Fixed-price agreements: Contracting for profit

10/13/2003 12:00:00 AM
Tom Burfield

(Oct. 13) Last season, when supplies of iceberg and romaine lettuce got tight, Dierbergs Markets Inc., Chesterfield, Mo., not only was able to continue offering its customers all the packaged salads they wanted, but it didn’t raise prices a penny despite skyrocketing f.o.b.s on the open market.

That’s because Dierbergs had a long-term contract for its value-added salads that ensured it would receive adequate shipments at a steady price.

Contracts and fixed-pricing agreements are gaining popularity among supermarket chains as retailers and suppliers try to maximize profits.

Contract sales steadily are increasing on packaged salad mixes, value-added products and bananas, which are among the most frequently contracted items, but the practice is covering more commodities every year.

In the past, contract buying largely was limited to foodservice operators who wanted to keep their menu prices consistent, says Don Hobson, vice president of sales and marketing at Boskovich Farms Inc., Oxnard, Calif. Today, more retail chains are jumping on the bandwagon, and the volume of product Boskovich sells under contract has doubled to 20% in the past couple of years.

“We will do fixed pricing on every item we grow,” Hobson says. That’s everything from cilantro to parsley, from celery to leaf lettuce.

During late summer, green onions, one of the company’s specialties, were selling for $12-13 a box on the open market, Hobson says. But retailers with a contract were paying a paltry $7 a box.

COMING OUT ON TOP

Contract buying is a win-win situation, Hobson says, because the supplier is guaranteed a profit on every box, and the retailer is guaranteed consistent pricing and quantity.

Typically, shippers today sell about 20% of their volume on contract.

Most major retailers require contracts for precut vegetables, said Tom Koster, director of sales for Mann Packing Co. Inc., Salinas, Calif. But the percentage of bulk product available for contract also is increasing.

There’s no item that Mann will not contract, Koster says, but hardier vegetables like broccoli and cauliflower and some leaf items are the most likely candidates for a contract.

Most contracts today are for one year, which covers a full production cycle, but some can last up to five years.

Requests for contracts leap after high-market years, says Rick Alcocer, director of retail for Tanimura & Antle Inc., Salinas. The number of contracts for bulk product at Tanimura & Antle has increased four or five times in the past five years, he says.


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