The Challenge Of Direct Global Sourcing

Originally printed in the December 2018 issue of Produce Business.

International buying programs can be difficult, but some retailers seem intent to press on.

The sands have shifted since direct produce sourcing was pioneered for North American retail more than a decade ago by the likes of Walmart and SuperValu, following in the footsteps of their counterparts in Europe.

The model is no longer just a question of taking on risk to cut cost and shore up supply, and thanks to hybrid applications, it has ceased to be the exclusive domain of retail’s top dogs.

The plant biology that’s literally at its roots, combined with the existing supply chain ecosystem, makes a purely direct global sourcing plan that includes every key region and commodity nearly impossible. But the idea itself is a spark for new approaches in the marketplace, along with upstream and downstream consolidation from traders and growers alike.

Claudio Canziani

Claudio Canziani’s company, Safoods, headquartered in Santiago, Chile, is a perfect example of how the direct procurement concept has transmogrified into new forms. Connecting both small and large growers with retailers who may not wish to invest in an overseas office, Safoods facilitates direct sourcing for prominent U.S. supermarkets.

“The biggest chains in the United States are buying directly,” says Canziani, whose company also has operations in Peru, Argentina and Mexico. “Every day, retailers are more open to finding ways to ensure the fruit can go directly from the field to the shelf as quickly as possible within their specifications and with the greatest control possible.”

He says what supermarkets have realized is that import capacity allows them to better compare with offers they receive daily from importers.

“Once you understand what is happening, you have a lot more information. And information is power,” he says.

Canziani’s motto is to never let the fruit stop after harvesting. With a faster speed to market, the result is less shrink in stores. “The cost of the fruit isn’t just in the price of the fruit, but rather in the shrink,” he explains. “And the difference between fruit that goes direct to the shelf vs. one that passed through many hands, that makes all the difference.”

The first step in a program like this is establishing a protocol that ensures paperwork is in order for shipping and that the retailer-importer complies with U.S. regulations around the Food Safety Modernization Act (FSMA).

“Before the fruit arrives at its destination, the responsibility lies with the grower-exporter,” he says. “We inspect every load that leaves the Southern Cone [the southernmost areas of South America, south of and around the Tropic of Capricorn], and if a load doesn’t meet the specifications, it doesn’t leave.”

“If there are accidents or problems that can happen on the ship, whether it be the temperature, leaking petrol or if the ship has problems in another port, any of these eventualities is covered by the growers’ insurance in case the fruit is lost.

“Only once the fruit is inspected and approved by the retailer does it become their responsibility,” he says, emphasizing a supermarket is going to keep consistent specs, regardless of whether fruit is from an importer or their direct sourcing partners.

Manuel Alcaino

His Chilean compatriot, Manuel Alcaino of Decofrut in Santiago, claims there is “only one definition” of direct procurement – a retailer setting up a program with an exporter or grower in another country. But he clarifies there are many ways to operate, whether it’s a retailer setting up an office abroad like Walmart has in Chile or importing through a service provider.

“Retailers are entering this terrain more and more buying loads, and I think there is an advantage for everyone, so long as commitments are kept,” says Alcaino, whose group provides quality-control services with offices around the world, including U.S. operations in Philadelphia; Wilmington, DE; Miami; McAllen, TX; and Los Angeles.

Alcaino believes direct global procurement is better suited to high-volume commodities.

“Grapes, blueberries, apples, these have bigger volumes,” he says, adding he doubts the approach would work as well in lower-volume items such as some stone fruit, and if so, it would be very limited.

With more retailers trying their hand at going direct to source, does this present a threat to importers?

“To some extent, yes, if it replaces what they do,” Alcaino replies. “However, importers also add value by doing quality sorting and selling fruit that doesn’t arrive in perfect condition for the program in question.”

“Many importers are service providers who do that for a lower fixed fee, but they barely finance anything, and they don’t run risks. So, it’s attractive for them too.”

BIG BRANDS THROW A WRENCH IN THE WORKS

Bob DiPiazza

Bob DiPiazza of DiPiazza Consulting Services in Chicago is now retired but until recently was the president of major Californian citrus and kiwifruit grower-shipper Sun Pacific Marketing, Pasadena, CA.

In a previous life as senior vice president of Walmart’s Sam’s Club, DiPiazza was very involved in setting up the group’s direct sourcing from Chile.

“I think we’re seeing an increase in dealing directly with importing, but there are some confinements,” he says. “You need to have some scale to effectively import directly, and it layers on additional work that needs to be completed.”

“You now get into the area of having to manage the freight-forwarding, inspections, phytosanitary [aspects] … it opens up a whole other area of responsibilities, so you have to maintain your records by grower.”

DiPiazza echoes Alcaino’s comments that certain commodities are more appropriate for direct programs than others.

“I don’t think you’re going to find too many retailers today that say, ‘let’s go import kiwifruit direct’, because the volume compared to other categories is building, but it’s not there yet,” he says.

He adds SuperValu was one of the pioneers early on, while Costco also has been involved in direct sourcing for many years.

“Kroger does some direct business; not to say it’s all direct, but a good portion is direct,” he adds.

Having started with Sam’s Club from the buyer side, more recently DiPiazza’s work with Sun Pacific fits into a parallel trend where grower-shippers integrate upstream to secure their place in the supply chain.

In this specific case, the shipper may not grow the counter-seasonal fruit it procures from overseas, but what it lacks in owning land, it gains through its brands – the household name Cuties in clementines, as well as Mighties in kiwifruit.

Why this is so relevant is because branded produce is in direct opposition to the private labeling trend that dominates Europe, the retail market that set the tone for direct sourcing.

If North America is to follow Europe’s lead, this ultimately begs the question of what part brands will play in direct programs vs. private labels.

“In my experience we saw several retailers try it [private labels], and on their own, they slowly withdrew,” says DiPiazza. “I see private-label programs in potatoes and onions, in veg and salad kits; private-label is certainly something that retailers want to make work whenever possible, and especially when there’s no clear dominant brand.”

But Cuties is one of the dominant brands in the easy-peeler market, and there are many similar examples in the industry, whether it be Driscoll’s and Naturipe in berries, or the likes of Mission Produce, Calavo, Camposol and Westfalia in avocados.

Roberta Cook

“If the retailer tried to cut out a Mission Produce, I can’t imagine how the company would succeed, because there are so many services a California avocado shipper carries out for a retailer,” says Roberta Cook, Emerita faculty member of the University of California-Davis Department of Agriculture and Resource Economics.

Aside from the ripening services to the technical aspects of packing in Mexico, there is also the weather to contend with, as well as Mission’s global supply chain sourcing from Peru, Chile, and more recently, Colombia.

So if a grower-shipper is already set up at a source of origin, bringing with it all the efficiencies of scale and experience, what case then is there for setting up a sourcing office in that country?

“What we always have to remember is margins are low upstream in the supply chain,” replies Cook. “Often, retailers have failed when they’ve tried direct sourcing because they think they’re going to eliminate a lot of cost, but in reality, they don’t.”

Cook believes direct sourcing programs may be easier for retailers if they’re sourcing from countries where they also happen to have stores. In the case of Mexico, this includes Costco, H-E-B and Walmart subsidiary Walmex.

“H-E-B is in Texas; they’re a regional firm that is also in Mexico, where they have operated for a long time,” Cook says. “Texas has a lot of Hispanic consumers, particularly of Mexican origin, and H-E-B imports a lot of produce from Mexico into the United States, including ‘ethnic’ produce.

“They’re located north of the roads coming from central Mexico into Texas … so it makes sense for H-E-B to maybe go more direct and bring products in because they’re also sending trucks down, providing a backhaul opportunity.”

Retailers often keep their cards close to their chests about what products they procure using direct sourcing, but Cook believes there might be a case for U.S. retailers with Mexican operations to source from growers where supply is fragmented, such as in crops such as chili peppers.

“They have their stores in Mexico that have relationships with growers in the area anyway,” she says. “It’s not like setting up a whole new sourcing system.”

“Walmart has huge operations in Mexico with Walmex, and the majority of the fresh produce that we have comes from Mexico. It makes sense to me that a retailer might do something more interesting in terms of direct sourcing because they’re there anyway.”

Cook adds the vertical integration piece of the supply chain is very significant in any conversation around direct sourcing.

“If you look at the Mexican industry for example, for most of the fresh produce they’re exporting in large volume, the key growers are forward-integrated grower-exporters that have offices in the United States,” she says. “So you can source directly from Mexican growers that way. You don’t need to have an office in Mexico to do that.”

ALL SHAPES AND SIZES

Jim Donovan

Jim Donovan, senior vice president of global sourcing at Mission Produce in Oxnard, CA, considers his company to be as vertically integrated as possible.

“In Mexico, we don’t grow any fruit,” he says. “The vast majority of the industry does not, but our vertical integration and level of control is at packing. That’s the consolidator of 30,000 growers in Mexico.

“I can tell you, my perspective is that in actual direct sourcing — retailers going toward farms, or for that matter packers — those relationships are pretty minimal on the retail side.

Obviously, Walmart is one. H-E-B is another example that comes to mind of companies that have been very active and progressive over many years actively searching out a direct relationship with a producer.”

Apart from that, Donovan claims a lot of direct procurement is really ‘direct sourcing-lite.’

“To be honest, most of it is talk,” he says. “They may go to Chile or go to Peru and communicate with an exporter, and they deal with them, but there might be somebody on the receiving side. So, there are kind of hybrids.”

Donovan also echoes Cook’s comment that it would be challenging for retailers to bypass major avocado players such as Mission and Calavo.

“Yes, it’s really difficult,” says Donovan. “There is diversification of supply and trade disruptions — those are all things with avocados that we have to deal with. A retailer may have stores in Mexico, for instance, and say, ‘well if I bought from a grower and it didn’t make spec for export, I could sell it internally,’ but that’s typically a different supply chain,” he says.

Nonetheless, the executive does not deny the new model brings competitive challenges. “I think I’d be naïve to say there isn’t some sort of competitive component,” he says. “There are many avocado people who might be at risk because they play a part in between. The bigger you are, you’ve probably integrated in either direction, so you’re less threatened by that concept because you’re part of it, so to speak.”

DEVIL IN THE DETAILS

The other challenge any retailer would face in bypassing a leading player’s packing lines is the fact fruit size varies not just from orchard to orchard, but within every individual tree.

“That’s where I find some of the direct part is tricky for the smaller producer because they still need to talk and deal with multiple people to basically sell everything the tree is producing,” he says. “Mostly, the retailers that are sophisticated enough to go direct are also pretty particular that they want one or two sizes.”

Andreas Schindler, chief executive of Don Limón in Hamburg, Germany, also emphasizes the ranging standards expected by different retailers around the world.

As a trader who has become an integrated supply chain manager whose group has farm and packhouse investments from Central America to India, Schindler says people get the impression direct buying is cheaper, but the management cost is more complex.

“We have 200 customers, and I would say we have 190 different ideas of what quality they want,” says Schindler. “You need to know all these details.”

Cindy van Rijswick, fruit and vegetable industry analyst at leading agricultural lender Rabobank in Utrecht, the Netherlands, says retailers sometimes make it harder for themselves in the way they set their quality requirements.

“Retailers like Tesco sometimes have specifications for the product that can be hundreds of pages,” she says. “I spoke with a grower who was growing berries, and he said it was also extremely difficult because for one German supermarket, there could be only five chemical residues for the berry, and for another country the limit was six; he has to keep track of all of this, and he has to keep separate flows in his packhouse.”

Danie Kieviet, founder of exporter and service provider Freshworld in Stellenbosch, South Africa, says a growing emphasis on popular new varieties that may be in short supply can also factor into a direct sourcing decision.

“With the new global trend towards taste and new varieties that are high in brix with a better eating experience, it’s important that they [retailers] try to maintain that, and those commodities are normally fewer to begin with and scarce,” says Kieviet. “It becomes more difficult, especially with the newer varieties with short production periods, moving from one variety to the next. You need to be very much on your game to do that well, and that means you need to have good people with experience who know how it works.”

“I just recently visited a U.S. retailer — one of the best I’ve seen — and they’re really focused on freshness, range, taste and consistency, and they do their own procurement through nominated partners who do pre-packing and then deliver to their own distribution facilities, specializing in making the most of all categories of fruit.”

THE RIGHT DISTRIBUTION-CENTER MODEL FOR DIRECT PROGRAMS

Kieviet was responsible for opening Walmart’s sourcing hub in South Africa, an office that has since passed hands to International Produce Logistics (IPL) of the retailer’s UK subsidiary, Asda.

IPL now claims to be the largest single importer of produce in the UK.

“Walmart in my view was one of the leaders; I still see them as a fantastic company,” says Kieviet. “They took the lead opening up their global-procurement initiative for food with hubs in Spain, South Africa and Chile, and eventually in Mexico, to supply Walmart stores worldwide. That was the ultimate model. But it’s no longer in the format that it was.”

He says any retailer that sets up a direct sourcing program is faced with the same problem — capacity in their distribution centers (DCs).

“The first step normally is to build a big distribution center, and we’re ready to go,” says Kieviet. “But facilities very soon become fuller due to range expansion and the new varieties utilized. Packed to the hilt. You get to the stage where over the past 10 years, the increase in the number of SKUs and also specific products have become more in favor, such as the berry category, cherries, avocados, kiwifruit. And then you have increases in the range of apples, stonefruit and grape varieties.”

All of this puts “hefty pressure” on supermarkets, which then need to decide whether to invest in new stores, expanding DCs or building new ones. Usually, it’s the stores that win out.
“The result of this has been that people who are doing pre-packing for limited high-volume items in their distribution centers are having to outsource,” he says. “They have to push out certain services, such as owning stock, so they’re becoming a flow-through distribution center or they’re giving people around them the opportunity to pre-pack for them on an open-book basis.

“Distribution centers are very expensive to build and also to get all the accreditations from your local authorities. It’s a complicated process, and it takes a long time to get new fresh DCs to be built.”

In Walmart’s case, this has led to the creation of large regional DCs that can carry stock, passing it through to smaller distribution centers that act as flow-through hubs.

On Aug. 14, the retail giant opened a $135 million DC in Irvington, AL, spanning 2.5 million square feet, about a 15-minute drive for trucks coming in with imported goods from the Port of Mobile.

To improve its sourcing of domestically grown food, on Oct. 18, the retailer announced it would be building a high-tech distribution center for fresh and frozen groceries in Shafter, CA, which is set to open in the fall of 2020.

NOMADIC SHORT SEASONS VERSUS LONG AND STABLE

Michael Castagnetto, director of global sourcing at Robinson Fresh in Eden Prairie, MN, says the drive from some retailers to source directly comes from a desire to control the supply chain and get better purchase prices.

“But the truth is in today’s information world, the markets are what the markets are, and the ability to make a significant change in the purchase price by buying direct from the grower is minimal,” he says.“We’re starting to see people recognize the full value of the transaction from purchase to consumer, and that is shaping buying decisions in categories, certainly the volatile categories that we operate in.”

Castagnetto’s colleague, Gary York, the company’s vice president of sales marketing, sees the direct buying conversation as a euphemism for finding what’s best in the supply chain.

“Ultimately when you dig in deeper, what all parties want is for each of the parties within the supply chain to bring value,” he says. “In today’s world, you’re going to have to have contingency plans — you’re going to have outlets for the rest of that crop that is different from their retail specs that they can’t take from the grower.”

A second plan is needed in the event of geopolitical disruption, while York also points to the value that brands with strong consumer recognition can bring to retailers. In Robinson Fresh’s case, this includes Green Giant Fresh, Tropicana and Welch’s Grapes.

Castagnetto says direct sourcing is difficult for crops that are “nomadic” by nature.

“A buyer at a retail level would be forced to manage grower relationships across six, seven or eight growing regions, which means the retailer’s vendor base is changing multiple times,” says Castagnetto. “On a global scale, that could be a product like mangos that we manage in Brazil, Ecuador, Peru, Costa Rica and eight different growing regions in Mexico.

“When you think about how a buyer would manage that direct relationship with growers across five or six countries and 14-16 growing regions, that’s a pretty tall tale, especially when some of those seasons may only last four to six weeks.”

According to the National Mango Board (NMB), per capita mango consumption in the U.S. increased 82 percent from 2005 to 2017. Would this growth have been possible without an organization such as the NMB, and would boards such as this exist in a world of retailer-led direct sourcing programs from farms?

“Each commodity is different,” responds Manuel Michel, executive director at the NMB in Orlando, FL. “When you have commodities and there are only a few large players — there are a few that come to mind like pineapples and bananas — that whole scenario is very different to when you have an industry that’s very fragmented.”

“It benefits everybody to work together to do the promotions and increase demand all together. That’s one of the reasons why you see commodity boards with some commodities and not with others.”

Michel claims the increasing trend of direct mango sales to supermarkets has been more grower-led than retailer-led.

“In the past five years, we’re seeing them becoming more vertically integrated, so there are some growers who reach all the way to importers now,” he says.

“Some of the original ones were Coast Tropical [McAllen, TX], Diazteca [Rio Rico, AZ], Ciruli Brothers [Rio Rico, AZ] — they’re involved from the production side all the way to the export-import side. Out of San Francisco, there’s also Splendid by Porvenir of the Arcos family.”

DIRECT SOURCING: DROPPING OFF OR HERE TO STAY?

As a leading global supplier with a high percentage of the product it supplies grown on its own farms, buying from Del Monte Fresh Produce is effectively direct-sourcing.

This is the view of Del Monte’s vice president of marketing, Dionysios Christou, whose company is based in Coral Gables, FL.

“An increase in direct sourcing is an opportunity for Del Monte as it enables us to remind retailers, foodservice and the convenience sectors that, while we are one of the largest importers of fresh produce, we are also one of the largest producers of the products we offer,” he says.

But in terms of the pure model where offices are opened overseas, Christou says retailers’ exploration of direct sourcing has “levelled off” over the past few years.

“Investing in the resources required to implement a successful direct sourcing program can be a significant risk for retailers, as this is not their primary business,” he says. “Retailers opting to source directly lose some of their flexibility, which may mean they cannot secure the most advantageous conditions.

“There is also the risk of retailers being forced to become suppliers themselves if market conditions change and they need to find a solution for excess product, which is an added risk to their business.”

He recommends retailers carefully consider the risks and their available resources before taking on a direct sourcing program.

“Suppliers are taking on the burden of logistics, availability and demand,” says Christou. “A good supplier will work to find retailers the product they need even when supply is limited, for example early or late in the season or as a result of the impact of pests or natural disasters. If the retailers are sourcing directly, they may not have the resources or relationship needed to be able to source and deliver quality fruit and vegetables to consumers during these times.

“If retailers want to try direct sourcing, I would recommend that they start with a small volume of products, so they can understand what is involved and assess the benefits and risks in a controlled way.”

Markus Fellmann, regional head of Perishables Americas for logistics company Panalpina of Basel, Switzerland, says direct global sourcing is a “very relevant” trend that the company sees continuing to develop.

“The evolution of this trend is accelerating faster in the Western world and modern retail, which includes the U.S., driven largely by regional and global supermarket and retail chains,” says Fellmann, who is based in Panalpina’s office in Miami.

“The direct sourcing model has been the preferred sourcing model for dry cargo for eternity. It is now making its way into the perishables, and for sure, is there to stay and to grow in the future. The decision-making, space and rate negotiation is shifting to destination.”

However, Fellmann clarifies importers will continue to have an important role, even though for some, their roles may change, such as extending into areas such as quality-check, re-packing, invoice checking and payment functions.

“The grower continues to concentrate on producing the best possible quality product with longest possible shelf life,” he says.

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