Q 15Q 15
Case 2: Buying Local Cuts Costs for Wal-Mart
Wal-Mart (www.walmart.com), with more than $120 billion in annual food sales, is the largest seller of grocery products in the United States. Although the firm is known for scouring the globe for the lowest-cost producers, Wal-Mart has recently begun purchasing fruits and vegetables from local farmers in order to reduce shipping costs and product spoilage. Locally grown produce also does not have to be stored in distribution centers as it can be shipped multiple times per day, if necessary, directly to each store. Local farmers can more easily handle emergency shipments so that there are fewer stockouts and lost sales. The availability of fresh local produce offers a significant benefit for many consumers who view fresh fruits and vegetables as a major competitive advantage in their store choice.
Wal-Mart is encouraging its produce managers to purchase fruits and vegetables grown within 450 miles of its distribution centers. Ten years ago, almost all of Wal-Mart's jalapeño peppers came from Florida, California, and Mexico. Now, Wal-Mart has suppliers of these hot peppers in 30 states. According to Wal-Mart's senior manager for produce: "I'm going to pay a higher price in Ohio for peppers, but if I don't have to ship them halfway across the country to store, it's a better deal."
Recently, Wal-Mart made a commitment to double its purchases of locally grown fruits and vegetables. Wal-Mart plans for local produce to comprise 9 percent of its U.S. total produce sales as of 2015. This strategy will ultimately shift sales from large far-away farms to smaller local farms. Similarly, Kroger (www.kroger.com), which operates about 2,400 grocery stores, is purchasing more produce in Texas to send to stores in the Southwest, as opposed to getting these crops from California or Colorado. As a Kroger spokesperson notes: "We use less energy and fuel to store, transport, and refrigerate the products." Supervalu (www.supervalu.com), the owner of more than 1,000 Jewel-Osco, Albertsons, and Luck supermarket stores, estimates that it uses local suppliers for between 25 and 40 percent of its produce purchases.
Interestingly, there is no federal standard or consensus among grocery managers as to what constitutes "locally grown" produce. At Safeway (www.safeway.com), the term "local" means that the produce is grown less than an eight-hour drive from a store. Kroger defines the term more loosely, designating "local" as being grown in the same state or even the same region as a store location. At Supervalu, the meaning of "local" varies by store. Some stores use this term to describe produce grown in neighboring states. At Wal-Mart, "locally grown" means the produce is grown in the same state where it is sold. A problem with this definition is that in a large state like Texas, "locally grown" can be used to describe produce grown a 12-hour drive from a supercenter location.
These varying definitions have generated criticism among consumer advocates who state that some chains are engaging in misleading promotions. A secondary issue is that there are limits to what can be produced locally in the winter in the northern United States due to climate considerations.
1. Discuss the pros and cons of purchasing locally grown produce from the perspective of the retailer and from the perspective of the consumer.
2. How would you educate store employees to understand why the retailer carries local produce and how they should explain these benefits to consumers
3. Do you think the cash flow needs of small local produce firms are different from those of large produce firms What are the implications of your answer for retailers
4. Explain the implications of the different meanings of " local." What definition would you use Why