Belrose, Inc.
Belrose, Inc.
The main negatives impacting consumption of fresh apples have been the decline in the numbers of large family households, the steady trend towards eating more food away from home and consumers' tendency to spend income increases more on nonfoods than on foods.
Wrinkles, not Revolutions
However, many changes in demand are more subtle. They represent not revolutionary
societal changes that are easily documented, but rather small wrinkles in
the way retailers want to do their food business. In many cases, the effects
of these changes in retailers' tactics have not been analyzed, nor has their
impact been measured. Just some of these wrinkles will be discussed here.
Readers may be aware of other wrinkles that they believe have a greater effect
on their relationship with retailers.
The Benefits of Increased Choice
In the early 1980s, the typical U.S. supermarket carried three or four varieties,
Red Delicious, Golden Delicious, McIntosh and one other local or seasonal
favorite. Twenty years later, the typical supermarket also stocks Granny Smith,
Fuji, Gala, Braeburn , one or two older favorites like Rome or Cortland, and
one or two newer favorites like Cameo and Pink Lady®. Most producers and
consumers would assume that this increase in choices available is a good thing.
However, "it ain't necessarily so".
The very act of placing 12 apple varieties in a produce section where there used to be 4 varieties, dramatically increases the choices available to consumers. In theory, a consumer who preferred a Rome apple could motor from store to store until he/she found that variety. In practice, most consumers will, without complaint, choose among the varieties that are currently on the shelves. Having a wider selection should stimulate consumption because more consumers are able to buy their preferred variety.
When consumers can choose between 12 varieties instead of between 4 varieties, the frequency with which they pick traditional varieties will inevitably go down. Many consumers will shift allegiance towards their most preferred newcomer and away from their least preferred older variety. If they did not, retailers would have little incentive to continue stocking the newer varieties. As our annual retailer surveys have shown (for example, see the World Apple Report August 2002 issue), retailers have begun to reduce their stocks of traditional varieties and increase their stocks of the newer varieties. Thus, increased choice has worked against the once dominant varieties.
Problems of Uniform Pricing
When many of the newer varieties were first introduced, retailers offered
them for sale at premium prices, often up to twice the price of established
varieties. However, as the newer varieties have become more familiar to consumers,
many retailers now sell a cluster of varieties at the same retail price. For
example, in Star Markets in Boston in early February 2003, Washington Red
Delicious, Golden Delicious, Granny Smith, Gala, Fuji and Braeburn and California
Fuji were all selling at $1.49 per lb. This may be for administrative or operating
convenience, rather than for subtle marketing purposes.
In early February 2003, the delivered price per lb for these varieties in the Boston wholesale market varied from $0.46 for Red Delicious to $0.65 for Braeburn. Assuming that the wholesale market price approximates the delivered price to the retailer's distribution center, the retailer margin varied from $1.03 on Red Delicious to $0.84 on Braeburn. The weighted average retailer margin would have been about $0.93.
If the retailer had charged a uniform margin of $0.93, rather than a uniform price, Washington Red Delicious would have sold for 10 cents less at $1.39. The new prices for other Washington varieties would have been Granny Smith $1.45, Golden Delicious $1.48, Fuji $1.51, Gala $1.54 and Braeburn $1.58. In some cases, the differences might have been too small for consumers to notice. However, the changes in Red Delicious and Braeburn prices would have been sufficient to boost the demand for Red Delicious and dampen the demand for Braeburn. Clearly, the uniform pricing strategy does the opposite. It inhibits consumer demand for the more plentiful variety, Red Delicious, and stimulates demand for the less plentiful variety, Braeburn.
During the season, this subtle discrimination against Red Delicious causes stocks to back up and puts further downward pressure on FOB shipping point and grower prices of that variety. Conversely, it has the opposite effect on Braeburn FOB and grower prices.
Mixing Supplier Lots
Another common retailer practice is to mix different supplier lots of the
same variety in the same section of the produce department. In some cases,
lots of the same variety from different origins are mixed. In other cases,
lots from the same state, bearing the same logo, are mixed. In either case,
the problems are similar. The supplier that provides higher quality is treated
the same as the supplier with lower quality. The premium for higher quality
is essentially eliminated. This, in turn, reduces the supplier's willingness
to pay his growers for higher quality.
Suppliers' efforts to distinguish their product by district or by brand are essentially watered down. The consumer is left with the impression that all the fruit is from the same lot. Even a small amount of inferior product scattered throughout a display case can sully the reputation of the whole lot. Any supplier whose logo (whether a firm or state logo) is visible on a sticker, can see his/her reputation sullied by fruit that is not his. Rather rapidly that translates into consumer dissatisfaction and lower demand.
Seeking Higher than Minimum Standards
Some larger retailers now demand quality standards that are above minimum
grade standards. When a large retailer requires that all Red Delicious supplied
have 14 lbs pressure or higher, a number of interesting things happen. First
the packer (and his grower suppliers) has to incur additional sorting costs
that may not always be recovered in negotiating price.
In many seasons, Red Delicious apples of 14 lbs pressure or higher may constitute quite a small proportion of the total pack. If a large share of these firmer fruit goes to one retailer, the average firmness of the rest of the pack going to other retailers at home or abroad will drop. This will tend to depress prices for the rest of the pack. Industry efforts to move the whole firmness curve upwards (so there are a higher proportion of firmer fruit) will not be easy and will involve additional costs for materials, sorting and management. It may be difficult to recover those costs from the marketplace.
Contract Pricing
A number of large retailers are contracting ahead with shippers for several
months' supply of specific varieties and packs. They no longer wish to be
at the mercy of the spot market. Many analysts expect this sort of contracting
to become more widespread. However, contracting has price implications both
for those shippers and their growers who contract and those who operate only
in the spot market. Contracting can bring a number of distortions into the
marketplace.
For example, suppose that the U.S. market faces a total supply of 100 million boxes of apples. Under prevailing economic conditions, the free market would establish an average price of $15 per box for these apples. Now suppose that 10 percent (10 million boxes) are sold on advanced contracts. If they are sold at $15 per box, the spot market will still be able to absorb 90 million boxes at the same average price of $15 per box. Nothing will change from the pre-contracting situation.
However, there are a number of possible scenarios where the contracting retailers do not accurately estimate the market-clearing price. In one feasible case, if the contracting retailers pay a premium, say $18 per box, total movement will be slowed and there will be downward pressure on the spot market. If the contracting retailers want to buy at a discount, say $12 per box, they will sell more than anticipated and will have to come into the market for more supplies and will tend to boost the spot market price.
In an alternative scenario, the remaining retailers might follow the price leadership of the contracting retailers. If the non-contracting retailers mimicked the higher price paid by contractors to their suppliers and kept the same margins, less than 90 million boxes would be demanded from them. They would either have to stimulate consumer demand by taking lower margins or by getting a lower FOB price in the spot market. Conversely, if they lowered the price they paid suppliers and kept the same margins, they would face demand for more than the 90 million boxes available. They would either have to raise their margins to slow consumer demand or pay a higher FOB price in the spot market.
As contracting becomes more widespread, it creates another kind of problem. As a greater percentage of the volume moves through private contracts and a smaller share moves through the more open spot market, market price reports become less comprehensive and representative of all sales being made. Published market reports become of less and less value to buyers or sellers.
Category Management
Category management has so many variants that it could justify an entire article
in itself. For simplicity, we here look at just one aspect of category management,
the gatekeeper function. The category manager can decide what SKUs will be
placed on the retailer's shelves. In evaluating a category manager, retailers
frequently set the manager a goal of increasing the category's contribution
to the retailer's gross margin.
Category managers will naturally want to place as many as possible SKUs from their own product line on the retailer shelf and to exclude other suppliers. For those other suppliers that they do include, they will have a strong incentive to maximize gross margins either by charging higher retail prices or by offering lower purchase prices. Thus, the practice of category management can alter the competitive relationship between suppliers. The firms that do not qualify as a category manager, will probably face reduced demand for their products.
Store Labeling
Retailers have increasingly been using store brands to differentiate their
stores, provide customers with better value and weaken the bargaining power
of major processors. As a product category becomes standardized, retailers
can offer quality equivalent to that of the top proprietary brands, but at
a reduced price, because they do not have the heavy market development and
promotional costs of a proprietary brand. Retailer brands have been very successful
in mass-market categories such as cereals, detergents, colas, etc.
Many retailers now want their store brand on produce items such as bagged or packaged apples. The added packaging and segregation costs for apple suppliers are obvious, but the potential benefits to apple suppliers are elusive. If store labeling helps a retailer to win customers from its competitors, there may be no net increase in apple sales. If store labeling weakens the clout of proprietary brands, supplier and district brands are likely to be the losers. If store-labeled apple products are to give better value to consumers, either retail margins will have to be lowered, or FOB price will have to be lowered. Apple suppliers could end up with the worst of both worlds, higher costs and lower FOB prices.
Summary
We have highlighted just some of the wrinkles that are emerging in the apple
retailing system. While it should be emphasized that there has been little
or no empirical research into the potential effects of these new wrinkles,
many of them should give suppliers and growers reason to be nervous. Clearly,
we need to better understand all the implications of these wrinkles and develop
firm and industry strategies to exploit the opportunities they create and
minimize the negative effects.
For more information on any of our publications, email belrose@pullman.com
Belrose, Inc.
1045 NE Creston Lane
Pullman, WA 99163, USA
Tel: 509-332-1754
Fax: 509-334-5209
Belrose, Inc.
1045 NE Creston Lane
Pullman, WA 99163, USA
Email: belrose@pullman.com
Tel: 509-332-1754
Fax: 509-334-5209