Smoke-and-Mirror Retailing

Jim Prevor - The Fruits of Thought

When an external enemy attacks‭, ‬it tends to create a response‭. Jim Prevor - The Fruits of Thought‬Look at how Wal-Mart‭, ‬most recently with its acquisition of‭, ‬is consciously trying to respond to the threat posed by and the growing onslaught of online shopping‭.‬

Obviously some adversity can’t be overcome‭, ‬but the clarity of the threat and the instinct of organizations to be self-defensive often leads them to find a way to survive and thrive‭. ‬They defeat the competition or get out of the way of the competitor‭, ‬or they find a way to co-exist‭.‬

When the undoing of an organization is internal‭, ‬it is harder to battle‭. ‬When the problem is one’s boss‭, ‬the challenge is substantial‭.‬

And such is the dilemma faced by many‭, ‬perhaps most‭, ‬supermarkets today as supermarket CEOs insist on policies that hurt the whole produce department‭.‬

What is the issue we speak of‭? ‬What surreptitious force is undermining produce departments‭? ‬And why would CEOs act in a way that‭ ‬weakens one of their most important departments‭?‬

The answer is that retail produce departments suffer because they are compelled by supermarket CEOs to match competitive banana‭ ‬prices‭. ‬Sometimes it is with another supermarket‭, ‬sometimes directly with Wal-Mart‮…‬‭ ‬in many cases‭, ‬it amounts to the same thing‭:‬‭ ‬One supermarket in a region decides it must price compete with Wal-Mart on bananas‭, ‬and the whole market is pricing with Wal-Mart on bananas‭.‬

The driver behind this disruption is rarely the produce executives at retail‭. ‬It is top corporate executives who have decided that bananas are the marquee produce item‭, ‬that consumers will flee a chain in search of better banana prices‭, ‬that consumers will‭ ‬remember competitive offers on bananas and that being high on bananas will powerfully impact consumer price perception of the entire chain‭.‬

Yet CEOs’‭ ‬perceptions may be out of date‭. ‬You can hear them focus on bananas and iceberg lettuce‭, ‬as memories bubble up of their younger‭ ‬days spent in the stores‭. ‬Yet iceberg lettuce has become a minor item and‭, ‬though bananas have long been the best-selling produce item‭ ‬‮—‬‭ ‬and that remains true today‭ ‬‮—‬‭ ‬bananas are rarely the best-selling category these days‭.‬

Produce departments suffer because they are compelled by supermarket CEOs to match competitive banana prices.

Thirty years ago‭, ‬it was not uncommon for bananas to account for 15‭ ‬percent of produce department sales in less affluent stores‭.‬‭ ‬All this was destined to change‭. ‬An explosion of counter-seasonal fruit meant that bananas would have more winter competition‭. ‬An explosion of fresh-cuts meant that many convenient snacking options would appear‭. ‬More flavorful grapes‭, ‬tree fruit‭, ‬apples and berries were more competitive‭. ‬Easy-peeling citrus made a whole new category develop‭. ‬Innovations in packaging would allow many produce items to be handled conveniently‭ ‬‮—‬‭ ‬think of Naturipe’s blueberry packaging used in McDonald’s superseding a world where bananas‭, ‬almost uniquely‭, ‬had this advantage naturally‭.‬

Yet while there are good reasons why bananas would not dominate produce as they once did‭, ‬this natural trend has been accelerated because prices have been set so low that profitability has been drained from the category‭, ‬and that means retailers are loathe‭ ‬to advertise‭, ‬market or give prime display space and more copious room to bananas‭. ‬Imagine you had a brilliant merchandising idea that would result in sales dropping for berries or grapes by‭ $‬1‭ ‬million but would see banana sales climb‭ $‬2‭ ‬million‭. ‬For most‭ ‬stores that would be a loser because the gross profit on bananas is typically so low‭.

If this all resulted in the department’s Number One item being drained of profitability‭, ‬we could probably lament that and go on living with it‭. ‬But it is much worse‭. ‬When top corporate executives order low banana prices‭, ‬they do it as a form of advertising for the overall store‭. ‬They want to impact the price perception not just of the produce department but of the whole store and of the banner name‭. ‬Yet‭, ‬rare indeed is the CEO who both says to produce executives that A‭) ‬I want you to lower banana prices and B‭) ‬I am going to treat the lost margin as a corporate advertising expense and reimburse the department for lost margin‭.‬

Instead‭, ‬most top corporate executives at retail expect the department to meet the same margin goals as before‭, ‬but without the‭ ‬profits from its highest volume item‭. ‬Translation‭: ‬Produce departments have to raise prices on every other produce item to maintain overall margin when they are getting little or no margin from bananas‭.‬

This depresses consumption‭, ‬consumer trial‭, ‬and everything the industry hopes to achieve‭. ‬And for what‭? ‬We actually don’t have good data indicating that consumers won’t pay a fair price for bananas‭. ‬And there is a lot of anecdotal evidence that the elasticity of demand on bananas is not high‭.‬

Retailers have seen this story before‭. ‬In the‭ ‬“wet salad”‭ ‬department in the deli‭, ‬vendors came to offer the big three salads on the cheap‭ ‬‮—‬‭ ‬that is potato‭, ‬macaroni and coleslaw‭. ‬But the price shift of moving all the profitability to small volume salads‭ ‬‮—‬‭ ‬cucumber‭, ‬beet‭, ‬carrot raisin‭, ‬etc‭. ‬‮—‬‭ ‬made these items excessively expensive and suppressed consumer demand‭.‬

The idea of price matching is a relic of days when retailers were comparable‭. ‬Now the specialized retailers‭, ‬such as Trader Joe’s‭, ‬Aldi and Whole Foods‭, ‬have different cost structures‭, ‬different merchandising approaches‭, ‬different clienteles‭. ‬It will be impossible to match price and assortment with these radically different concepts‭.‬

Building a reputation for good prices shouldn’t be done through shifting margins from one item to another‭ ‬‮—‬‭ ‬that kind of smoke-and-mirror retailing won’t be the way forward‭. ‬Reputations need to be built on sustainable profitability‭. ‬We can start by urging CEOs to set banana prices free‭.‬