Sunday, August 24, 2003

Oligonomy in the produce industry You might think that one part of the food chain that would be relatively resistant to concentration would be the produce department. Surely the relative unimportance of brands to the consumer, the dispersed and seasonal nature of the industry, and the preferability of local grown produce when available would restrict the oligopolization that is rampant on the other aisles of the grocery store. But our rule that oligopolies create oligopsonies and oligopsonies create oligopolies has hit the produce market as well as soft drinks and chicken. In an article in California Grower magazine, entitled "Retail Consolidation Continues to Plague Growers," author Bob Johnson spells out how the concentration in the supermarket industry is affecting the grower community. In short, only big growers get invited to negotiate with the big chains. Johnson notes, as we have, how at the end of the nineties three chains, Safeway, Kroger, and Albertson's gobbled up lesser chains, so that an unprecedented amount of buying power was placed in the hands of a few companies, and even then at a disadvantage. By the end of the millennium these three firms alone owned 5,637 supermarkets with annual revenues roughly equivalent to that of all the farmers in the entire country. These retail giants dwarf even the largest of farming operations. The result has been "oligopsony exploitation" of the producers. The result has been a rapid reduction of income for the growers, as the chains squeeze prices and services from their suppliers. But the squeeze has not benefited consumers. Rather the supermarket chains have taken an extra bite out of the savings they demand from the growers. In the first half of the 1990s, the farm share of the retail dollar for fresh fruits dropped from 23 percent to 18 percent, for fresh vegetables from 28 percent to 23 percent, and for processed fruits and vegetables from 26 percent to 20 percent. In the extreme case of lettuce the supermarkets came to receive four times as much as the farmer. The erosion in supplier prices has been steady through the whole decade of the 90s. "A thousand dollars worth of fresh market tomatoes at the beginning of the 1990s was worth, when adjusted for inflation, $805 by the end of the decade. Table grape growers saw their $1,000 crop shrink to $893; while $1,000 in head lettuce declined to $944; and peach growers saw the value of their $1,000 harvest shrink to $893." While farmers have managed to increase productivity through improved cultivation techniques, that has not been enough. Even with the exploitation of migrant laborers through low wages, land and energy prices keep going up. The answer, naturally enough, has been consolidation among the growers. Farmers have also been forced to reshape the way they do business in the image of the corporate chains. Consolidation among the buyers has triggered a parallel move toward consolidation among the producers. "A few firms have copack arrangements that allow each firm to specialize in products in which they have an historical advantage. Other firms have consolidated their sales operations, thus providing larger volumes, a wider array of products, and/or a recognized brand name," according to a USDA report cited by Johnson. There is also a move toward alliances among shippers in order to increase their volume and variety. Some smaller grower-shipper operations have even abandoned sales altogether, and become growers for larger firms. But that has not been enough. It used to be the job of the food producer to supply a sufficient amount of good-quality produce, to get a truckload of fresh romaine or strawberries to the store in good condition. But as supermarkets get more into supply-chain management and start treating produce suppliers just like they treat Kraft, Perdue, and Heinz. In other words, they are demanding that suppliers support the retail effort with marketing and promotion. . The marketing supports involve helping supermarkets get the right mix of products for maximum profit and minimum wastage. This category and shelf management task used to be the responsibility of the supermarket; it is now, as with other supermarket departments, becoming the problem of the produce grower/vendor. The growers are being asked to do special displays, offer coupons, and device new packaging strategies. Even worse, they are being asked to take more responsibility for unsold produce. In addition, supermarkets are now charging slotting fees for produce. It started with the sellers of packaged salad, a category that looms larger and larger in each market. As with any new brand of cookie or mustard, the salad farmers/packers have to pay fees. One produce firm is reported as paying a million dollars for the right to sell packaged salads throughout one supermarket chain. Others have followed suit, with fees up to $2 million for the largest chains. But the effect has spread beyond the branded, packaged produce. Some shippers claimed that when such a firm negotiates a contract with retailers for its bagged salads and/or other value-added products, they may also negotiate terms favoring their commodity products," the USDA study reports. "One lettuce shipper reported losing a retail account to another shipper that had negotiated a joint value-added/commodity contract. Supermarket chains now form an oligonomy in the produce area, as with other foods. They are an oligopoly to the customers, and an oligopsony to the producers. As we have seen, the trend is to hold down costs while maintaining prices. The supermarkets sit in the enviable middle position of a simple oligonomy and, within limits, dictate the terms. 5:31:19 PM

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