Banana Prices, Contracting And Retail-CEO Shortsightedness

April 2018 – The Wall Street Journal recently ran a piece on banana pricing in the US:

Wholesale banana prices in the U.S. rose 15.5 percent in the first two months of 2018 to around $0.577 a pound, an all-time high, according to data from the World Bank, after the weather phenomenon known as La Niסa upended weather patterns. The price fell somewhat in March as supplies to the U.S. improved but are still up 8.4% from a year ago.

Bananas are the most widely eaten fresh fruit in the U.S., and many retailers have been loath to pass their higher costs on to shoppers. For many supermarkets and other stores, bananas drive trips to the store because they are an item that most people go out to purchase rather than buy online. Most large retailers sell bananas at a slim margin or sometimes no price markup, which means higher wholesale prices are likely hurting returns for sellers that havent locked in prices with long-term contracts.

I go to competitors regularly, and no one has moved on retail prices, said Jeff Cady, director of produce and floral at supermarket chain Tops Friendly Markets, which has stores in upstate New York and neighboring states. Id love to go up, but we just cant, he said, referring to prices. He also said that limited supplies have meant Tops is shipping out fruit from its warehouses that has spent four days ripening, as opposed to the usual five days.

In this case, with a short-term, weather-driven reduction in supply, it is understandable that retailers might want to maintain consistent pricing. In any case, the headline of the story, Why You Arent Paying More for Bananas, but Retailers Are, and the subhead, “The wholesale price of the worlds most popular fruit hit a record high in the first quarter,” may, in fact, be a bit misleading.

It is not clear to what extent “retailers” are paying more for bananas, since much of the chain business is sold on contracts. Indeed, one reason the “wholesale” price has zoomed is that any reductions in volume tend to come from the relatively small uncontracted portion of the market.

The growing use of contracting throughout the produce industry is leading to an increase in volatility on pricing, but this volatility often does not affect most businesses very much. In other words, if 80 percent of bananas or Romaine hearts or Iceberg is contracted, but volume falls short by 10 percent due to weather, the non-contracted market has to absorb all this shortfall if contracts are honored. So, the non-contracted market will be down not 10 percent in volume but 50 percent! So prices will zoom. And when prices zoom, contracted buyers take up all their allotments and beg for more.

There is a bigger question, though, as to whether this perception on the part of retailers that they “just can’t” increase banana prices is actually true — that is whether keeping prices low on particular high visibility items creates better produce sales and higher consumer satisfaction.

Most retail produce executives echo Jeff, but not for any consumer-driven reason. They echo Jeff because, quite literally, these produce directors “can’t” raise banana prices because their CEOs have ordered them to equal Walmart or other competitors on banana pricing.

There is a theory behind this. Bananas are often the No. 1 selling item in the store and, perhaps, bananas are one of the few produce items consumers will recall the price at which they are sold in other stores. So being competitive on this item might help the pricing image of the overall store.

So, if there is a chain that wants to make bananas a marquee item and meet or beat any price, it might make sense to keep prices down — provided the retail chain wants to fund these low prices out of general marketing dollars.

This, however, almost never happens. In fact, what happens is that CEOs demand that their produce departments both meet their margin requirements and be the cheapest on the block in bananas. This is exactly the same as the CEO ordering the produce director to raise prices on everything else to compensate for low, zero or negative margins on the department’s largest selling item.

This is called the “stupid customer theory” — we can raise prices on everything else, and nobody will notice as long as we keep low prices on a marquee item.

It is very common. When Amazon took over Whole Foods, it gave out a list of items it was going to reduce prices on. It got loads of media. Nobody stopped to ask the only relevant question: “Did Whole Foods simultaneously reduce margin requirements for the store or will these lower prices be compensated for by higher prices elsewhere in your offer?”

Pricing this way is a mistake for today’s produce offer.  Retailers should be promoting the new innovations that have the potential to drive growth in consumption and sales — items such as Mann’s Nourish Bowls, Cece’s Veggie Noodles, Love Beets’ flavored offerings, Naturipe’s Snacks and on and on ­— not overcharging for these items to offer artificially low prices on bananas.                                                 pb