Rantings of a Produce Guy

While visiting a local supermarket yesterday I took note of the everyday retail on White and Red Seedless grapes; an astounding $2.99 lb.! You just have to scratch your head. Based on current FOB costs, freight, and D.C. up-charges, I estimate that their store level cost to be no more than $.95 lb. Which means that this retailer is generating a whopping 68% gross on their number one seasonal sales generator, or what should be their number one sales generator. With a $2.99 lb retail, no wonder the grapes on display looked tired in their gigantic two row spread on each.

When you see retails like these in the height of the summer sales opportunity, you sense retailer dysfunction. A state where merchandising and operations are in C.Y.A. mode. A situation more than likely brought on by a sales decline from a new competitor. It goes something like this. New competition opens, sales falter, operations cut labor in an effort to maintain budget, shrink increases, merchandising raises retails to offset shrink. And so it goes.

Meetings are called to discuss shrink and retailer reduces displays to reduce inventory. Sales fall off once again, labor is reduced, and retails are raised in an effort to maintain margin budget by offsetting increased shrink. Before you know it you have grapes retailing at $2.99 lb in the third week of July. This is a classic case of operations and merchandising not working together to develop plans to increase sales through investing labor from the operations side and margin from the merchandising side. Instead you have operations doing what it can do: control labor, and merchandising doing what it can do: raise retails. This way each division can say that they are doing what they can do.

If this retailer had a reasonable retail on grapes; say $1.69 lb with a July vs. February spread, they wold probably move roughly four times as many pounds and cut shrink by half. That is of course if they have enough help to maintain the displays. Because if grapes are at these ridiculous retails, everything else in the department reflects the same retail strategy. And you can count on the fact the balance of the departments int he store reflect same.

All of this while suppliers of summer fruits are in a panic. They see the lowest FOB costs in years and then look at retails in supermarkets and can not understand what the heck is going on.

The sad thing is that all retailers are not in the same boat as the one described above, but enough are to the point that they allow other retailers to maintain inflated retails. That and the fact that produce operations by and large must return a FORTY PLUS gross margin. For some this is easy, other it is difficult. There must be a BETTER WAY.

More About Mark Up and Bill Out

I was looking at ads today; specifically at a few of the feature ad items in the produce section. Two of the major retailers in my area had Green Grapes advertised in a feature position. Retailer A at $1.99 LB. and the other; let's call them retailer B, at $1.69 LB.

Based on current FOB's on Green Grapes of around $12.00 for a large berry, these Retailers probably landed them at their D.C. at around $14.60 - $14.85 per lug and when you add on a D.C. up charge of let's say, 12% you have a store cost of about $16.35, or $.90 LB. Based on these assumptions; retailer A is out there at around a 50% gross on a lead ad item and retailer B is out there at about 46%. No wonder suppliers scratch their heads and ask why retails don't reflect costs.

Well let's look at this a bit further.

I remember when I got my first job running a produce operation. We had a 6% D.C. up-charge and I had to manage a 30% store level gross, so our company actually achieved a 33.50% gross for the produce operation with D.C. and Store gross combined.

At my second stop some three years later, we had no D.C. up-charge, so store level gross had to 'pay for" the D.C. operation. Therefore we had to achieve a robust 43% gross, but then again that was in a very heavily populated area where per store sales and were very high and shrink was very low. Based on the area of the country the retailer was in a D.C up-charge of about 10% would be right on, so in reality the store level operation after D.C. Deductions actually achieved a 37.50 gross margin. Not really too bad at all. And not that much higher that where we were when I left my first stop.

During my third and last stint, we had a D.C. up-charge of a whopping 12%. Before I got there that retailer had made a decision to do away with all the up-charges except for the produce up-charge. They had postponed nixing the produce ups because the other departments had not reflected any margin increases when they did away with their ups. NO KIDDING. I mention this because these folks wanted me to achieve a 42% gross with a 12% up-charge. It took quite a few meetings to convince them that they were asking me to deliver a 47.50% gross margin! Based on competition and the lack of density in our marketing area, that was just crazy. We got that worked out, but I wonder how many retailers today force their produce departments to double dip on margin. By that I mean to conveniently forget about any D.C. up-charges when they develop their gross margin forecasts.

How many retailers out there that buy through a third party don't include the increased cost of goods in their budgets. I mean the whole point in utilizing a third party is to save the time, carrying costs, and overhead costs associated with managing a D.C. and inventory. If you know that your cost of goods are increased, but your overhead costs are decreased, then your margin budgets should reflect those facts, but I wonder how many retailers budgets actually do?

Just makes you wonder.