Originally printed in the February 2018 issue of Produce Business.
In the continuing drive for improved operations and profits, management often makes unusual requests of various departments to help bolster results. Over the years and especially recently, it has become more frequent for management to utilize the produce department as one of these “cash cows.” Often as the accounting period goes on, management realizes there is a shortfall in the profits needed to report at the end of the period. To rectify the situation, executives often go to the produce department managers and request they supply the necessary dollars to assure the store hits its profit target. This is yet another instance where management proves, “they just don’t get it.”
This practice has become more prevalent as management has realized Produce is the one department that can generate cash quickly. Top management recognizes quick action during the last few days of any accounting period can generate substantial profit dollars with the least amount of effort.
Unfortunately, this directive is always aimed at the leader of the produce operation and essentially threatens his or her position and a successful operation if he or she does not generate results. The end product of this “request” is the produce operation complies with the edict and generates the money.
This method of operation is used in nearly every operation on the retail side. It is especially prevalent in those publicly held companies that must report its results to The Street every period. Poor results that miss the target affect the stock price and/or valuation of the operation. Because of this potential consequence, management will most always resort to these short-term solutions to avoid a shortfall in the eyes of the Market or overall industry.
This type of action is not just aimed at Produce and other more “liquid” departments. It also includes the larger departments of the store, such as Grocery. In the grocery department the action is to take in new products, or lines of products, that are accompanied by “slotting fees,” which are payments from the vendor to essentially “buy” space on the shelf. These items, and their slotting fees, are taken in at the end of a period and, more often than not, then ignored and left to be “noticed” by category analysts. Very little, if anything, is done to promote these items, and they simply fail and are removed from the shelf due to lack of sales.
Produce and, to a lesser extent, other perishable departments, do not have slotting fees to rely on for a source of funds. Produce, by its perishable nature, has the ability to affect sales quickly, and ultimately profits quickly, because of the high rate of product turnover. The two most popular ways to generate this additional cash both involve manipulation of the pricing in the department. The first and easiest way to generate additional cash, and the one most often used, is to arbitrarily raise prices across the board.
The second requires more effort and adds the element of timing. If the request is made with enough advance warning — where pricing can be affected in the next week’s promotional cycle — then the produce department can adjust pricetags to secure more profits. If more money is needed, the department can further resort to raise prices on other higher volume items.
Both ways are inherently successful, given the volume and turnover in Produce, but the effects are far-reaching. This type of action erodes the retailer’s price perception in the eyes of the consumer — as the promotional prices are not quite as competitive as in the recent past. As a result, and in the case of overall price increases across the board, the entire price image of the department suffers. Clearly, these manipulations can have a negative effect on the success and continued growth of any retail operation.
Because of the continual success of this action, it’s unlikely it will disappear any time soon. Management will continue to utilize this “request” as long as it continues to yield results. It seems inevitable that, in the near future, this action will continue as produce personnel generate the dollars needed to maintain the store’s position. The solution to the problem would be a more realistic forecast of sales and profit by upper management to avoid, or minimize, the number of shortfalls. This seems unlikely as management tends to over-estimate results to impress the “Market” by painting a positive, healthy picture of the retail operation.
Given this management attitude, the responsibility to minimize the negative consequences of this type of pricing fluctuation falls to the produce operation. The best outcome would be to abolish this type of action totally and allow for the growth and continued success of the operation. However, given the likelihood this type of action will continue, the best course may be to plan for it. Using historical records, a smart produce operation could build into its strategic plan provisions that allow for the generation of more profits throughout the period resulting in contingency funds for such “requests.” It is a lesser of two evils to implement such planning, but in the long run it will minimize the damage from arbitrary cost fluctuations caused by the “28-day dash for cash.”