I recently asked industry veteran and California-based consultant Rick Eastes about the changes he has seen in the buying and selling of produce through the years. Rick’s extremely thoughtful and informative response follows:

 

From Rick Eastes:

 Today, the biggest changes in retail produce revolve around the abundance of “choices” and what that means in terms of logistics, product promotion, packaging, product placement in the produce department and the pricing strategies required for each item being presented.

Twenty years ago, retail stores typically might carry 350 to 400 produce items, presented predominantly in bulk displays, with a few specialty items in individual packages. Today, it is not unusual in high end stores to see as many as 850 individual items, virtually all in some kind of unique packaging, with some individual items presented in multiple styles of packaging.

On the contrary, most traditional retailers have chosen to maintain a similar square footage in their produce departments, so more items are increasingly being presented in the same space that accommodated fewer than half the items available for merchandising today.

Today, it is about ‘yield per square foot’ in the allocated space in the produce department. The de facto markup policies of 20 years ago, usually based on ‘cost plus’ formulas, no longer apply for most produce items today. Special “ad prices” on multiple items are fewer and less common. Essentially, two divergent methods now dictate how produce is priced to the consumer.

Yield per square foot strategies

 Today, prices based on FOB, or Delivered costs have little to do with how any item is priced. Twenty years ago, an individual item’s retail price might be based on, say, a 40% markup of the delivered price of the item to the store. Today, typically the price is based on what that item may yield based on the space dedicated to the product’s sale.

For example, if an item is to be allocated, say, two linear feet of display space, the question becomes, will there be any loss in sales velocity at $1.49/lb. when the item, based on a fixed markup formula, could be sold to sell at .99/lb.? Often, there is no loss of sales volume or velocity for individual items offered on a fixed markup, so “imaginary pricing” then becomes the method for determining an item’s actual retail price. The product’s FOB value to the producer, in this case, has zero to do with how the product will be sold at retail.

What I call imaginary pricing is a sophistication of the ‘basket approach’ to pricing. The basket approach is a way for retailers to fund ‘loss leaders’, for example, on hot promotional items.

Strawberries are an excellent example where retailers at times will sell them well below their actual cost because the added store traffic ‘floats’ total store sales, and individual ancillary produce items are priced to make up the difference. In many cases that higher prices on other items will not diminish their sales velocity based on any individual item’s space allocation.

Using this strategy, the prices of individual items become “inelastic”, that is, neither more, nor less of an item is sold regardless of its offered price. As I learned in the case of selling lemons, for example, if the recipe calls for 2 lemons, it makes no difference if they are .29 each or .59 each, you are still likely to sell the same 2 lemons based on their availability at the time the consumer decides to make their lemon purchase.

“Size” offerings of individual items, especially many fruit items, also enter into the yield per square foot strategies, especially compared to strategies 20 years ago.

There has been an even increasing demand for larger sizes for individual items, especially when the space allocation for the item is limited. If a consumer is interested in buying 2 oranges for example, a store can sell more than twice as many pounds of oranges stocking size 56s vs. stocking size 113s in a loose display. I have had retailers refuse to buy any small size peaches, for example, regardless of price simply because the “yield” per square foot for available space to be allocated to peaches simply is not competitive with a range of other available items at any given time. The price per lb. of “small vs. large” can be dramatic in some items. With Chilean grapes, for example, I have experienced as much as $10-15.00/ box price difference for the same 18 lbs. of fruit all dependence on berry and bunch size.

The size phenomena, is also carried over to the ‘unit of purchase size’. Major club stores choose to sell large packages of individual items to increase their velocity of the items they choose to stock. I maintain that in the case of some major club stores, the home garbage bag is the retailer’s ‘best customer’, as buyers will choose to buy a big unit, economically priced knowing they will discard some portion of their purchase.

Selling Produce items with Contract Pricing Policies

 Over the last 20 years we all have experienced the move toward bagged salad mixes of every description, with the latest wrinkle being the increased offerings of various kale mixes for both salad and cooking vegetables. The common wedge of iceberg lettuce my family served 20 years ago has gone full circle, evolving first to the full range of loose-leaf salad mixes (with their attendant dressings and admixtures in the bag), back to the iceberg wedge sold at many high-end steak restaurants as a ‘specialty’. Some younger consumers likely have ‘no idea’ what a head of iceberg, romaine, or butter lettuce actually look like because their experience has been the loose-leaf offerings in bag salads.

The whole salad category has moved from the ‘commodity’ status of individual lettuce varieties, to the ‘branded product’ with its high-graphic packaging, and attendant advertising very similar to historical grocer items like cereals, chips, and soda items.

This is a major change, and how these items are sold have virtually zero relationship to individual items quoted FOB by shippers and reported to the USDA Market News. In fact, the role of the USDA Market News is evolving as well because there are so many different pack styles to report, that it is virtually impossible to quote a predominate market for 2-lb., 4-lb, bagged, clam-shelled, high graphic bag, standard PLU bag, 16-lb., 18-lb., 19-lb., or a multitude of different package weights for items like table grapes, as an example. Many items are becoming quasi-branded simply by the method of packaging required by a vast number of retail outlets who sell produce in their “produce” departments.

The biggest change I have witnessed in the produce business over the last 20 years is the blurring of pricing policies in the ever expanding produce marketplace due to the dramatic expansion of “choice”. The concept of an FOB per-shipping package “price” is virtually obsolete. New varieties, new colors, and new flavors of the expanding offerings virtually 52 weeks a year in the retail produce marketplace are leading to the application of a type of fuzzy logic based on data points, display space allocation, and pseudo-branded product offerings. This diversity is creating totally different ways for both producers and buyers to ‘value’ their offerings to the final consumer.

If we then consider the expanding categories to differentiate one offering of a single produce item, the choices may be; organic produce vs. non-organic, GFSI certified items, Rainforest Alliance, and or third party pesticide certifications and traceability programs. How fresh produce is ultimately priced then becomes complex in the extreme.

The most difficult dilemma for today’s consumers to resolve is how to define “value”. In the past, you could ask a person to define “quality and value”, and at the very least they could say “I know it when I see it”. Today, that ability is a far different task than it was 20 years ago in the produce department.

 

TK: Rick’s point about the choices consumers must make - organic produce versus conventional, GFSI certified, local, Whole Foods’ “good, better and best” rating system, and more (I add to the list) - make the complexity of the produce department astounding, not only for the consumer but also for the retail executive and store-level produce staff. Readers, what would you add to what Rick said here?