The road by the way is Oxford Street, London , directly across from retail icon Selfridges.

The photo was taken in mid-June, in a season the English call ’summer’!

The fruit is nicely blocked in its trays and the focus is on summer fruit, not an apple or banana in sight.  Neither are price tickets.

Contrast that with this photo, taken 100 m further up the road.

The picture is not as sharp as I would have  liked, but I am sure you get the jist.  The fruit is displayed with flair. Bananas and green grapes are used to accentuate the predominant red colour of peaches, cherries and plums – and the price tickets are not only plentiful but easy to read and professionally executed.

The vast and silent majority of supermarket trolleys appears to be herd focused, just like many of us – and of course elephants.

We know what happens to us when we pass on; we are carted off to the cemetery in either a long angular box or a small urn.  We also know that elephants disappear when their time comes and the phenomenon is important enough to justify its very own Wikipedia entry.  But did you ever wonder what happens to shopping trolleys which have passed their ‘use by’ date?  Sauerkraut has been wondering about that for years and the answer can now be revealed.  YES, shopping trolleys whose time has come behave like lemmings and join their mates in the shopping malls’ car parks, where they quietely rust away, in full view of any customer who parks his or her cark within a 200 metre radius. 

Supermarket Gurus may well spend their time talking about the new trends in supermarket shopping – but will supermarkets still be around in a few years time, given the rate at which their trolleys slink away to their car park grave yard?

Bu t I digress.  Anyway, this letter arrived today inviting me to the Turners & Growers AGM.  A couple of proxy forms were also floating around in the envelope and then there was this other letter.  A letter from one Howard Cedric Zingel.  If you now want to know who Howard Cedric Zingel is, you are asking the wrong cabbage head.  A quick Google search reveals that Howard Cedric Zingel lives in Tauranga and seems to be someone who invests in the share market from a position of knowledge, being a longtime member of the NZ Shareowners Association Inc.  So we have to assume Mr. Zingel takes his investing serious.

And serious investor that he is, Mr. Zingel intends to propose a Motion at the 2010 Annual General Meeting of Turners & Growers Ltd on 24 June 2010.  If you are interested in reading the Motion in full, you can satisfy your curiosity here, and if you want to know what Tony Gibbs thinks of the Motion you can check that out here.

The short version goes something like this:

Mr.  Zingel wants Turners & Growers to engage the services of Price Waterhouse Coopers  in order to establish whether shareholder dividends and capital could be maximized if “the growing assets of the Group could be split off and the worth thereof returned to shareholders.”

Alan Gibbs’ letter inviting me to the meeting and advising me that I get to vote on Howard Cedric Zingel’s Motion gets straight to the point.  “The Board,” says Tony Gibbs, “does not support this resolution on the basis that the retention and growing assets is consistent with the long-term strategic objectives of the group.”

So there you have it.  As the Board votes the majority of the stock, Mr Zingel’s Motion will be handsomely defeated.  And this is where this story could stop.

It is too good a story to be stopped at this point though.  There are several reasons for this:

1. The Motion challenges the core of what all corporate advisers have been advising their clients. for years – opt for vertical integration wherever possible.
2. The facts speak for themselves.  Numbers do not lie.
3. This is Turners & Growers we are talking about, still considered by many to be a, if not the, commercial Doyen of our industry, albeit with a new emperor.
4. Mr. Zingel puts up an intelligent and articulate argument and the issues surrounding the Motion and its naturally present alter ego deserve exposure.  Our industry will wither on the vine without robust debate – and Turners & Growers certainly knows all about debating contentious issues.

So I will attempt here to look at the argument contained within the Motion from an objective perspective – the objective being to provide a considered opinion to the debate, to inform and to get more industry participants to consciously think about the issues raised by Mr. Zingel. 

The core of Mr. Zingel’s Motion is that Turners & Growers shareholders are disadvantaged because  the growing activities of the business are returning insufficient yield if  at all and, he suggests, are being propped up by the trading business.  Mr. Zingel draws the conclusion that whilst the balance sheet of the company most certainly recognizes the value of the company’s land assets and reflects this in the net asset backing per share of 276 cents (Dec 09), “the share price at the time was only half of that value.”  He also suggests that businesses base on land value achieve better returns when “transparency and a bankable strategy” are in play as the market then has a greater degree of confidence to back that business.

At first glance, it is difficult to argue with Mr. Zingel.  The data he presents in support of his Motion appears to be very plausible – and it would indeed be nice to enjoy a dividend that is greater than just 1.7% of revenues.  He also points out that the company’s brands such as ENZA have no presence on the balance sheet.

Readers might not be surprised that I have an opinion on the matter as well – and not just from the position of shareholder.  Over the years I have bought from Turners & Growers, I have fought with Turners & Growers, I have consulted to Turners & Growers and I have advised other clients on how to manage their relationship with Turners & Growers.

Turners & Growers’  future as a pure trading house would be somewhat limited.  Traders notoriously sit between chairs and have to work extremely hard to add any value in an environment where supermarkets like purchasing directly from growers and growers feel that they have the skills to sustainably manage their own export portfolio, thank you very much.  Supermarkets also fancy themselves as importers and anything that does not require substantive value add upon arrival in the country is fair game for fledgling retailer import departments.

Turners & Growers therefore needed to reinvent themselves if they wanted to stay relevant and alive.  The space between chairs had become a bit lonely, value-add opportunities where somewhat limited for middlemen, so what were the options?  Open your own retail chain and compete with your customers?  Not a good move in anyone’s book.  That left vertical integration in the production aspect of the value chain – which lead to the ENZA merger after Mr. Gibbs had achieved deregulation of the pipfruit industry, the creation of the Status tomato business, the acquisitibusiness. of citrus grower, trader and exporter Kerifresh and a small stake in NZKD, a Dargaville based kumara packer.  All these decisions made perfect sense from the position of a trading house looking for its new place in the sun.

Incidentally, the company’s dogged attempts to liberalise the kiwifruit trade need to be seen in the same light.  What also should be remembered that the Turners & Growers directors need to be cognizant of the Commerce Act which governs directors’ behaviour and expects directors to act at all times in the interest of the business.  But I am digressing again.

Given that the company in Sauerkraut’s humble opinion, would not survive without its strategic position in production horticulture, splitting the land assets from the trading business is not advisable.  Product brands are intangible assets and companies who are conservatively and prudently managed financially, typically keep brands and other intangible off the balance sheet.  Prudent management is the order of the day I am afraid in the produce business and the international produce scene is littered with prominent produce brands with rather checkered performance as a result of prudent financial management not being a priority.

Sauerkraut therefore cannot support Mr. Zingel’s Motion and will vote accordingly.  Howard Cedric Zingel needs to be thanked nevertheless for his contribution to the debate on how Turners & Growers should move forward.

Maybe, it is time for a name change to reflect the new reality.  How about “Turners are Growers”, or “Turners the Growers & Growers”?  Just kidding. 

Or on a more serious note why not just  ”T&G”, the abbreviation which is already commonly used?

This brand evolution worked wonders for KFC.  Does anyone still remember that this chain was once called   “Kentucky Fried Chicken”?

When a shopping reporter (or was that reporting shopper?) spends his time inspecting the produce displays of Walmart and compares them with those of his local icon Whole Foods, you know America is on the move. And where America leads (having followed the UK), we in turn follow.  Eventually. To a point.  But nevertheless.

Especially when the themes sound  familiar.  Locally sourced, organically grown, attractively merchandised, survival of the small grower.  Now, where have we heard this before?

Do I have any answers here?  Of course, not! But may I suggest that in order to understand China better, we need to spend a bit of time on critical evaluation – and that involves learning about Chinese mindsets and strategies.  This article about the Chinese commodities strategy in Africa entitled “The Next Empire”   is a good place to start.  I would pay particular attention to the section about Mozambique allowing 3,000 Chinese settlers in to buy and farm the land.

The article provides a wider historic perspective and is certainly not solely focused on horticulture – but neither are the Chinese.

The real news in this story is actually not that the Dutch are geographically challenged, but that Australian growers have discovered what to them seems to be a new revalation altogether.

Far North Queensland grower Doug Phillips is being qoted as saying,  he is “still sending fruit to market, but only the pick of the bunch.  We’re only sending the very best of the bunch, we’re not sending any large or mediums. If there’s any marks on it at all it’s getting thrown out.”

Well fancy that.  Australian fruit growers have discovered that one can maintain prices by “only sending the pick of the bunch” to market.  I wonder how long before they trying to patent that highly exciting bit of new knowledge they have gained  and try to sell it to us?

I don’t know about you, but what comes to my mind is that this very cleverly put together promotional vehicle reflects the state of our produce retail  industry.

The two front bits represent respectively the supermarkets – Foodstuffs (New World, Pak N’ Save) at one end and Progressive (Countdown/Wooolworths/Foodtown)  at the other.  The ‘bit in the middle’ is the rest of the retail industry – the urban green grocers, the fruit shops at the edge of town, the gate sellers, the farmers markets, the opportunitists at the roadside selling produce from their vans, the office fruit bowl stockists and the internet ‘box of stuff’ vendors.

There are several questions that play on my mind in connection with this state of the retail industry:

• How big are the two front bits, i.e., the supermarket produce share, really?
• What is a realistic level for the supermarket share of produce sales before it disturbs the industry value chain equilibrium?
• To what extent is ‘the middle bit’ dependent upon the two ‘engine drivers’ for its well being as opposed to being in control of its own destiny?
• How will the local New Zealand model be impacted by international trends in the next five years?

Let me start with this observation.

Fruit and vegetable ranges stocked in supermarkets are continuing to reduce, driven by item based shrink and profit consideration at both merchandise and buying office level. Buyers and category managers whose performance is judged by the profitability of narrow product categories are not prepared to gamble by stocking niche products.  Store staff with insufficient training are not best placed to sell non-mainstream produce.  So if I am looking for whitloof, fennel and red currants, I know that I will not find those in the supermarkets.

This thread will be continued over the next few weeks and comments are as always welcome.

I walked away with several learnings from the day and the concluding dinner. These were:

• There appears to be a disconnect between what HEA can do under its governing legislation and what the product groups which have chosen to export under the legislation believe HEA ought to be doing.
• Those product groups which are not exporting under the HEA framework do not appear to have a clear understanding of what HEA’s function is.
• KGI, the kiwifruit growers product group who works under the HEA framework for kiwifruit exports to Australia, believes that WTO exemptions applying to Zespri’s single point of entry status could also be applicable to other product groups.
• MAF Policy managers present at the meeting took the position that it would  not be in New Zealand’s best interest from  a wider perspective to test the KGI belief.
• HEA appears to be at times ‘anticipating’ a problem and advise product groups accordingly which some product groups think could result in them not fully taking advantage of all possible options in a given situation.
• Conversely, HEA feels ‘underchallenged’ at times, in the words of its chairman, who encouraged product groups to engage more proactively with HEA on exploring export related regulatory opportunities.
• A debate on the future role of HEA in light of the horticultural industry 2020 strategy and its $10 billion sales target is highly desirable.

There was general agreement at the end of the day that HEA needed to be commended for discussing the Review outcomes in an open industry forum rather than behind closed doors and with its members only, and for taking the initiative of getting everyone’s mind focused on the objectives of the industry strategy and calling for action.

It does not matter where in the developed world one lives nor whether one is male or female, straight or otherwise, of European descent or already part of the cultural & ethnic mix that our descendants will turn into – supermarkets are never far from our mind. The hunter/gatherers of prehistoric times pursue these activities within supermarkets today. Supermarkets have, depending whom one wishes to believe, a market share of between 60-85% of the total food business. Yes, I know that there are variations and fluctuations based on store departments, store location and the competence level of store management, but I am talking averages here.  My favourite source of semi-reliable information, Wikipedia (http://en.wikipedia.org/wiki/Supermarket), suggests that

 “a supermarket is a self-servicestore offering a wide variety of food and household merchandise, organized into departments. It is larger in size and has a wider selection than a traditional grocery store and it is smaller than a hypermarket or superstore.”

 Whilst one usually has to take wikipedia with a grain of salt as all and sundry are able to edit contributions on-line , I am sure that most readers would agree with this description as being fairly accurate. Let’s see what else wikipedia has to say on the topic to help us better understand what a supermarket is – and equally as important, what it is not!

On the matter of why we shop at supermarkets, Wikipedia feels,

 “Its basic appeal is the availability of a broad selection of goods under a single roof at relatively low prices.”

As a possible reason why relatively low prices should be achievable, Wikipedia offers this explanation.

 “The stores often are part of a corporate chain that owns or controls (sometimes by franchise) other supermarkets located nearby — even transnationally — thus increasing opportunities for economies of scale.”

Wikipedia also thinks it has got the answer to the fundamental question on supermarket economics.

 “Supermarkets usually offer products at low prices by reducing their economic margins. Certain products (typically staple foods such as bread, milk and sugar) are occasionally sold as loss leaders, that is, with negative profit margins. To maintain a profit, supermarkets attempt to make up for the lower margins by a higher overall volume of sales, and with the sale of higher-margin items.”

Hm, let me sum up here. Supermarkets are food outlets that achieve economies of scale which enable them to sell food at relatively low prices and in the process often reducing their economic margin.

I have spent the last few days contemplating the Wikipedia article which appears to have been put together by perfectly sane and sensible people. Yet the supermarket world I see is somewhat different to the one described by the Wikipedia authors. How can this be? What is happening here? Who has gotten hold of the wrong end of the stick? The answers to these questions, valued readers, are actually very exciting because we may just have reached the point where the good old supermarket business is at the verge of proving and confirming a theory that has fascinated mankind for hundreds of years.

I am referring, of course, to the theory that parallel universes exist!

No, I have not gone completely of my rocker but I know that consumers and growers alike are experiencing a totally different supermarket related reality than the one described in Wikipedia. In our reality here, supermarkets with established and unquestionable economies of scale are, for example, selling Royal Gala apples for around $1 per kilo more currently than a greengrocer down the road. Suppliers are being asked to buy space in supermarket catalogues in order to have their produce advertised whilst reducing their own economic margins is typically a totally abhorrent concept for supermarkets because that is not in their shareholders’ best interest. On top of that, regular suppliers are being asked to implement complex food safety programmes whilst supermarkets reserve the right to buy from whomever they like regardless and when it suits them, food safety system or otherwise.

This all fits with physics theories involving parallel universes, “which form a natural four-level hierarchy of multiverses allowing progressively greater diversity.” (Tegmark, M. 2003. Parallel Universes. Science and Ultimate Reality. From Quantum to Cosmos. Cambridge University Press).

In his somewhat challenging paper, Tegmark (2003) introduces multiverses as a conceptual hierarchy that is peppered with Hubble volumes, chaotic inflation, unitary quantum mechanics and mathematical structures unknown to us that give rise to different fundamental equations of physics.  The key question, by the way, for Tegmark is not whether parallel universes exist, but how many of them there are!

So, you can see it is perfectly simple. We do not live in a universe but on several multiverse levels all at once. That would explain why what the supermarkets are saying and what they are doing is often barely related to each other. It seems that supermarkets have developed the ability to cross from one multiversal level to another and back so rapidly that we don’t notice and perceive them to be locked in one spot because of the brick and mortar needed to build them. Another possible explanation is that supermarkets are able to be simultaneously present on more than one level of our multiverse without themselves realizing that this is so. If I have thoroughly confused you by now, forgive me. My excuse is that the topic is very complex. I will try to explain it in a nutshell.

Common economic principles related to economies of scale no longer apply because the economic unit size of supermarket chains has grown exponentially and disproportionally compared to the economic unit size of supermarket suppliers.

We started off in the 1950s and 1960s with New Zealand supermarkets buying their produce at auction, alongside all other produce retailers. In the 1970s first attempts to buy direct from growers emerged. This trend became more robust in the 1980s and snowballed in the 1990s. By 2000 then separately owned Woolworths and Progressive had their respective systems sorted out, often sourcing whole categories from just one supplier. This in turn changed the nature of some of these suppliers from growers who packed, to packers who grew and purchased from other growers. Subtle difference, eh. Foodstuffs in the meantime followed its own evolutionary path on produce supply.

Then two events occurred in relatively short order. Firstly, Progressive purchased Woolworths. No sooner had the dust settled, the tables turned for Progressive. It became the successful takeover target for Woolworths Australia. Now we have a substantial volume of New Zealand produce being procured every day under Aussie rules. The intrinsic costs of running a produce buying operations, the additional costs of complying with Woolworths Australia requirements in this market, the costs associated with funneling all produce through a centralized distribution centre, the impact of corporate accounting policies on distribution costs as well as associated regulatory or self-inflicted compliance costs and the produce department margin expectation all add up to negating the benefits of being able to buy attractively due to enjoying economies of scale. To be very clear here – I am not blaming supermarkets or anyone else for that matter. Running a buying team costs money and, of course, one wants to play by one’s own rules if one is big enough to achieve it; centralized distribution provides more control and accounting policies exist for a reason; compliance costs are a fact of life and positive margins are needed in order to justify the capital intensive nature of being in the supermarket business.

Every single aspect listed here can be vigorously defended and justified up to a point.

My point is that the sum of these aspects when added to the fact that our industry markets and sells commodities and not 18 karat gold jewellery, and compounded by the imbalance in economic unit size between buyer and seller, is tipping the balance and no longer makes it possible for a supermarket to do what Wikipedia says a supermarket should be doing – offering “a broad selection of goods under a single roof at relatively low prices.”

And none of the above is purely a local New Zealand phenomenon.  This brings me back to the multiverse theory, which obviously deserves closer investigation than many of us have realized until now.

The second level is product or category related margins. What should the margin on potatoes be, compared to the one earned by strawberries, bananas or turnips? What is a realistic margin, what is a fair margin and what is downright obscene?

The third level looks at the overall fresh food department, which consists of meat, produce, deli, bakery and seafood and may well have consolidated margin expectations at that point as well. The meat department, for instance, includes the poultry, beef, sheep meat and pork categories and within the sheep meat category there are subcategories such as lamb, hogget and mutton and products related to the three – legs, racks and chops, to name a few.

The fourth level is the company level. What is the margin the overall business delivered last week? Was it above or below budget? What were the underlying reasons for the performance? What can we change? How can we improve the margin mix?

At every one of those levels, managers are busy analysing the product or product ranges to death, in an attempt to optimise product, category, departmental or business performance. The managers are referred to by various titles: Product Manager, Category Manager, Merchandise Manager, Divisional Manager, General Manager Fresh Foods, Managing Director. It does not matter what the individuals are called, they are all concerned with the same task – the profitable performance of whatever it is they are responsible for.

It would be fair to say though that regardless of how much energy and effort goes into the continuous process of margin setting, results analysis and margin readjustment, ultimate success will be denied unless the organisation – in our example, the supermarket company – achieves the ability to generate at the fifth level, the consumer level.

What do I mean by that? Let’s go back to the lower levels first. At product level, potatoes will always be sold at higher margins than strawberries, for example. The reason? Well, one product has a longer shelf life than the other and does not have to be sold so fast. Guess which one! The fact that the potato supplier harbours black thoughts about the supermarket’s potato buyer and feels it is unjust that his product has to support the bargain basement prices he considers the strawberries to be selling at is beside the point.

The produce department has to deliver an overall gross profit margin and this is achieved by balancing products against each other, depending upon their shelf life, consumer appeal, the time of year, the condition of the product and the choice of advertised specials in any given week. The fresh food departments have to deliver margins at certain levels in order to compensate for the lower FMCG margins. In the centre of the aisles, whole categories can at time hover at the breakeven point, when competitive pressure demands downwards price adjustments.

Unless the business banks a certain amount of dollars at an acceptable margin, shareholders, owners, institutional investors and business media commentators will have their pound of flesh whenever financial results are released. All efforts into margin management are thus applied in good faith and for a good cause – keeping the business in business.

And yet, at the fifth level – that of the consumer – do I care about the supermarket’s margin policy? No, I don’t. Will I buy more potatoes in order to support the supermarket’s margin mix in relation to berry fruit? No, I won’t. Do I think about store profitability when I scoop canned goods and nappies (figuratively speaking, I hasten to add) into my trolley?

No, I don’t. What do I care about then? Here is an example. A consumer comes home from her weekly supermarket experience and exclaimed, “Guess what! Smoked salmon pieces are only $17 for 500g at Supermarket A. At Supermarket B they are always at least $37 for the same amount. I have noticed that for the second time now. So I did my whole shop this week at Supermarket A.”

Consumer perception – that is what the fifth level is all about. All that careful work in getting the margins right and then a customer allows herself to be influenced by what she sees. Shouldn’t be allowed, should it? But how do you stop it? The truth is you can’t.

Consumers have always had a mind of their own but today’s consumer is a lot more discerning than her mother. She will shop where she damn well pleases and her buying decisions are based on personal preferences and perceived value.

We are moving from the age of market segmentation into the age of market fragmentation and many shoppers are going back to the old “butcher, baker, candlestick maker” shopping model – for candlestick maker, read greengrocer. So, isn’t it time therefore that supermarkets become more consistent at managing margins at the fifth level, the consumer level, if they don’t want their entire model to implode? I’d say so.