ORIENT EXPRESS

Dan Alaimo

While some find China's dominant role in seasonal imported goods and other categories unsettling, it is helping to level the competitive playing field, supermarket executives told SN.

From good-quality outdoor furnishings to low-priced toys and plastics, it's hard to find seasonal products that aren't made in China -- even American flags in some stores -- whether they are in supermarkets, drug stores or mass merchants. Some estimate China's participation in supermarket seasonal programs at 80% and higher.

"Everything seems to be coming out of China," commented Dan Spears, HBC/nonfood director, Ingles Markets, Asheville, N.C.

Some supermarket nonfood executives said the combination of relatively high quality and low prices on outdoor goods like umbrellas, gazebos, and table and chair sets allows them to compete with such channels as the big home supply stores, which is a welcome addition to their business. Others flatly said that selling imported goods is a cold reality in 21st century retailing.

"Spring and summer used to be a good season for us, but now it's a great season because of all the products that we import," said Bryon Roberts, vice president, GM, Bashas', Chandler, Ariz. As a result, the retailer can challenge the home stores on outdoor furniture (see related story).

"For us, the import world for season products has exploded in the last four years," he said.

"To be competitive, we have to become more aggressive in importing," said Lanny Hoffmeyer, corporate director, wholesale general merchandise, Supervalu, Eden Prairie, Minn. "It's not a matter of choice, but a matter of survival." Hoffmeyer and the other wholesale and retail executives quoted in this story were interviewed during the recent GM Marketing Conference of GMDC, Colorado Springs, Colo.

"Import is a fact of life forced on us by competition and everybody needs to understand how to do it, do more of it, and do it better," said Al Jones, senior vice president, procurement and marketing, Imperial Distributors, Auburn, Maine. "If you don't, you will not succeed."

"It is absolutely necessary for supermarkets to handle imported merchandise in order to compete in today's marketplace," said Morrie Zimmerman, executive vice president, sales and marketing, Far East Brokers and Consultants, Jacksonville, Fla.

BY THE NUMBERS

Most said the biggest selling season for imported goods is spring and summer, with Christmas running second. The U.S. Census Bureau reported that the value of U.S. imports of Christmas tree ornaments was $312 million from January to July of last year, with the People's Republic of China as the top exporting nation. China also led as the leading country of origin for artificial Christmas trees last year, shipping about $40 million.

In total imports, China has grown at a double-digit rate every year except 2001 for at least the last 10 years, according to numbers from the U.S. International Trade Commission and the U.S. Department of Commerce, reported by the U.S.-China Business Council, Washington. They were up 29% in 2004, 22.3% in 2003 and 22% in 2002. The total increased more than fourfold over the 10-year period ending in 2004, when total imports from China were worth $210.5 billion, up from $48.5 billion in 1995. In the same time period, U.S. exports to China increased slightly less than 300%, from $11.8 billion to $34.7 billion.

While trade figures for March -- the most recent available -- showed the trade deficit dropping 9%, observers said this was a temporary situation, perhaps caused by the late occurrence of the Chinese New Year. This follows a period of mounting concern that was captured by a much-quoted Business Week cover story last November on "The China Price" -- "the three scariest words in U.S. industry." The article said manufacturers operating from China can sell goods for 30% to 50% less than domestic sources.

PEACE WITH CHINA

The retailers and wholesalers interviewed said they had made their peace with this scenario, mainly because they have no choice.

"Most of the products you touch every day and use in your life come from somewhere else, not from the U.S.," said David Lowe, senior GM/HBC merchandise manager, C&S Wholesale Grocers, Keene, N.H. "So while I am a big U.S. supporter, the cost of goods is the cost of goods."

The cost disparity between imports and domestic goods is too great for consumers to resist, said Jay Goble, vice president, merchandising, Valu Merchandisers Co., Kansas City, Kan. "Deep in the soul, the shopper would rather have American-made goods, but it's becoming less a reality; the gap is getting too great," he said.

"I believe the Wal-Marts and Targets of the world have gotten us over the issue of buying 'made in the U.S.A.,"' said Charles Yahn, vice president, merchandising, Associated Wholesalers Inc., York, Pa. "The American consumer wants quality, and where it comes from is not an issue anymore."

Yahn said he has concerns over how big China has become in the marketplace. "I think Americans have to be cautious of the power that we're giving up to the overseas manufacturers, and the value of the dollar. Look at what it's doing to oil," he said.

"If we can buy a product in the United States, then we need to support the United States," said a nonfood executive with an east Texas retailer. "I think something has got to be done soon to stop the trade deficit or the United States is going to be in trouble in a lot of different areas."

Where the retailer can, it buys domestic products and advertises it as "Made in the U.S.A." with favorable sales results. "A lot of people want to buy American, and in the near future, you're going to see that 'Made in America' is going to be very important," the executive said.

If domestic manufacturers could produce equivalent quality for the same price, buyers would lean to them, but such companies do not exist, said a Northeastern retailer. "You have to deliver what the consumers are looking for. The consumer is demanding high quality at a fair price and, if that causes us to import, then that's what we have to do. Our focus is the consumer, not on our personal preferences," he said.

"The bottom line is, we're going to continue to look for different opportunities that are simple, no-brainer home runs, and we'll keep expanding and growing that," Roberts said. "The spring and summer has been so strong that we're looking to do more in the fall next year, to try to capitalize more on September and October before we move into Halloween and Christmas."

Importing is playing an increasing role in the strategy of Unified Western Grocers, Commerce, Calif., to stay competitive in seasonal goods and provide its retailer customers with the right items at the right price, said Larry Ishii, general manager, GM/HBC. "Look at the major retailers across our country. They're importing product very heavily and, to be competitive, we have to do the same thing so our retailers can be competitive. By and large, I think the consumer recognizes that and accepts that," he said.

"I don't see the trend changing without governments intervening," Goble said. "Mass merchandisers are driving the price down and American industry is scrambling. I don't see the end."

U.S.-China Trade Statistics

Imports and exports in billions of dollars

1995; 1996; 1997; 1998; 1999; 2000; 2001; 2002; 2003; 2004

U.S. Imports: 48.5; 54.4; 65.8; 75.1; 87.8; 107.6; 109.4; 133.5; 163.3; 210.5

% Change: 17.1; 12.2; 21.0; 14.1; 16.9; 22.6; 1.6; 22.0; 22.3; 29.0

U.S. Exports: 11.8; 12.0; 12.8; 14.3; 13.1; 16.3; 19.2; 22.1; 28.4; 34.7

% Change: 26.9; 1.7; 6.7; 10.9; -8.0; 24.4; 18.3; 14.6; 28.5; 22.2

Sources: U.S. International Trade Commission, U.S. Department of Commerce, from the U.S.-China Business Council

Big-Time Growing Pains

China's dominance of imported seasonal merchandise was acknowledged by all retailers and wholesalers SN spoke with. However, increased production, shipping and delivery issues this year have some questioning whether this will continue.

Recent trade figures show a decrease in imports into the U.S., which may confirm this. Supermarket executives cited the late Chinese New Year, as well as issues with labor, raw materials, weather, fuel and the logistics of transporting containers, as having an impact.

One result of these difficulties may be the emergence of new sources of supply, such as Vietnam, Thailand, Indonesia and Mexico, they said. However, all these countries combined have less capacity than China for this kind of merchandise, noted Morrie Zimmerman, executive vice president, sales and marketing, Far East Brokers and Consultants, Jacksonville, Fla., which specializes in imports for supermarkets.

"Doing business with China has changed dramatically in the last few years," Zimmerman said. Regional labor shortages are causing production to shift to more far-flung parts of the country, he said.

"It used to be that all sourcing could be done in just a few places. Now we have to cover an area much bigger than the United States to source the best product at the best price," he said. There are two solutions, neither satisfactory: large regional trade fairs, or dealing with Hong Kong trading companies.

"It is absolutely impossible to know exactly where the product is coming, and to control the quality and delivery without actually visiting the factory at several times during the sourcing and production process. This has become unfeasible for all except the very large buyers due to high costs on a per item basis," Zimmerman said.

The widespread geographic area has also created major logistical problems for shipping, he said. "Instead of consolidating in just two or three ports, we now use more than 10 different ports just in China to ship our merchandise. It is difficult for even the largest buyers to control the shipments from so many areas, but the smaller buyers are really challenged to make minimum shipments from now larger factories in more remote locations," he said.

"We've had a lot more trouble getting imported goods this year, especially for the spring and summer, than we have had the last couple of years," said a nonfood executive with an east Texas retailer. He sees more product coming from diverse sources. "China may have to take a step back. They are still going to be the leader, but you are going to see a lot of goods from a lot of other countries," he said.

"Other Asian countries are starting to become involved, and we're also starting to see quite a bit from Mexico that looks interesting and is priced properly," said Peter Hettinger, vice president, nonfoods, Stop & Shop Supermarket Co., Quincy, Mass. He attributed the recent difficulties to the large amount of imports coming from China. "I think we're going to continue to be challenged and face some similar situations in terms of supply-related issues." Pricing and value are essential in doing business, he said. "Everybody is going that same route and that sheer volume is going to be a problem."

To address the problem of delayed shipments of spring and summer merchandise, Bryon Roberts, vice president, GM, Bashas', Chandler, Ariz., is moving up decisions on his orders by 30 days. "In most cases that should protect me and get the product to the stores when I want it there. We're still learning." -- Dan Alaimo

Customized Quality, and Price

Sourcing imports from China is giving supermarket buyers a level of quality and customization at a competitive price they had not seen before from domestic suppliers.

"You can set quality levels. You can set price levels. You can go over there and say, 'This is what I want for my marketing area,' and they will produce it for you," said Charles Yahn, vice president, merchandising, Associated Wholesalers Inc., York, Pa.

"If you want a cheaply made product at a ridiculous price, you can get it. If you want a quality product at a reasonable price, you can get that too. But the connection the person has who is going there for you has more to do with it than anything," he said.

AWI, and a number of other wholesalers SN spoke with, were members of buying consortiums. "You've got to have connections and you've got to have direct lines to the Orient to import properly. If you have that, the quality of the product is at a level that it's never been before," Yahn said.

In Puerto Rico, there's a need for larger-sized chairs than in the U.S., noted Bill Mansfield, vice president, GM/HBC, Pueblo International, San Juan, who recently returned from a trip to China. "We're able to really customize the product," such as adding an inch or two inches to chairs. "Going through an importer in the United States, you're going to get the same chair as everybody else, and if that meets your needs, great."

"It's critical from a profit perspective to be involved in direct import," said Al Jones, senior vice president, procurement and marketing, Imperial Distributors, Auburn, Mass. "When you see the huge percentage of sales in Wal-Mart that is attributed to direct imports, you need to do it to be competitive. You can't afford not to."

"We have a very aggressive direct-import initiative in our company and we are sourcing it ourselves with our own category managers going overseas. We are sourcing product in all categories, including batteries, kitchenware, seasonal, bakeware," said Lanny Hoffmeyer, corporate director, wholesale general merchandise, Supervalu, Eden Prairie, Minn.

"We are aggressively pursuing all categories and even though seasonal is where we started our direct-import program, today we import a higher volume in everyday product than we do seasonal," he said. Besides China, Supervalu also imports from India, Indonesia, Thailand and Taiwan, "but certainly China has the lion's share of it," Hoffmeyer said.

It's all about efficiency, he noted, such as in creating special packs. "In many cases, it's easier and more efficient to create those special packs overseas" because the logistical savings justifies bypassing the domestic infrastructure. "But where we can partner with the domestic companies, that is really the win-win because we get their marketing expertise and then the logistical flow results in very significant savings." -- Dan Alaimo