Banana Prices‭, ‬Contracting‭ ‬And Retail-CEO Shortsightedness‭ ‬

Jim Prevor - The Fruits of Thought

Originally printed in the April 2018 issue of Produce Business.

The‭ ‬Wall Street Journal‭ ‬recently ran a piece on banana pricing in the US‭:‬

Wholesale banana prices in the U.S‭. ‬rose 15.5‭ ‬percent in the first two months of 2018‭ ‬to around‭ $‬0.577‭ ‬a pound‭, ‬an all-time high‭, ‬according to data from the World Bank‭, ‬after the weather phenomenon known as La Niña upended weather patterns‭. ‬The price fell‭ ‬somewhat in March as supplies to the U.S‭. ‬improved but are still up 8.4%‭ ‬from a year ago‭.‬

Jim Prevor - The Fruits of ThoughtBananas are the most widely eaten fresh fruit in the U.S‭., ‬and many retailers have been loath to pass their higher costs on to shoppers‭. ‬For many supermarkets and other stores‭, ‬bananas drive trips to the store because they are an item that most people go out to purchase rather than buy online‭. ‬Most large retailers sell bananas at a slim margin or sometimes no price markup‭, ‬which means higher wholesale prices are likely hurting returns for sellers that haven’t locked in prices with long-term contracts‭.‬

“I go to competitors regularly‭, ‬and no one has moved on retail prices‭,‬”‭ ‬said Jeff Cady‭, ‬director of produce and floral at supermarket chain Tops Friendly Markets‭, ‬which has stores in upstate New York‭ ‬and neighboring states‭. ‬“I’d love to go up‭, ‬but we just can’t‭,‬”‭ ‬he said‭, ‬referring to prices‭. ‬He also said that limited supplies have meant Tops is shipping out fruit from its warehouses that‭ ‬has spent four days ripening‭, ‬as opposed to the usual five days‭.‬

In this case‭, ‬with a short-term‭, ‬weather-driven reduction in supply‭, ‬it is understandable that retailers might want to maintain‭ ‬consistent pricing‭. ‬In any case‭, ‬the headline of the story‭, ‬Why You Aren’t Paying More for Bananas‭, ‬but Retailers Are‭, ‬and the subhead‭, ‬“The wholesale price of the world’s most popular fruit hit a record high in the first quarter,‬”‭ ‬may‭, ‬in fact‭, ‬be a bit misleading‭.

It is not clear to what extent‭ ‬“retailers”‭ ‬are paying more for bananas‭, ‬since much of the chain business is sold on contracts‭. ‬Indeed‭, ‬one reason the‭ ‬“wholesale”‭ ‬price has zoomed is that any reductions in volume tend to come from the relatively small uncontracted portion of the market‭.

The growing use of contracting throughout the produce industry is leading to an increase in volatility on pricing‭, ‬but this volatility often does not affect most businesses very much‭. ‬In other words‭, ‬if 80‭ ‬percent of bananas or Romaine hearts or Iceberg is‭ ‬contracted‭, ‬but volume falls short by 10‭ ‬percent due to weather‭, ‬the non-contracted market has to absorb all this shortfall if‭ ‬contracts are honored‭. ‬So‭, ‬the non-contracted market will be down not 10‭ ‬percent in volume but 50‭ ‬percent‭! ‬So prices will zoom‭. ‬And when prices zoom‭, ‬contracted buyers take up all their allotments and beg for more‭.‬

Retailers should be promoting the new innovations that have the potential to drive growth in consumption and sales‭ … ‬not overcharging for these items to offer artificially low prices on bananas‭.‬

There is a bigger question‭, ‬though‭, ‬as to whether this perception on the part of retailers that they‭ ‬“just can’t”‭ ‬increase banana prices is actually true‭ ‬‮—‬‭ ‬that is whether keeping prices low on particular high visibility items creates better‭ ‬produce sales and higher consumer satisfaction‭.

Most retail produce executives echo Jeff‭, ‬but not for any consumer-driven reason‭. ‬They echo Jeff because‭, ‬quite literally‭, ‬these‭ ‬produce directors‭ ‬“can’t”‭ ‬raise banana prices because their CEOs have ordered them to equal Walmart or other competitors on banana pricing‭.‬

There is a theory behind this‭. ‬Bananas are often the No‭. ‬1‭ ‬selling item in the store and‭, ‬perhaps‭, ‬bananas are one of the few produce items consumers will recall the price at which they are sold in other stores‭. ‬So being competitive on this item might help‭ ‬the pricing image of the overall store‭.‬

So‭, ‬if there is a chain that wants to make bananas a marquee item and meet or beat any price‭, ‬it might make sense to keep prices‭ ‬down‭ ‬‮—‬‭ ‬provided the retail chain wants to fund these low prices out of general marketing dollars‭.‬

This‭, ‬however‭, ‬almost never happens‭. ‬In fact‭, ‬what happens is that CEOs demand that their produce departments both meet their margin requirements and be the cheapest on the block in bananas‭. ‬This is exactly the same as the CEO ordering the produce director‭ ‬to raise prices on everything else to compensate for low‭, ‬zero or negative margins on the department’s largest selling item‭.‬

This is called the‭ ‬“stupid customer theory”‭ ‬‮—‬‭ ‬we can raise prices on everything else‭, ‬and nobody will notice as long as we keep low prices on a marquee item‭.

It is very common‭. ‬When Amazon took over Whole Foods‭, ‬it gave out a list of items it was going to reduce prices on‭. ‬It got loads‭ ‬of media‭. ‬Nobody stopped to ask the only relevant question‭: ‬“Did Whole Foods simultaneously reduce margin requirements for the store or will these lower prices be compensated for by higher‭ ‬prices elsewhere in your offer‭?‬”

Pricing this way is a mistake for today’s produce offer‭. ‬Retailers should be promoting the new innovations that have the potential to drive growth in consumption and sales‭ ‬‮—‬‭ ‬items such as Mann’s Nourish Bowls‭, ‬Cece’s Veggie Noodles‭, ‬Love Beets’‭ ‬flavored offerings‭, ‬Naturipe’s Snacks and on and on‭ ‬­‮—‬‭ ‬not overcharging for these items to offer artificially low prices on bananas‭.

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