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Value of Wal-Mart's food-buying system hazy

Published on November 11, 2011 3:01AM

Last changed on December 9, 2011 6:10AM

Anna Willard/East Oregonian
A truck pulls out of the Wal-Mart distribution center Tuesday, Nov. 8,  in Hermiston, Ore. The retail titan has been overhauling its food procurement system for several years, shaking up its relationship with farmers, packers and other suppliers.

Anna Willard/East Oregonian A truck pulls out of the Wal-Mart distribution center Tuesday, Nov. 8, in Hermiston, Ore. The retail titan has been overhauling its food procurement system for several years, shaking up its relationship with farmers, packers and other suppliers.

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Analysis


By MATEUSZ PERKOWSKI


Capital Press


Wal-Mart has invested several years in revamping its food-buying system, but the retail behemoth's performance hasn't resolved doubts about the wisdom of the overhaul.


The company has shifted away from relying on a limited number of trusted produce suppliers, opting to have a broader pool of fruit and vegetable farmers and packers compete for its business, according to industry sources.


However, that strategy has prompted Wal-Mart to take over logistical responsibilities previously assumed by its suppliers and brokers, such as ensuring that produce is replenished throughout the year.


Though the retailer may pay less per unit of produce, managing the flow of that food through the supply chain is probably more costly -- calling into question whether Wal-Mart is actually saving money with the new system.


"The produce industry is still trying to get its arms around what Wal-Mart is doing in global sourcing," said Bruce Peterson, CEO of Bland Farms, a sweet onion grower and packer based in Glennville, Ga.


As the former vice president of perishable procurement for Wal-Mart, Peterson said he realized that many tasks carried out by suppliers were invisible to the company.


For example, suppliers carefully monitored Wal-Mart's inventories and adjusted shipments so that its warehouses didn't run out of stock -- a challenge during periods of short supplies, he said.


"There's more to buying products than just the (freight-on-board) cost of merchandise," Peterson said. "There's a real skill set involved in getting that done."


Wal-Mart did not respond to several requests for an interview with Capital Press.


The change in the retailer's procurement strategy has also shaken up its relationships with suppliers, many of whom previously "bled Wal-Mart blue," said Jim Prevor, founder of the food industry website Perishable Pundit. Suppliers were loyal to the company because they knew solid results in replenishment would be rewarded with continued business with the retailer, he said.


"Now, nobody feels that way because it's more of a rolling auction," said Prevor.


Suppliers simply can't commit as many resources to Wal-Mart if they can't count on demand from the company being constant, he said.


"The cadre of suppliers has changed quite a bit since 2009," said Keith Matthews, CEO of First Fruits Marketing, an apple grower and packer based in Yakima, Wash.


That year, Wal-Mart opened a regional buying office in Yakima that brought such logistics under the company's own purview, Matthews said. Since then, Wal-Mart's procurement system has become more opaque for suppliers, who now have less access to information about inventories and replenishment.


As a result, Wal-Mart's demand appears to shift widely over time, giving suppliers less predictability in packing and preparing produce for shipment, he said.


Farmers and packers generally received better profits under the old system -- Wal-Mart may have felt those margins were too generous, spurring it to change its sourcing, Matthews said.


The danger is that disruptions in replenishment will impact the company's in-store availability of produce, said Prevor.


Prevor said an analysis by his company indicated the frequency of produce items going out of stock has increased significantly at Wal-Mart stores.


Prices may be lower for fruits and vegetables, but if the retailer doesn't have them available for sale, that won't help revenues, he said.


"The more corrosive impact is customers will stop shopping your store if they get frustrated," Prevor said.


Other major food retailers are likely sitting back and watching Wal-Mart's new strategy closely, said Desmond O'Rourke, CEO of the Belrose Inc. apple market analysis firm.


If the system is successful, other retailers may pursue similar strategies, he said. At this point, though, the new strategy seems to be fizzling.


"I'm really not sure they have their goals straightened out," O'Rourke said.


Matthews said other domestic food retailers have continued to partner with several suppliers that deliver consistent quality and negotiate prices on an ongoing basis.


After experiencing a prolonged decline in same-store sales, Wal-Mart will likely continue trying to drive down purchase prices, O'Rourke said. However, even bargain-oriented consumers are likely to be turned off to the retailer if quality suffers.


"Most people would tell you skimping on produce is not the way to go," he said.



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