From Jim Prevor's PERISHABLE PUNDIT
October 20, 2011
Richard Bright, Editor Of Reefer Trends, To Speak Out At The Global Trade Symposium:
Confluence Of Containerization, Direct Buying And Private Label Will Change The International Produce Trade
When last year’s edition of The New York Produce Show and Conference attracted many international traders — and they found value in the event as one Dutch firm explained in a piece titled Full Service By Means Of Global Partnerships in Pundit sister publication PRODUCE BUSINESS— it led the Eastern Produce Counciland PRODUCE BUSINESS to consider how to best show fealty to New York’s traditional role as a gateway to international trade.
The comeuppance was the decision to unveil a coordinate event with the New York Show, a decision that was unveiled with a piece we titled The Wall Street Journal’s Mary Anastasia O’Grady To Keynote New Global Trade Symposium At The New York Produce Show… Proceeds To Benefit Research For The Cure Of Pancreatic Cancer.
Getting Mary Anastasia O’Grady from The Wall Street Journal to keynote the Global Trade Symposium was a catch, but this is an event that just keeps getting better and better. You can’t really think about international trade without thinking about transport, and there was only one man we thought could combine an understanding of what is happening with transportation and logistics with an understanding of what might this might mean for the world of produce.
That man is Richard Bright, and we have mentioned him before in the Pundit. He’s coming over from the United Kingdom, and we asked Pundit Investigator and Special Projects Editor Mira Slott to find out what he would focus on in his presentation:
Q: What are the key issues you’ll be discussing atThe New York Produce Show and Conference?
A: The fresh produce business in Europe and in the U.S. is going through profound change; a revolution wouldn’t be an exaggeration.
Previously in model A, the supply chain was more or less controlled to a large extent by supplier nations. This is best exemplified by the large “board” operations of Enza in New Zealand andCapespan in South Africa running as a single channel, where the power was held by the supplier nations.
With the dissolution of those two boards in particular, the landscape has changed quite dramatically for major fruit agencies in South Africa and New Zealand. Now, instead of the consolidated constricts, you have a much more fragmented structure. As a result, it’s much easier for customers in Europe to go directly to producers and importers.
Q: How are these changes manifesting themselves in the international trading environment?
A: With globalization of the retail sector, retailers have become even more powerful. Also, they are looking for ways to increase their margins. The biggest way to do that, unless you pay suppliers less and charge consumers more, is to cut costs out of the supply chain.
Q: Could you discuss the trend toward direct sourcing from a logistics perspective? Do you see growth in containerization and the rising influence of container lines as a catalyst to direct sourcing of fresh produce?
A: There is a dramatic increase in container ships being built and an equally dramatic rise in the amount of reefer equipment being manufactured. In contrast, the order book for specialized reefers is empty. The principal advantage of the container over the reefer ship is that the unit of shipment is reduced: instead of requiring, say, a critical mass of 3,000 pallets to justify a sailing, all you need is 20 pallets. The change has freed up a lot of exporters and producers who want to ship direct to market. More importantly, it has freed up customers who would like to source direct and not have to buy from importers and distributors.
But also, fragmentation of the industry has given retailers much more power. In the old model, the retailer would say it would like to pay this price for grapes this week. Now the retailer controls the price and says, “We’re paying you this amount.” The balance of power has shifted. And the huge increase in reefer equipment has become a catalyst.
During my talk, I’ll be going into more detail adding statistics and graphs to better demonstrate the trend.
Q: You site Zespri and Capespan as indicators of a larger phenomenon. Are these scenarios happening elsewhere in the world?
A: Zespri’s single channel balances power, so that’s the exception. What’s happening in the rest of world is that the phenomenal change in international transport logistics is allowing retailers to bypass middlemen and go to individual producers. Instead of buying bananas through Dole or Chiquita, they go directly to the source.
Q: What are the implications for the produce industry in the global marketplace?
A: The implications are so broad I could go on for hours and hours. One question it raises is the value of the brand. For a UK retailer like Tesco, the brand is Tesco. There is a movement in this direction away from supplier brands.
Q: Are most retailers sufficiently equipped to take on the logistical complexities and challenges involved in direct international trade. Wouldn’t this require a transformation of infrastructure and specialized expertise?
A: You ask a good question. It does take expertise. Maersk is thelargest shipping line. They have created a subsidiary service called Damco, a freight forwarding and supply chain management provider to help retailers go direct. Maersk goes to the retailer and says, “We can ship product from anywhere in the world, so you do the deal, Mr. Retailer, with the producer, and we’ll facilitate the logistics through our subsidiary to get the product from farm to shelf.”
Q: How entrenched is this power shift you’re describing? And who will it affect most? Are there particular commodities or suppliers at more risk? What does this mean for companies throughout the produce supply chain?
A: It’s starting to happen now and will continue to happen. The principle consequence is the sector of the floating fridge reefer ship will disappear. It’s less cost efficient than the container.
It will limit the number of options of suppliers to market. And will have the most impact on companies in the Southern Hemisphere and the possible disappearance of brand, increasing power held by the retailers.
Another result is that it will keep costs low. Look at retail prices of bananas. They’ve remained pretty much the same over the years.
Q: Isn’t that because retailers have kept banana prices artificially low, often using them as a loss leader to draw consumers to their stores and away from the competitor down the street? From a marketing standpoint, bananas are a popular, high-volume commodity, where price points between retailers can be easily compared. So, retailers often look to value-added items or other differentiating strategies to drive profits...
A: Whether retailers want to finance those low banana prices themselves or force service providers to finance, the price paid to producers hasn’t changed. They’re not escaping from poverty. The retailers have become so powerful that they can push costs to the end of the chain. With disappearance of brand, the power struggle within the market will only intensify. From American multinationals to farm laborers to producers to middlemen, it will impact the entire supply chain.
Q: Is there still a place for reefer ships in certain instances?
A: Major fruit commodities will be impacted most, obviously bananas, apples, citrus, avocados, kiwi fruit and grapes. As far as the U.S. market, major suppliers’ counter-seasonal program is with Chile, and the majority of products still come from reefer ships, on a pallet-to-pallet basis.
Q: Why is that? Is product quality affected by form of transport based on commodity or trade route?
A: It’s a contentious issue. If you talk to surveyors, they claim containers on a pallet basis are inferior to reefer ships. That is changing and the quality gap is much, much smaller. I think quality issues will dissipate and be a non-issue over time.
One reason grapes from Chile to the U.S. are shipped in reefer ships is due to the methyl bromide postharvest fumigation process. The warehouses and cold storage facilities are right there, so the grapes can be isolated and fumigated right away.
If the grapes were going to the container terminal, they’d have to be shipped over, which is more time-consuming and more expensive when the program is very specific to the U.S.
There are other instances where reefer is preferred beyond just performance. There are citrus programs from South Africa and Spain to the U.S where the historic cold chain has been built around a reefer at the heart of the chain. It will take longer to make fundamental changes to that supply chain.
In Europe, the conversion from reefer ships will be faster than for the U.S. as developments are progressing at an accelerated pace over here.
Q: As this conversion unfolds, what should produce industry executives prepare to encounter?
A: It is in the process of taking place now, so there is a learning curve on the true impacts. I would speculate that over time the major implication is that the middleman distributor with his margins will be sidelined and the reefer ships will disappear. Ideally, suppliers could take lessons on the paradigm of Zespri, how it is organized, with its state regulations, where more money goes to suppliers, and the producers are wealthy. It’s completely different than anything in the world, but also almost impossible to duplicate.
I’ve been writing about reefer trends for 10 years, a benchmark for the reefer industry. There’s a market for reefer ships on a weekly basis, the cost of chartering them goes up and down based on supply and demand and I track that. A tipping point has been reached, where there are enough container ships and reefer containers for reefer ships to go into freefall. In terms of quality issues, essentially, the value the reefer ship can add will be outweighed by the costs.
Q: How does a changing retail environment influence this phenomenon? For example, in the U.S., could a resurgence of regional chains and independents strengthen the need for middlemen and distributors? Wouldn’t smaller chains in a more fragmented market find it financially and logistically untenable to source direct on a global scale?
A: In the UK and Europe, there is still very much consolidation. Bigger retailers are still getting bigger and medium and smaller stores are disappearing.
In this country, the big retailers are building out-of-town complexes and putting all the smaller less efficient grocers, fish mongers, and butchers out of business in the UK. And this is the case in Continental Europe as well. In the end, the logistical element of the supply chain generates the most cost. These retailers have the resources to keep costs low, and ultimately it’s the cost that drives consumers.
Richard’s thesis — that the boom in containerization will have revolutionary impacts on the international trade of produce — is both plausible and reminiscent of what happened in the US when trucks superseded trains as the primary mode of domestic produce transportation.
The Pundit grandfather, Harry Prevor, was a wholesaler and auction buyer down in the old Washington Street Market in lower Manhattan. He was for decades the chairman of the Auction Buyers Association of America. Then, one day, there were scarcely any auctions left.
This was primarily a function of transportation. The big auctions were given space by the railroads in the railroad terminals. Massive railroad cars of fruit would be unloaded and auctioned. But with the development of the Interstate Highway System, things changed. A tractor trailer is significantly smaller than a railcar, so many who couldn’t buy a whole railcar direct could buy a truckload.
The auctions tried to survive for a while moving off the rail terminals and building facilities elsewhere. But without the railroad support, the auctions had expense structures similar to that of any large wholesaler. They just couldn’t compete.
One can certainly see that pattern happening in seaborne transport.
In the days of Chiquita’s Great White Fleet, the big competitive advantage was transport. That is not as true today.
At the same time, rarely does only one thing change at a time. Richard, enmeshed in the highly concentrated British retailing system, notes the power of retailers to demand price concessions. Yet, in the long run, if retailers demand and receive such concessions that the items become unprofitable to produce, then new investment won’t be made in those sectors and a reduced supply will likely lead to bidding wars that drive up prices.
We also question if Richard isn’t shortchanging the utility and contributions of the various importers and marketers of these products. Retailers can, of course, buy direct, but they only want certain sizes, varieties, grades, etc. Marketers help producers sell what they have, and retailers buy what they want. That is a big difference.
Retailers will also find that they wind up being importers, having to dispose of unneeded product that had been ordered long in advance, deal with things not in the best condition for the stores, etc.
We wrote a piece about direct importing in Pundit sister publication PRODUCE BUSINESS that you can read here.
In the end, it is not clear that retailers actually save much money by direct importing.
Of course, sometimes there are other reasons. As retailers go global they become concerned with geopolitical matters.
Wal-Mart’s global sourcing initiative is as much about getting its own name on customs documents around the world so it can show countries it is a big buyer as it is about saving money.
We greatly appreciative that Richard is coming across the pond to help us sort out these matters.
Please join us at The New York Produce Show and Conference and at the Global Trade Symposium to discuss these important issues.