Fixed-price agreements: Contracting for profit - The Packer

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.

Wrapped iceberg lettuce, celery, cauliflower, broccoli and leaf items are among the most commonly contracted items at Tanimura & Antle.

The company, an exception to the 20% average, contracts up to 50% of its volume.

INCREASE PROFITABILITY

D&W Food Centers Inc., a 23-store chain based in Grand Rapids, Mich., has contracts for its packaged salads, bananas and other commodities like broccoli crowns and romaine hearts, says Norm Fitzpatrick, produce buyer. He says the chain turned to contracts, especially for bananas, to avoid volatile markets.

“It was actually a defensive measure,” he says. “I was getting beat to death on prices.”

Major chains that have either eliminated buying offices or consolidated buying into single facilities are more likely to seek contracts, Fitzpatrick says.

“There are more partnership arrangements … now, and there is more loyalty between retailers and shippers,” he adds.

So far, suppliers have not approached him with contracts, he says. But every time he’s asked a vendor to submit a bid, it has readily complied.

In the recent past, Steve Duello, director of produce operations for the 20-store Dierbergs Markets Inc., Chesterfield, Mo., says he typically got lower prices on bananas from the nearby St. Louis terminal market. Since then, improved inventory management has made contract buying from the big banana companies a better deal.

A contract “helps us manage overall profitability” by enabling Dierbergs to plan, maintain a growth margin and formulate a long-term advertising program, Duello says.

And there’s another advantage.

“A contract means suppliers will treat you as a preferred partner,” Duello says. “In periods of shortages, they will protect you and help you stay in business.”

Roche Bros. Supermarkets Inc., a chain of 15 stores based in Wellesley, Mass., has contracted for bananas for three years, says Paul Kneeland, director of produce and floral.

Knowing the price in advance helps project profits and expenditures and helps plan a balance of items that appear in the ads, Kneeland says.

He says he also would consider contracts for apples and citrus, especially Spanish clementines, which can undergo wild price fluctuations. However, Kneeland says he probably would not sign a fixed-price agreement for locally grown products because quality fluctuates from year to year or for strawberries, Vidalia onions and other sensitive commodities.

BENEFIT FROM ITS ADVANTAGES

The advantage of having a contract is obvious when the market price for bananas is $18 a box, and you’ve locked in a $12 price. But what about when the opposite is true?

Kneeland admits it’s irritating to see others buying on the open market for less than his contract price, but as long as that’s an anomaly, he can live with it.

Koster of Mann Packing says contracts are only as good as you negotiate them, but, in general, retailers come out ahead.

“Even if the markets remain flat for the entire year, the contracted price … allows them to make a profit,” he says.

Dierbergs’ Duello agrees that, in the end, retailers will profit from contract buying. But he says with so many small suppliers around and with his proximity to the terminal market, he often comes out ahead by playing the market on heavy-volume commodities.

Extreme weather can alter contracts. “They have ‘act of God’ clauses in almost all contracts,” says Fitzpatrick of D&W Food Centers. That typically means that a shipper can raise its price if the market price reaches a certain level. Although, if costs do increase from the contract price, they usually remain substantially below the market, he says.

Most retailers and suppliers think the trend toward contract buying will continue.

In fact, some large retailers now demand contracts as a condition of doing business, says Koster.

“Retailers would much rather be contracted so they can set their profit,” he says.

And with retailers cutting back personnel as a result of consolidation, the practice of contract buying makes even more sense, Tanimura & Antle’s Alcocer says. Retailers often view contracts as a “tool that can stabilize pricing,” he says. That means eliminating the need to constantly change invoice or purchase order prices and not having to change the shelf price.

“At the same time,” he says, “it gives their customers a very stable price on a daily basis.”



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