Direct Global Procurement: Worth The Plunge?

Diving In

Retailers who decide to dive in must navigate increasingly murky waters and myriad options.

With transnationalization of retailers such as Lidl, Aldi, Wal-Mart, Ahold-Delhaize, Costco and even Whole Foods, many competitors are contemplating setting their sites on global procurement as a potential boon to the bottom line.

Some retailers will discover financial and resource sense in pursuing direct-purchasing and importing themselves. However, others may turn to sage guides such as transnational marketers or vertically integrated growers to achieve the direct ideal. Regardless, the costs and complexities of global procurement promise pitfalls, as well as rewards.

“Going direct has always been the Holy Grail in the industry,” says Nancy Tucker, vice president, global business development for the Produce Marketing Association in Newark, DE.

Yet, Tucker cautions, from the retail perspective it takes a certain size, commitment and expertise to do so. “Chains such as Wal-Mart and Tesco have buying offices in many parts of the world as well as experienced support staff to support their direct buying efforts,” she says. “Others, even though they might be quite large, build the relationship directly with the grower/exporter, but work with importers to handle the transactions. Importers bring specific knowledge and experience to provide a very important service to both retailers and exporters.”

Wayne McKnight, president of McKnight Insights & Solutions in Niagara-on-the-Lake, Ontario, Canada, and formerly Wal-Mart vice president of global procurement food, says the amount of “true” direct sourcing remains relatively low compared to the overall procurement totals. “Obviously, some are making greater headway than others,” he says. “Direct global sourcing, when done correctly, can give a huge point of differentiation in quality, surety of supply and product innovation. There will no doubt be a greater focus over time in North America as more global companies enter this market with different business models and expose those that have zero capability today.”

While the pursuit of global procurement remains a noble quest, Bruce Peterson, president of Peterson Insights in Bentonville, AR, cautions retailers to consider the full picture. “When you talk about direct procurement, you have to think about how the supply chain works and your advantage in doing it,” he says. “There are many functions in the middle that have to be taken care of regardless. You could make an argument that if you’re large enough, you could skip one of those functions, like marketing. But you still have a pack, book freight, handle logistics, etc.”

The import world, explains Mayda Sotomayor, chief executive of Seald Sweet in Vero Beach, FL, requires forming and understanding a whole structure. “You need to set up a program way in advance,” she says. “It’s much more than picking up the phone, giving a PO and having product in three days.”

According to Reggie Griffin, owner of Reggie Griffin Strategies in Bluffton, SC, there is no one perfect solution to direct international sourcing asserts. “It’s going to depend on your level of risk and what you can do,” he says. “Moving more toward integrated partnerships might be more palatable for some retailers, whereas on-the-ground investment might make sense for others.”

Grayly Defined

One crux of the whole global procurement conversation lies in the fundamental definition itself. Griffin explains there is a gray area on what “going direct” internationally means. “In the narrowest sense it means the retailer has an agreement with a grower in another country, and the retailer is managing logistics and importation,” he says. “However, some retailers consider it to be when they have a long-term agreement with growers via an Oppy (Vancouver, Canada), Robinson Fresh (Eden Prairie, MN) or Seald Sweet (Vero Beach, FL). In my experience, there are very few who actually do boots-on-the-ground direct international sourcing.”

Sotomayor reports the ongoing development of many different kinds of “direct” business concepts. “What is direct for one retailer or one grower means something different to another,” she says. “The models are forming as we speak. One model is not necessarily better than the other but just fits different circumstances. Successful examples are those truly committed to what the program means and to the strategy of that company.”

The definition of direct can even be a conundrum to retailers who perceive they have direct programs. John Pandol, director of special projects for Pandol Bros. in Delano, CA, says even retailers who buy direct may not be always hitting farm-level. “Many large retailers simply do not have the buying organization to put together programs from lots of growers, so they rely on a few large exporters to make sure they get covered,” he says. “Most direct retail customers don’t know a lot of lateral trading goes on in the countries of origin, where large direct growers co-pack other growers’ fruit.”

McKnight notes the importance of understanding true back-to-the-farm and primary production versus just further upstream in the supply pipe. He cites the example of how Wal-Mart used the term “direct” sourcing in general merchandise until the company started to audit the manufacturing plants and found out the “supplier” was subcontracting production elsewhere. “The same principle applies in fresh,” he says. “Larger growers have become grower-shipper exporters with a few direct retail clients. They use source country brokers/exporters and final destination country importers for the balance so their business model is a hybrid of many methods. Few have 100 percent in one model only. We (McKnight Insights) had one retail client who had eight different sourcing models in play at one time, depending on the complexity and volatility of product and supply pipeline.”

Large multinational retailers employ various models depending on location and strategy. “Wal-Mart and Loblaws may be truly importing direct with boots-on-the-ground,” says Pandol. “Other large retailers tend to nominate a supply partner. And, we’ve had some retailers say to forget the global sourcing. They’d rather buy it in the United States because of flexibility in quality and price.”

As reported on Eurofresh-distribution.com, global sourcing of fruit and vegetables for Düsseldorf, Germany-based Metro Group’s main product categories takes place in its Valencia, Spain, trading office, from where it serves most of the Metro shops, which are located in 28 countries. The trading office acts as a center, offering support in category development, focusing on direct sourcing, food safety, and supply chain control, while offering strategy, guidelines, new concepts and country support.

McKnight says there are parts of European models that need to be examined to see what learning can be transferred. “It is critical each organization develops its capability based on its own DNA and appetite,” he says. “Yes, the status quo will get challenged, sooner rather than later. At the very least, North American retailers should be gaining new visibility into their supply and becoming educated in everything upstream from their business.”

Though much noise has been made of the European retail entry into the U.S. marketplace, Griffin says European retailers are not yet sourcing produce directly internationally for U.S. stores. “Their stores are spread out, and it’s not efficient for them yet,” he says. “This may change in the future as they continue expansion. To take a shipment from overseas, they must have a store base to handle the volume, and right now they don’t. Currently, they have arrangements with regional distributors and importers for the product.”

The Cost of Going Direct

For many retailers, the historical justification behind global procurement has been increasing profit by decreasing cost. However, such conclusions are not so cut and dry.

“The illusion that retailers will have better control and less cost if they buy directly internationally is a myth,” says Pandol. “The biggest buyer doesn’t always make the best deal, and many retailers have entered and then left this arena.”

Though retail has tried to establish one-size-fits-all procurement strategies, the CPG (consumer packaged goods) mold doesn’t necessarily translate to produce. Griffin illustrates with the case of private-label. “In grocery, you make more penny-profit out of private-label,” he says. “However, in produce, you don’t have a significant cost reduction by going to private-label — it’s nowhere near that of CPG. Likewise, in produce sourcing, retailers need to ask if they save enough to justify the risk and complications of direct-import versus sourcing another way. This is not an easy decision. It’s not something you do on the back of an envelope.”

Mayda Sotomayor“Some retailers don’t have the stomach to handle a falling market, and some growers don’t have the stomach to handle a rising market. So you need to understand the long-term implications of the business.”

— Mayda Sotomayor, chief executive of Seald Sweet

Peterson Insights’ Peterson suggests the need to look at the real cost of going direct, not just the FOB cost of goods. “A buyer can increase his gross margin because the only thing he is measuring is the FOB of goods,” he says. “But, that’s the only thing that shows up — not the shrink or cost of being short or long. I’d be willing to bet when you go all in and look at infrastructure — times when you’re out of product or times when you buy too much and don’t know what to do with it — direct sourcing is much more expensive than is thought. There are some large retailers this happens to all the time.”

Pandol’s impression is most buyers and merchandisers’ main problems with direct programs are their loss of market flexibility. “I heard one large chain employee complain about how the price is always higher on set programs,” he says. “For example, Chilean suppliers will cover 100 percent of contracted volume because the price is higher than the spot market. However, the chain’s sales slow down because it can’t compete price-wise with other retailers who bought similar fruit cheaper from importers on the open market. So the chain either matches retail prices and loses money on margin or maintains prices and doesn’t move the volume it contracted.”

The natural volatility of the produce business also presents challenges when retailers find themselves on the wrong side of the swing. “We find retailers being forced to sell what they bought instead of buying what they can sell,” says Pandol. “One large wholesaler has a significant business picking up and selling on consignment all of the extra stock from a chain’s direct import program.”

True direct buying, notes Seald Sweet’s Sotomayor, takes a certain type of retailer and grower who can withstand market fluctuations and stay committed to the buy, even if the market changes. “Some retailers don’t have the stomach to handle a falling market, and some growers don’t have the stomach to handle a rising market,” she says. “So you need to understand the long-term implications of the business.”

Peterson reports issues particularly show up at the beginning and end of the season. “When supply is tight, good shippers/marketers will get out and source the product from others to be able to fulfill the deal they have with a customer,” he says. “Marketers do a lot more than just sell what’s in their shed — they go out of their way to fulfill the PO. Those functions are difficult for a direct-buy retailer to perform.”

Creating More Value

Rather than focusing on cost savings, procurement experts point to other parameters outlining the importance of a global procurement strategy.

A report by Accenture titled, Procurement’s Next Frontier, by Kai Nowosel, Abigail Terrill and Kris Timmermans, notes “in the next several years, our research suggests the definition of ‘value’ will evolve from a focus exclusively on cost reduction and savings to work that helps differentiate the company strategically. Procurement increasingly will be evaluated by more advanced measures, ones that are intimately linked to the company’s strategy and financial metrics. How will procurement respond to this new set of demands?”

Bruce Peterson“Marketers do a lot more than just sell what’s in their shed – they go out of their way to fulfill the PO. Those functions are difficult for a direct-buy retailer to perform.”

— Bruce Peterson, president of Peterson Insights

Sotomayor agrees it doesn’t boil down to price anymore. “An international sourcing strategy really comes down to what is the freshest fruit we’re putting on the shelf, as well as what other value we provide for our customers,” she says. “The big retail earning here is in shrink and transparency.”

Surety of supply is another major benefit McKnight Insights’ McKnight reports is the high retail priority. “Having the right product throughout the season — particularly beginning and end of seasons or when crops are short — yields the biggest advantage,” he says. “Having product for your customers when others don’t is meaningful. The best also see opportunities in innovation. For example, a new variety offering a superior eating experience (driving consumption and consumer loyalty) enables brand or banner differentiation that matters.”

A more direct relationship with growers generates greater knowledge of the product itself for retailers who in turn find value in sharing this with customers.

“In this day and age with transparency on the forefront of everyone’s mind, consumers are now more than ever interested in their food source,” says Kimberly Flores, Seald Sweet’s marketing director. “Retailers working more direct are capturing an opportunity to provide that transparency.”

Flores notes how some European retailers take much more advantage of forming and telling such stories. “A dedicated program with a source or grower gives them a chance to connect consumers with the food source,” she says. “We had the chance to do that this past year with one of our direct programs and a Fair Trade-certified grower. It was impactful to tell the story of how these funds are being used in the community.”

Another reason large multinationals look to develop global sources includes having a presence in countries where they want to put stores. Peterson says retailers such as Wal-Mart, Tesco or Aldi, which do business in multiple countries, have a political advantage to being able to point to their purchasing from those countries when they want to open stores in the same countries.

Investments in overseas stores may also provide a platform for exporting. H-E-B stores in Mexico likely facilitate company knowledge and access for importing to the United States. A few years ago, Wal-Mart bought out Lider, a major chain in Chile, which experts speculate may have contributed to facilitating its U.S.-Chilean import program.

International Marketers

The crevice between a retail desire for more direct international sourcing and the lack of ability to effectively implement such programs results in transnational produce suppliers stepping up to bridge the gap. Brian Miller, vice president, managed services at Proactis, a global spend control and e-procurement solution provider in Phoenix, says from the perspective of the mid-size retailers he deals with, none are currently doing global direct procurement. “They are all purchasing through supplier marketers rather than direct from growers,” he says.

These larger importer/marketer companies, according to Miller, can aggregate volumes from several retailers to help negotiate contracts with growers that have guaranteed sales. “Additionally, the cost of the boots-on-the-ground is spread over several retailers rather than borne by a single retailer, reducing labor costs and headcount,” he says.

McKnight points to the benefits of marketers and importers investing in expanding their diversity of supply from the Northern to Southern Hemisphere. “In some cases, they are taking an equity position so they come across more as a grower than a pure marketer or middleman,” he says. “Developing knowledge and skill sets in this group has been a top priority.”

Vertical integration among importers, growers, and marketers plays a significant role in companies adapting to fill the global sourcing gap, according to PMA’s Tucker. “Growers have added export functions and exporters have purchased farms,” she says. “This is true on the buy side as well. At a PMA member breakfast seminar in Chile this past December, one of our panelists from Eachtake Ltd. in China is an importer, wholesaler, and retailer.”

At the same time, concurs McKnight, consolidation of the supply side creates larger grower/shippers who also see the same writing on the wall. “Diversifying farm operations and growing in several other countries is key to their future growth and market penetration,” he says.

With respect to commodities representing a significant part of the retail business such as berries, grapes or avocados, Griffin acknowledges the effect of lack of year-round season in the United States. “So instead a retailer builds a relationship with a Driscoll’s, who in turn gets the retailer berries basically 52 weeks a year, regardless of where they’re grown,” he says. “Greenhouse grower Red Sun Farms in Kingsville, Ontario, Canada, is another example. They formed a partnership with a large greenhouse operation in Mexico to provide a year-round supply. So, if retailers buy direct with Red Sun Farms, they continue to get product during the winter via Red Sun, who ships it from Mexico.”

Mission Produce, a vertically integrated, year-round avocado supplier of fresh Hass avocados in Oxnard, CA, represents a good example of such a supplier. “We source from multiple production regions, looking for optimal growing conditions from around the world to provide year-round supply for our global customer base,” says Robb Bertels, vice president of marketing. “The primary benefit for the retailer and end-user is having uninterrupted supply, regardless of production area. Our goal is to have at least two sources of supply available to our customer base at any given time of the year. We are active in California, Mexico, Peru, Chile, New Zealand, Colombia and other emerging markets.”

Strategic Sourcing

Navigating the future requires a more strategic and collaborative map.

“A strategic approach to sourcing can help even the best-performing grocers enhance vendor relationships, increase product and ingredient quality, reduce spending and find new sources of supply,” says Miller. “This ultimately equips them to generate more value for their organization and become more efficient and effective in their jobs.”

Griffin says building a collaborative relationship helps leverage both sides of the purchase order. “If you sit down and build a strategic collaborative partnership and agree to do X on a commodity, it allows a company such as an Oppy to do more in the country they’re already doing business in,” he says.

Wayne McKnight“Someone needs to do it with excellence. … Decide your appetite and DNA, and determine your course of action. That decision will ultimately determine the market winners and losers.”

— Wayne McKnight, preisdent of McKnight Insights & Solutions

In the future, Bertels says successful marketers will look more like Mission Produce. “We are globally diverse both in terms of customer and supply, and that is a critical component for success,” he says. “You cannot be a part-time, seasonal player in the global avocado business. It’s a year-round business.

“We also provide expertise in ripening fruit to individual customer specifications; are active in developing innovations in production, packing and value-added services; provide leadership in category management information; fully manage the supply chain for customers, and have the highest standards in food safety and security.”

Increasingly, savvy companies such as Seald Sweet work with several models. “We have some growers who are small, and we completely market their fruit,” says Sotomayor. “But we also work with larger growers who can do the deal with a large retailer, and we handle the logistics.”

Sotomayor says another common model will be a three-way relationship between the retailer, grower and a third-party strategic supply chain manager with boots-on-the-ground. “That third party will be someone who looks out for the grower and the retailer, and ensures the deal flows as efficiently as possible logistically.”

This is one justification for the expansion of Seald Sweet’s parent company, Greenyard Logistics USA in Swedesboro, NJ. “This facility reflects our evolving future as an importer,” says Sotomayor. “We still have our traditional business, but we are expanding our role. In this new model, the grower negotiates directly with the retailer, but we help the grower and retailer ensure all regulations are met. We bag it and take care of all the logistics for the customer. We provide a service to the grower and the retailer.”

Sotomayor proposes a future scenario where Seald Sweet identifies 10 growers who meet a specific retailer’s needs.

“We go back to the retailer and present the 10 growers who can supply them,” she says. “The retailer takes that information, negotiates with the growers and comes up with their deal. Then it’s up to us to make sure the grower complies with the promises they’ve made. We handle the logistics, act as the importer of record and inspect the product. Any product that doesn’t meet specs, we sell on the open market. We watch the product and make sure the retailer gets what they expected.”

Pandol Bros.’ Pandol likens this new supply chain manager to the Amazon model. “It’s really the old wholesale market model but on an international scale,” he says. “Once upon a time, a terminal market wholesaler with cold storage would direct-deliver a chain store. Now an intermediary can provide the same service for an international product even if the buyer is talking directly to the grower. It’s similar to Amazon’s third party.”

Though Miller of Proactics predicts large companies such as Wal-Mart or Kroger may continue to work to source directly internationally, he also says mid-market retailers will continue using strategic broker partners. “They’ll be looking for ways to differentiate their product mix,” he says.

McKnight Insights’ McKnight warns with global sourcing there is tremendous knowledge and work that needs to be done from end to end. “Someone needs to do it with excellence,” he says. “You need to decide whether the retailer will invest and do it, whether your grower can provide all of it and reward them accordingly, or if a service provider can do all or parts thereof. Decide your appetite and DNA, and determine your course of action. That decision will ultimately determine the market winners and losers.”

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