Feeding Walmart

RICHARD GONZALES HAS ON his shopping list many of the same items as consumers making their weekly trips to the supermarket: apples, cherries, potatoes, onions.

The difference is in the quantities being purchased. Consumers are looking to fill a grocery cart. Gonzales is hoping to fill truck trailers and railroad freight cars.

And while those consumers want to feed hungry mouths around the family dinner table, Gonzales hopes to satisfy the voracious appetite of Walmart, the nations biggest retailer.

Gonzales is a senior director of global food sourcing for Walmart and head of its Yakima Valley buying office, which buys Northwest fruits and vegetables directly from growers and packing houses in the region.

Walmart buys a lot of Northwest produce, including 400 million pounds of tree fruit from Washington producers in the past year, the company says, as well as 15 to 20 million pounds of potatoes and 80 million pounds of onions. Between 70 and 75 percent of the apples and cherries Walmart sells across the country comes from Washington.

It wants to buy even more and make more of those purchases directly, rather than through consolidators or brokers. Established in 2009, the buying office has grown from one employee to 10.

In part, the move reflects Walmarts need to fill the shelves of its growing network of grocery stores, including in Washington where it was a relative latecomer to food retailing. The company opened three storesin Bellevue, Lynnwood and Spokane Valleyin October 2012 alone, bringing its total to 58. It has plans for more, including a new Tacoma location, possibly opening in 2013.

But Walmart also believes there may be some competitive advantages to running a direct-buying operation. A lot of our job is making sure we have product on the shelf, Gonzales says. Having that communication with the grower allows us the opportunity to make sure were giving the customer the best product at the best price and making sure its regionally relevant.

What Walmart gets, he adds, is real-time information about whats going on with the crops it plans to market to customers. What does production look like this year? What constraints and issues do growers face? What new varieties are growers planting and harvesting that might do well in stores? That [information] doesnt come when you meet with salespeople on a quarterly basis, he says. It comes when youre out in the field on a weekly basis, developing these relationships.

Scott McDougall, co-president of Wenatchee-based McDougall & Sons and general manager of the companys orchard operations, says getting such information is important to retailers because of the change in Washingtons apple industry during the past decade, from when most of the states output was in red or golden delicious. Its more important that they be out here and get a little more familiar with all the varieties that are out there, he notes. Gonzales adds that Walmart can also use its volumes of data about customer purchasing patterns to match varietal flavor profiles with those regions where theyre likely to do well.

What growers get is access to Walmarts vaunted distribution network, which includes a major center in Grandview, just minutes from many of those growers and packing houses the company deals with (although Walmart also buys from ag producers west of the Cascades, too). It also gets a customer buying in quantities.

Were almost a hedge for a lot of growers doing business with us because they know theyre going to get paid, which is a big part of doing business. They get paid timely by us, they have a certain amount of business thats sold at a sustainable price for them and theyre not subject to the whims of the market, Gonzales explains. The growers like the fact they can move a lot of product with us. We need them as much as they need us.

While Walmart has a reputation of being tough on price negotiation withs vendors and suppliers, Gonzales says, We tend to pay what we have to to make sure we have product in our store. Walmart pays a fair price; I would challenge you to find someone who says we dont pay a fair price whos doing business with us.

McDougall, whose company packs about 4 million boxes of apples and pears a year, likes the direct-sales model between retailer and marketing representative (McDougall & Sons owns a portion of Columbia Marketing International, a fruit packer and shipper).

I dont see any downside, he says. Its all been positive from the standpoint of having somebody closer and having people come to look. … Theyre stringent on their quality but their sales mechanisms a lot better than the older model. We know that if we can put quality in the box, the grower will get a good price for the product.

Being as big in the agriculture business as Walmart is in retailing is not an essential for supplying the company. Gonzales says his office deals with growers ranging in size from as few as 15 acres to operations with thousands of acres. What is required is compliance with food-safety rules and Walmarts internal sourcing requirements.

But with consolidation reducing the number of retailers (while increasing their size), the trend is having an effect on the producer side as well, notes Desmond ORourke, a veteran Northwest agricultural economist and publisher of World Apple Review.

Large operators like Walmart and Kroger need large volumes of fruit every day of the year, he says. Price is important, but not being out of stock is just as important. The best way to ensure security of supplies is to deal with the big, integrated grower-packer-marketers. It is too risky trying to buy the volume of the desired varieties from many small growers.

Having an office in the growing regions isnt unique to Walmart, which has similar offices in California and Florida. McDougall notes that Kroger, which owns QFC and Fred Meyer, has had such an office in the state. Topco Inc., a Chicago company representing multiple retailers, also has a Yakima buying office.

The largest retailers have had offices in producing regions like Yakima on a fairly erratic basis, ORourke says. When they are doing a large volume of buying, they like to have personal relationships with the major shippers. Those buying offices tend to come and go as retailers expand or contract, as the philosophies at central purchasing change, and as fads in use of telephone or internet buying come and go.

Retailers such as Walmart like local buying offices to enhance their buy local credentials or to cut out the middlemen, ORourke adds. That latter goal hasnt worked out quite as planned, he notes, since apples have more frequently been in short supply than not, so Walmart has been unable to apply much leverage on suppliers. In addition, most Washington apples now are controlled by integrated grower-packer-marketers like Rainier or Stemilt, so the distinction between growers and middlemen [like packers and marketers] has become academic.

Whatever the track record of direct-buying offices, Walmarts venture in the Yakima Valley will be closely watched by everyone in the business, from growers to competing retailers and even to consumers paying attention to whats in the produce section of their local stores.

Walmart has proven to be hugely influential not only for its size, but also for its growth, its buying and pricing policies and its logistical capabilities, so the mere fact that its Walmart doing it will prompt others to consider whether there is merit to the effort.

Gonzales believes there is. Were in touch with whats happening on the growing side, and having that connection allows us to have a deeper understanding of what the growers go through as well as what we can do for our customer, he says. Obviously, we want that to translate into some sort of benefit.