ST. PAUL, Minn. – John Johnson remembers the first time he went to
pitch a product to Wal-Mart a few years ago.
He and 40 other potential sellers sat in a room with theatre seats and
picked numbers.
When his number came up, he walked down a hallway a quarter of a block
long, past a string of rooms. In his designated room, he found its
sparse décor included four chairs and a table.
The Wal-Mart buyers entered the room, sat down and the meeting began.
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Johnson had 30-60 minutes to pitch his co-operative’s product, a pet
food.
Three weeks later he was called back. The company liked his product.
Johnson, who is now president and chief executive officer of CHS
Co-operatives (Cenex and Harvest States) out of Inver Grove Heights,
Minn., now knows what to expect when he does business with Wal-Mart and
its almost 4,000 stores in the United States. The company has 1,100
stores in other countries, including Canada.
“Wal-Mart is tough as a buyer, but if you can adapt your business
methods, there is money in the market.”
CHS is the second largest co-operative in the U.S., also the most
profitable farmer-owned co-op, representing 500,000 producers. Last
year it had sales of $9 billion US and earnings of $150 million.
Johnson said Wal-Mart forced his company to work on tighter margins,
but also made it more profitable because of the quantity of business.
He said Wal-Mart takes “the cost out of everything in-between,” keeps
low inventories and works on a just-in-time system where the business
“knows when a bottle leaves the store” and then demands more be
manufactured.
“We sell cheaper, but we make more money,” Johnson told a recent North
American Agricultural Journalists conference.
He said farmers need to look at that and work on becoming
interdependent with companies to market their goods, even if it means
selling their product under a store label or brand.
By not selling it under a label, Johnson said his company profits
because it doesn’t have to spend money on advertising. His company’s
peanut oil, for example, has the predominant share of U.S. business
thanks to the food stores connected to Wal-Mart such as Sam’s Club.
If farmer-owned co-operatives have philosophical problems with working
with huge food companies, they may wish to think again.
“If you’re in the food business and say you will avoid Wal-Mart, that’s
a formula for failure,” Johnson said.
One of the main reasons is the size of Wal-Mart and its impact on the
food retail and food service sectors.
It’s the world’s largest retailer, and earned $218 billion in sales in
its last fiscal year. According to Wal-Mart, more than a million
customers per week visit its stores worldwide.
In 2000, Wal-Mart placed sixth in the top supermarkets in the U.S. with
sales of $17.2 billion in its almost 1,000 grocery stores. It
represented four percent of the entire supermarket share in the country.
The company is unique because it also is one of the top five food
service distributors in the U.S. It earned $10.2 billion in sales and
placed No. 3 overall with six percent of the total share.
Jean Kinsey, co-director of the Food Industry Centre at the University
of Minnesota, also emphasized the power of Wal-Mart.
She said it has influenced the adoption of new technology to collect
data on consumers, changed the profit margins in different areas, and
affected inventories carried by stores.
“Wal-Mart is such a huge negotiator,” she said. In the supply chain,
they “say what they will buy, but also influence the manufacturing.”
For example, Wal-Mart liked Johnson’s pitch for pet food but demanded
that three more plants be built to supply its needs. Estimating it
would cost $25 million to build each plant, Johnson said he couldn’t do
it. The sale was off, and Wal-Mart struck a deal with another company
willing to build the plants.
Kinsey said the 130,000 other grocery stores in the U.S. try to compete
with Wal-Mart but don’t have the same negotiating power. She expects
that middle-of-the-pack grocery stores are in trouble, and “third party
wholesalers will also have to find their niche.”
As Wal-Mart grew more powerful, changed the relationship between buyers
and sellers, and collected more data about its customers, it has become
more difficult for economists to get price data for consumers.
It is also harder to track quality and quantity of sales, Kinsey said.
“We’re an information society, and those with the most information and
ability to analyze this will have the competitive advantage.”
She said each sector is essential in the food industry web, but also
depend more than ever on each other.
“The system can’t exist without farmers, but farmers can’t exist
without the system.”
