FIELD COMMAND 2004-04-19 (1)

TOM ZIND

It's the equivalent, some old-schoolers might say, of trying to fit a square peg into a round hole.

Nevertheless, the supermarket industry continues to make headway in remaking the historically fragmented produce procurement function into the comparatively sleek and orderly image of grocery buying.

Judging by the degree to which many of the leading supermarket chains have retooled their produce buying departments, instituted new types of relationships with suppliers, and increasingly done away with the tyranny of the day-to-day, market-based buying model, they're succeeding in giving produce buying a makeover of "Queer Eye for the Straight Guy" proportions.

The clearest evidence of the fundamental shift in the strategy for buying fresh fruits and vegetables is the industry's increasingly widespread use of contracts. Once relegated to the fringes of the produce buying function, contracting is being embraced by retailers and suppliers alike. It's seen as one way to subdue the anarchy inherent in trading highly perishable products rarely consistent in quantity or quality and, by extension, price.

Studies conducted as recently as 2002 suggest produce contracting growth is paralleling the retail consolidation trend that's yielding fewer, but larger, chains. Although current numbers on the extent of contracting usage aren't available, anecdotal evidence points to an unmistakable trend to contracting.

A September 2001 study, "Supply Chain Management in the Produce Industry," forecasted steady growth in the use of contracting. The survey, based on industry polling done by the Cornell University Food Industry Management Program, and commissioned by the Produce Marketing Association, Newark, Del., found that almost 80% of retailer participants predicted they'd use contracting for at least 11% of their produce purchases by 2006. That compares with only about 11% of those respondents who said they were using contracting to that extent in 1996.

Even more noteworthy was 36% of respondents predicted that by 2006, they'd be using contracts to purchase more than a quarter of their produce needs.

Part of the study's narrative discussing the findings noted that the primary motivation to procure more by contract relates to a desire for better management. Relying on day-to-day haggling over price -- long the hallmark of the produce procurement model -- has come to be viewed by consolidated retailers as an archaic, inefficient approach.

"Opportunistic buying and selling of merchandise, where one or the other party finds itself facing unusually unfavorable short-term conditions, is not part of the long-term mission and operating strategy of the ever larger, sometimes multinational, companies," the report states. "These companies have been more aggressive in adopting supply chain management practices where the objective is year-end, not week-end results; net returns, rather than gross returns."

Edward McLaughlin, director of the Cornell program that conducted the study, said contracts are becoming a key building block in laying the foundation of produce buying programs for retailers facing rapid growth, especially through acquisitions.

"As retailers have ever larger needs, they often want to ensure consistency of supply across more and more stores, and want to take some of the risk out of the traditional [freight-on-board] buying arrangement," McLaughlin told SN. "They still account for a minority share of buying and selling transactions -- the open market is still the way most produce is bought and sold. But a larger and larger percentage of trading is being done using contracts."

Another 2002 study, the Giannini Foundation of Ag Economics' "Retail Consolidation and Produce Buying Practices," points to the growing use of contracts by retailers as a key element of an efficient replenishment strategy that cuts across product lines.

"Retailers benefit from contracting by being able to maintain relatively constant levels of stock for each commodity, something that is critical to the efficient distribution and inventory systems for which Wal-Mart is well-known," the study notes. "Further, by awarding contracts based on timeliness and quality of supply, retailers are able to offer more consistent quality to their consumers, a critical factor in building produce volume."

Meanwhile, produce grower/shippers, many of whom have resisted entering the new world of contracts, show signs of relenting. As their ranks thin, and surviving players become bigger and more powerful, suppliers increasingly recognize the advantages of sewing up more of their production at set prices, bringing more predictability to their businesses as well.

"We do get a sense that a greater proportion of volume is going into contracts, and that grower/shippers recognize the need for getting a larger share of their volume locked up," said Tom Stenzel, president and chief executive officer of the United Fresh Fruit & Vegetable Association, Washington, which represents fresh fruit and vegetable producers. "It's not advantageous to either suppliers or retailers to be negotiating price all the time, but instead to, in advance, lock in fair and reasonable terms [with] some degree of flexibility."

Stenzel added that as contracting grows, suppliers and their retail customers are trying to expand the scope beyond just price issues. "We strongly advocate that both buyer and seller start to look at how contracting can help them work together to improve customer satisfaction, drive sales, and take a renewed look at the concept of business partnerships."

Veterans on the selling side said fresh produce contracting is increasingly seen as a win-win scenario for sellers and buyers. One of those veterans, Rick Alcocer, who heads California, Florida and Texas sales for A. Duda & Sons, a leading grower/shipper based in Oviedo, Fla., said large suppliers now approach contracting as essential to winning and keeping the business of dominant retail customers.

"Over the course of just the last three years, the use of contracts has been growing rapidly," he said. "Retailers want to use them to stabilize their prices on the shelf and to make up for an awful lot of shortages of people in their buying offices. They no longer want to chase daily markets, and for suppliers there's something to be said for efficiency when you know what kind of volume is coming your way. When you have a set amount of business coming through the pipeline, you can structure your operations so much better."

Alcocer said more widespread use of contracts has been spurred in part by rising price volatility. "Since about 1987, it seems, you have much larger swings in the market for some commodities. The $27 market spike in that year was considered high, but markets in recent years have consistently topped out in the $50 range. You've seen more crazy ups and downs, and the variances then weren't anything like we've been seeing."

While all signs point to more widespread use of contracts, open-market dynamics are likely to stay firmly rooted in the interplay between retailers and produce suppliers. Even under contracting scenarios, allowances are routinely made for both parties to reap some of the benefits of spikes in market conditions. Additionally, buyers and sellers appear careful to hedge their bets by keeping at least some volume out of the straightjacket of contracts.

"Suppliers don't want to be in a position where everything they produce is on contract for retailers," Alcocer noted. "They still like the flexibility of being able to shop their products around. And one of the recent trends that we've seen is for retailers to allow clauses in contracts that give suppliers some protection on a low market, but allow them to take part in high markets as well. No shipper wants to be in a position of doing 100% of their volume on contract, and retailers understand that reluctance."

While the move to contracting has been the most fundamental change in supermarket produce buying, other shifts have been evident, too. As retailers have grown in size and streamlined their buying offices, direct buying -- whether on contract or through the open market -- has continued to grow in popularity. In turn, the use of local wholesalers, terminal markets and brokers continues to decline, especially for the high-volume produce commodities.

"Retailers aren't buying as much from strangers," United's Stenzel said. "There's an increasing interest in establishing long-term partnerships and more of a need to know who you're dealing with, whether you're a buyer or a seller. Today, as a supplier, you almost have to get on a 'qualified vendor' list to get a retailer's business."

In a recent study looking at the changing dynamics of the U.S. produce industry, University of California-Davis professor Roberta Cook noted that the declining use of terminal markets by retailers has mirrored the growth of supermarket chains.

"The decline in terminal market share is largely a result of the increased buying power of integrated wholesale/retail buying entities," Cook said. "Integrated wholesaler/retailers are self-distributing, operating large-volume centralized buying operations, making it more efficient for them to buy directly from the source, thereby avoiding intermediary margins and handling costs."

Sign on the Dotted Line

Retailers say they are increasingly looking to contract buying to fulfill more of their annual produce inventory

Percent purchases under contract: 0%

1996: 34.2%

2001: 12.5%

2006: 12.8%

Percent purchases under contract: 1-10%

1996: 55.3%

2001: 30%

2006: 7.7%

Percent purchases under contract: 11-25%

1996: 10.5%

2001: 42.5%

2006: 43.6%

Percent purchases under contract: 25 %

1996: 0%

2001: 15%

2006: 36.9%

Source: Supply Chain Management In the Produce Industry, CornellUniversity/Produce Marketing Association, 2001