entity — Albert's Organics, a company it acquired in 1999.

Spezzano said Albert's is better at distributing produce than UNF was “because produce is what Albert's lives and breathes.”

UNF officials could not be reached for comment.

PMA's Silbermann said moving produce distribution into a separate entity — as Supervalu and UNF have done — is a logical step. “Over the last few years we've seen several companies, including some in food service, create a separate division so they can handle produce with special care.

“Produce has always required a very focused and, often, a different set of skills,” he explained. “It requires much more hand-holding, far more communication with the supplier side of the business, and the ability to turn on a dime.

“A company that specializes in produce has an understanding of its peculiarities — its perishability and the narrow temperature ranges it requires, for example — and anytime you involve people with that kind of specialized expertise, it's a competitive advantage.”

“We expect to see more of this dedicated, produce-only approach,” Gionnette said.

Cost Containment

Still, some wholesalers are sticking with the more traditional method of warehousing perishables in a separate, refrigerated section of their distribution facilities, and shipping a combination of dry and perishable products to customers in mixed loads.

Associated Wholesale Grocers is one of those. “We've found it's a lower-cost model to keep all products together in one building,” Steve Dillard, vice president of corporate sales, told SN. “It doesn't raise the cost of the product, and delivering perishables and dry goods out of the same facility enables us to contain costs.”

AWG stages perishables separately from dry goods in temperature zones within the delivery trailers and ships everything out at the same time, he pointed out, “because that saves on freight costs for the retailers and lowers their cost of product, and we've had very good results shipping combination loads.”

In the last few years warehouse turns are such “that we're probably moving product in the minimum amount of time possible from the farm to the stores,” Dillard said. “Product comes in and goes out very quickly because of our high-volume throughput, and we feel we're as efficient as anyone out there at getting product from the grower to the retailer.”

Associated Food Stores also operates grocery and perishables distribution under one roof, where growth in the cooperative's perishables volume is prompting it to add a 60,000-square-foot perishables expansion later this year at its 1-million-square-foot distribution center.

Most of the increased volume has flowed from the addition of corporate stores over the past six years, Dick King, vice president, told SN. “As a result of increased volume at the corporate stores, we've been able to stock a larger selection of products in terms of item count and quality so our members don't have to use third-party suppliers for some items,” he said.

Produce has been “the shining star” in the increase in Associated's perishables business, King said, with sales rising in each of the last three years, including a jump of more than 10% in 2006 as the company repositioned produce at the front of its corporate stores “so customers walk into fresh instead of canned goods,” he said.

Quality Improvement

Affiliated Foods Midwest is implementing a series of programs to improve rotation, hand-ling and quality based on a survey last year of what members said they wanted to see in the wholesaler's produce operation, Martin Arter, president, told SN — geared to improving product to the membership.

“The biggest thing we've done is gone to a truly branded program — using Dole for leaf vegetables, Green Giant for tomatoes and Earthbound Farms for organics — instead of selling products featuring the labels of whichever producers we were using at a given time,” he explained. “That gives us a more upscale offering, and merchandising at store level is more consistent in terms of consumer expectations.”

The result has been better sales, he pointed out. “We pay a little more, but we're getting a higher ring,” Arter said.

He said AFM also established a new set of receiving standards that exceed industry averages on more than 100 top-moving items; put personnel through training programs to update them on the latest handling and receiving procedures; set up store schematics and promotional schedules for organic varieties; and worked with Dole to implement internal protocols for banana-handling and banana-ripening procedures.

Associated Grocers, Seattle, is also stressing improved quality in its fresh offerings. “We're going back to the way things used to be,” Morley told SN. “Rather than being driven by sales numbers, we're driven by product — something the industry has gotten away from.

“Decades ago, the fresh business was about the quality of the product, not what the numbers were saying. The numbers will take care of themselves if you take care of the product.”

The proof for Morley is that fresh food distribution has gone up 5% in the last year — from 27% of the total to 32%, he said.

“In my opinion, the people side of the business is still the best edge the industry has going for it, and it's the know-ledge of those people that drives sales of fresh foods.

“People in the Pacific Northwest are passionate about produce, so when someone calls me or our president [John Runyan] and asks how the strawberries are, they can believe what we tell them.”

Morley said he prefers the term “fresh foods” rather than “perishables” to describe the commodities he handles “because ‘perishable’ means it's dying and produce is fresh. And while the produce is dying, we don't sell dying produce — we sell fresh produce.”

AG also offers natural beef to customers who want a hormone-free product. “But while some suppliers claim their beef is free of antibiotics and hormones because they haven't injected anything for the last 120 days before slaughter, we make sure our natural beef is natural, and our customers can trust us on that,” Morley said.

“Do the numbers tell us that's the right decision? No. The numbers say to go with the supplier who stops injecting hormones shortly before slaughter because we can make more money that way. But sales are coming to us because of the management decisions we're making.”

Category Management

At Spartan Stores, the addition of category management principles in 2001 has enabled the wholesaler to develop merchandising strategies and marketing and promotional programs for its base of corporate retail stores, the results of which are shared with its wholesale customers through model-store presentations.

“Those principles allow us to determine consumer product preferences more accurately and then to fulfill them in all product categories,” Jeanne Norcross, vice president of corporate affairs, told SN. “Then we share those principles with our independent customers to offer them the same type of market evaluation and product planning to improve their sales and customer satisfaction, and they're able to translate those programs to their markets and their customers.”

That distribution model has proved to be highly successful and profitable for Spartan, as well as for its independent customers, Norcross said, “and we've seen our perishables business increase 33.9% over the last 10 periods [roughly 10 months],” she pointed out.

To improve its offering and increase capacity to accommodate higher purchasing volume in perishables, Spartan last year added about 15,000 square feet to its perishables distribution center in Grand Rapids, and it also added a banana-ripening room.

One program that accounted for some of the improvement in perishables volume last year was the introduction by Spartan of an all-natural meat program called Star Ranch, Norcross said — an offering of Angus beef that has “never ever” been exposed to antibiotics or growth hormones or, alternatively, an offering where hormones and antibiotics were withdrawn in the last 120 days of feeding.

When it comes to perishables, Spartan believes it's important to provide customers with value-added services to keep the cost of goods competitive, Norcross added. “It is crucial that the fresh departments, especially produce and floral, utilize the synergies and flexibilities inherent in a comprehensive supplier,” she said.

While some distribution customers have sufficient volume to receive straight produce and floral deliveries at an efficient cost, others would have to sacrifice the cost of goods or freshness — because of less frequent deliveries — to utilize straight deliveries, she explained.

“So customers have the option of doing mixed-commodity loads. Increasing the order tonnage and subsequently driving down the freight portion of the cost of goods while retaining the frequency of deliveries ensure fresher produce for the consumer.”

Spezzano said some of the impetus for better perishables distribution is coming from discount competition.

“The industry recognizes perishables as a major point of differentiation when it competes with Wal-Mart,” he pointed out, “and retailers recognize they need to do a better job in perishables to avoid being the same as Wal-Mart, though with higher prices, so they're trying to drive the price separation down between themselves and Wal-Mart.

“Instead of being 30% higher, they may be only 25% higher but with a better offering that's fresher. Perishables enable them to tell customers they're competitively priced and better than the discounters.”

While produce has grown in importance over the last 20 years or so, profit levels have remained about the same, Spezzano said.

“At a store that's 50,000 to 55,000 square feet, the bottom-line profit on produce is about the same as it was 20 years ago, but the mix within the box has changed. As Center Store business and margins shrink, perishables help make up some of the difference, and as consumers demand more produce, meat, service delis and floral, those categories get a bigger distribution share at a higher margin.”