BUYING FROM THE LOWEST BIDDER 2004-04-19 (1)

TOM ZIND

An established tool that supermarkets have used successfully in grocery buying is being introduced to the fresh produce sphere, and may be raising the supplier community's ire in the process.

Reverse auctions -- in which supermarket produce buyers use the Internet to solicit competitive bids for the lowest price from grower/shippers -- are growing in popularity. Thus far, it appears to be gaining only in the sense of participation, but it is now on the industry radar screen, which is to some itself a troubling development.

One grower/shipper buying director, who requested anonymity, told SN the buzz in the produce supplier community is that the practice, which allows bidders to see competing bids, leads to a rapid race to the bottom that hurts those who "win" and only helps sully the already tense relationship between buyers and sellers. Instead of "buyer's remorse," those who win the business often experience "seller's remorse."

"Oftentimes, you don't really want to win in this bidding process," the buyer said. "People often end up making a commitment to provide product at a price that's lower than their cost. On every reverse auction I've been aware of, I've never heard of one shipper who's felt good about getting the business."

With more supermarkets whittling down their supplier base, setting strict terms for making the company's select vendor list and establishing rigid contractual relationships, some suppliers feel obliged to take part, especially those who don't have an inside track with a particular retailer.

The extent of the practice isn't clear, but some suppliers say more regional and national chains are testing the concept in produce. A July 2003 story in Line 56 Media, an Internet-based, e-business technology and strategy news service, quoted executives with Giant Eagle, Pittsburgh, as saying it was planning to expand to bring reverse auctions to produce procurement in a bid to create "a buyer-friendly pricing war" environment.

Other critics of reverse auctions say because the programs are conducted electronically, the chance for retailer manipulation of the process exists. One supplier community source said "retailer shills" could help artificially drive prices lower during an auction.

Other industry observers say there are signs some players in the supermarket industry may be backing off reverse auctions. The grower/shipper buying director says he's heard that some retailers have stopped using the technique because of supplier backlash.