Originally printed in the November 2019 issue of Produce Business.
In order to fill some supply and logistical issues, I often do some fixed pricing contracts. But they need to make sense and should not be 100% of any item, especially for retail. In foodservice, fixed pricing makes sense because restaurants need to know their serving cost and they charge so much. The demand is much more consistent than in retail, so the fixed pricing is not a huge factor.
I have done Roma tomato contracts for the past 5 years, maybe longer. I deliver XL Roma tomatoes to the East Coast from $12.50 to $13.50 depending on location. To me, this is a no-brainer contract. My retailers can sell at $.99 a pound for 6 months and double their money. Most chain stores in the Northeast very rarely go to that price and use $1.49 as an ad price. As I said, a no-brainer contract.
Some other contracts are not as lucrative. My recommendation to customers: “Take half of your volume on contract, and ‘play the market’ with the other half and average out the cost.” With this scenario, if your contract is $20 and the market goes to $10, you will keep your overall cost lower by averaging down. More importantly, you should take the opportunity to lower the retail to better compete and to sell more volume.
Side note on average costs when it comes to produce (something else they don’t teach in MBA classes). Before you say, we don’t sell more at a lower price, I will ask you WHY DO YOU PUT THINGS ON SALE? Why does your volume double or triple when you are on sale? Stop with the BS, and start selling produce the way it was meant to be.
Let’s talk a moment about sustainability. You know what is sustainable to a farmer? Selling his crop is sustainable. Farming is not a machine; you can’t turn off the switch when you have too many, and you can’t speed up production when you have too few. Growers count on an average for their crop. When there is a shortage, prices go up; when a glut occurs, prices are down. Selling their entire yield becomes very important to get a better average. The farmer does not need to sell everything he has for $10 in a $20 market, but he does need to sell everything even when the market is $4 and it’s under production cost. You know why? Because $4 gets you a better average than $0.
Selling produce with its natural ebb and flow is the way to the future.
In the supply-and-demand scenario as it pertains to fixed pricing, retailers want everything the farmer has in a $20 market for $10 because that usually correlates to great demand. Many retailers – but not all — will use this bargain to make more profits and not pass it on to the consumer. When the market changes and the same retailer has a price of $10 with the market at $4, the retailer generally take less volume at a time the farmers need them to take more volume. WHY? First, the competition may be retailing off the $4 price. Second, they are locked into a $10 price, and more importantly they don’t change the retail price. In fact, they hardly ever change the retail price when prices get cheaper, and this stifles demand. It’s the biggest problem in large retail today.
At that time, there was a glut in Mexico, and I was delivering 15# XL red peppers to the Northeast for $4.50, yes $2 FOB. That is a $45 sale on a $5 item; this is the problem with our current retail produce paradigm.
Selling produce with its natural ebb and flow is the way to the future. As retail competition heats up, I can see some changes on the horizon, and I hope it’s not a mirage.
I have been around long enough to see some very good and bad ideas come and go. With the utmost certainty, I can say the independents that use supply-and-demand buying in concert with their retail pricing beat every large retailer any day. The one exception is when their 3-week sale hits a shortage and prices skyrocket. The caveat there is — they didn’t get all they needed because the market was short.
Independents cater to their local community, something large retailers need to learn. I recently read Walmart is introducing produce 2.0. It sounds encouraging because they are going to speak with their produce managers, which is a step in the right direction because it looks like they have been listening to those accountants for too long. I think Walmart could captivate the retail produce industry with some store and ideology changes.
The way forward for all of us — from grower, wholesaler, retailer and consumer — is to use nature’s natural growing cycles and to adhere to the perfection of a supply-and-demand market. We need to price produce in accordance with these cycles. The days of retailers paying too little for product from farmers and charging consumers 40%-600% markup is past its time. We need every link to work together.
As I have stated: Demand is the daddy of this equation, and the demand comes from the consumer. So, you must realize that catering to them with price, quality and value is the shortest route to increased demand, just in case you didn’t learn that in college. Many of the things I have learned were through experience and my love affair with the produce business. These things were not taught or could be learned in college.
Let’s take what I have learned through experience and everything you have learned in college on data-collection and metrics, put them together and propel this industry into the future with the knowledge of the past. Deal? I am ready.
Paul Manfre is general manager at Top Katz Brokerage LLC, located in The Bronx, NY. In his role, Manfre oversees purchasing, sales and contract negotiations. He is also a produce supply and demand specialist.