Living in a consumer society, as we do, it’s generally assumed that the customer always comes first. You would think, for instance, that the soup cans and Cool Whip containers in neatly aligned rows on supermarket shelves would be selected according to a scrupulous analysis of consumer preferences and purchasing power. You might assume this is why there are five brands of mint-chip ice cream, six styles of bacon, and seven kinds of mustard on the shelf.
It turns out, however, that consumer tastes figure only marginally in these decisions. The seventh jar of mustard is probably there, for example, because the buyer got Super Bowl tickets from the seller and so put it on the shelf, says Tim Ramey, a food-industry analyst with D. A. Davidson & Co. “Lots of food companies agree that retailers are just a bunch of thieves,” he continues. “They want the Super Bowl tickets before they’re going to sign the order.”
It seems hard to imagine that anything so benign, so common, and so seemingly straightforward as a supermarket could be vulnerable to such byzantine schemes, and yet it is. If I’m selling chocolate to a chain, for instance, I’m charged all sorts of fees—for promotions, advertising, and “slotting” (to put my chocolate on the shelf), as well as a fee if my product doesn’t sell and has to be removed. A distributor for the New York market says that the slotting fee in many of the city’s supermarket chains is about $150,000 per item.
“One of the things people don’t realize,” explains John Stanton, a professor of food marketing at St. Joseph’s University, in Philadelphia, “is that, traditionally, supermarkets really made their money when they bought food from suppliers, not when they sold it to consumers.”
There is one supermarket, however, that does not capitulate to this seamy practice. It shuns all extra fees. It pays only for the actual goods themselves, and rotates its buyers so that relationships with suppliers can’t get too cozy. It is, in fact, the paragon of corporate honesty. And that store? Wal-Mart.
Wal-Mart is now the number one seller of food in the country, accounting for an estimated 15 percent of all sales. Supermarket experts say that the company owes its astonishing position, at least in part, to its reputation for transparency. “When some suppliers do business with many of the big supermarket chains, they feel like they’re being mugged in an alley,” says Stanton. “Whereas when they do business with Wal-Mart, it’s like a championship fight—big and bloody, but they respect each other in the end.”
Seventeen years ago, when Wal-Mart decided to expand its offerings from “everything” to “everything plus food,” a shopper might have been forgiven for viewing the move through a cheesecloth of suspicion. There was the obvious concern that Wal-Mart would do to its grocery competitors what it had already done to hardware stores, clothing shops, and toy sellers—namely, drum them out of business. In addition, Wal-Mart had made its reputation by selling goods of low-ish quality at very low prices, a formula that didn’t bode well for the perishable and health-related commodity that is food.
To a large extent, the doubts were merited. Since Wal-Mart began selling food, some 10,000 supermarkets have shuttered their doors. Wal-Mart’s entry into the food business has been an earthquake of such magnitude, in fact, that the entire industry has been left scrambling. America’s largest grocers—Kroger, Albertsons, Ahold, and Safeway (chains that together had more than two centuries of experience before Wal-Mart arrived)—have all seen their sales slow over the past decade. “I think that in the next five years you’re going to see the elimination of one or two of the major supermarket chains,” predicts food-marketing consultant Gary G. Kyle. “They’re just going to bow out.”
Of greater concern, perhaps, to people who care about the food they eat, is that Wal-Mart’s policies have diminished food diversity and quality in ways that ripple far beyond its own stores.
George Siemon, CEO of the Organic Valley Family of Farms cooperative, has his stocking feet up on an unadorned desk, and through the window beyond I can see Wisconsin’s softly undulating hills. “Doing business with Wal-Mart was one of the hardest decisions we’ve ever made,” he says. Which is not surprising—the reason I’m here, actually, is that Organic Valley, the largest organic dairy cooperative in the country, is a most improbable candidate for working with Wal-Mart, and it seemed fair to ask: Why? Is Wal-Mart’s sweep now really so broad as to include even an organic-milk producer in the pristine Kickapoo Valley?
Actually, the post-hippie idealism running through the company belies a certain rigor. Organic Valley had more than $200 million in revenues last year and is the industry’s gold standard for environmental stewardship. A stickler for quality, the company is also an outspoken defender of family farms. “We see this as a movement; we don’t see this as a trade,” says the regal, square-jawed Siemon. And yet: Organic Valley chose to sell to Wal-Mart.
The 52-year-old has been farming since college, and he still owns a spread a few dozen miles from here. He grew up in South Florida, he says, the son of a businessman who ran a successful chain of office-supply stores until Office Depot came to town. “My family was devoted to downtown business, and the trend was toward mall shopping,” he says. “So for me, my lesson from that is: If you’re going to have a mission, that’s great. But in order to keep that mission, you have to run a professional business and stay up on what goes on. Nowadays, what’s the trend? Wal-Mart.”
Organic Valley’s decision to supply Wal-Mart was traumatic for the co-op, and it evolved during the course of a few heated meetings in 2001, involving some 100 farmer members. The first objection was obvious: If Organic Valley was committed to building rural communities of the kind in which all its members lived, how could it do business with a company that sucked the life out of small-town Main Streets? For every opening of a Wal-Mart Supercenter (the 180,000-square-foot stores that sell everything, including food), two supermarkets close, estimates a report by Retail Forward. Siemon argued that Wal-Mart was no more predatory than other supermarkets; for example, he said, the natural foods giant Whole Foods had also proved itself capable of setting itself down next door to the only little organic foods shop in town. Siemon also argued that Wal-Mart benefited the hinterlands by serving remote towns where Organic Valley’s products would otherwise be unavailable.
The other objection amounted to a fear—that Organic Valley might become too dependent upon Wal-Mart and be cornered into dropping its prices. Because wildly vacillating prices have long plagued the dairy industry, one of Organic Valley’s bedrock principles is to pay farmers a fixed amount for their milk. “They were worried that Wal-Mart’s buying power would get us on our knees,” says Siemon. He vowed never to offer discounts or to let the Wal-Mart account grow disproportionately large.
Similar hand-wringing is taking place in boardrooms across the country. Food manufacturers have become alarmingly dependent on Wal-Mart: It is the number one customer for such leviathans as Kraft, Campbell Soup, and General Mills—and food sales to Wal-Mart are growing by 20 percent annually, according to a report by Morgan Stanley. That increase is astounding given that, according to the report, sales to traditional supermarkets like Safeway are dropping by 2.5 percent a year. “I know lots of companies that have over thirty percent of their sales to Wal-Mart,” says St. Joseph’s Stanton. Wal-Mart therefore has enormous leverage over manufacturers—particularly small ones. The company may have learned that putting modest suppliers out of business is bad press, or just bad business, but mom-and-pop outfits nevertheless struggle with the slow squeeze of Wal-Mart’s constant pressure to lower prices. “They don’t want you to make a ten-percent profit,” says one supplier. “They want you to make one to two percent.” And that slim margin can slide a company—especially a small one—right off the edge.
Like off-season athletes who wince with appreciation while being whipped into shape, however, suppliers do praise Wal-Mart for professionalizing their business. “Wal-Mart’s been givin’ us a real education,” says Siemon. “We’ve had to become a better operator.” He recalls the time Organic Valley got marked down on its “vendor scorecard” for imperfect “on-time” delivery. “It’s so funny,” he grins, “because I thought we were doing great with Wal-Mart! But they call arriving early ‘not on time,’ because they have all the trucks scheduled. They don’t want them clogging up their parking lot. When they say 10:15, they mean 10:15, not 10 a.m.”
More important, though, is the fact that most food companies would stagnate without selling to Wal-Mart. While growth in the supermarket industry has virtually flatlined, Wal-Mart is expanding at a furious clip. Its growth in 2004 alone, for example, was equivalent to folding in the sales of a Microsoft or PepsiCo.
For organic companies, there is also a more profound reason to sell to Wal-Mart. “We’re in business to change the world,” says Gary Hirshberg, “CE-Yo” of Stonyfield Farm, which sells its organic yogurt to Wal-Mart. “And they’re helping us to get to folks we never would otherwise. I know that Wal-Mart is having a crushing effect on local economies and local entrepreneurs. But the people who shop there are hastening the transition to an organic economy.... Wal-Mart can do more to change the world in one purchase order than I can do in my whole life.”
When I visited Wal-Mart in Bentonville, Arkansas, I turned off Sam Walton Boulevard and drove up and down a narrow street six times before realizing that the squat brick building with no windows was, in fact, the international headquarters of the world’s largest company.
The lobby is a low-slung, boxy affair. Fox News is on the TV and a coffee urn sits in one corner, with a little tin box where you’re on your honor to drop in a dime. The place is swarming with supplier representatives, each awaiting his turn with a Wal-Mart buyer. And because everyone is always on time at Wal-Mart, soon the reps are ushered back into a hallway lined with tiny, airless rooms. This hardly looks like the apex of the business universe, but the modesty does send the unmistakable message that Wal-Mart’s economies begin at home.
Bruce Peterson, the senior vice president in charge of all perishable food at Wal-Mart, has his own small, windowless office amid a warren of others. He is an affable man in his fifties, with a cherubic face and a smile more steely than sweet. Peterson, who has been in the grocery business for more than three decades, interviewed with Sam Walton in 1991: “Sam said to me, ‘In ten years, we’re going to be the biggest supermarket in the country.’ And I thought, ‘Wow, I may be getting into something big!’”
Wasn’t he, though. Adding food to Wal-Marts in 1988 almost doubled each store’s footprint, expanding it to the equivalent of three football fields. Since then, food sales have led Wal-Mart’s growth (the chain offers groceries at prices 15 to 30 percent below its rivals), and food now accounts for roughly one third of sales at all Supercenters.
The result is a supermarket landscape that looks more and more like a tale of two cities. Wal-Mart has the discount end cornered. Other supermarkets can’t compete—in part because they pay union wages, whereas Wal-Mart has long had a vigorous anti-union policy. “You cannot go to a meeting in the food industry where someone isn’t saying ‘The battle for the lowest price is over,’” asserts Stanton. “You have to do something else.”
That “something else” might mean adding a pharmacy, 16 varieties of turkey, or better service; it might mean buying up competitors to gain Wal-Mart-like efficiencies (and, in fact, the large chains have all but devoured smaller operators); quite often it means going upscale. Safeway, for instance, has spruced up some of its stores with hardwood floors and introduced a panini program.
“If you’re not carving out a special niche, you’re going to get creamed by the likes of Wal-Mart,” says Bill Andronico, who runs his family’s eponymous gourmet supermarket chain in California.
Andronico’s represents the other end of the supermarket spectrum, as does Whole Foods, a company with exploding growth. These are the places with olive bars and organic everything. One would think they’d be shielded from the tsunami of Wal-Mart, but even Bill Andronico feels gusts—because if contenders in the “middle,” like Safeway, are dressing themselves up, they’re moving upwind into his territory. And the fancy foods arena simply can’t accommodate everyone. “There’s just no room,” says Kathleen Seiders, a marketing professor at Boston College. The high-end niche is less than 5 percent of total food sales, according to the industry’s main trade publication, Supermarket News.
But even people who shop at stores within that niche might be surprised to learn that they, too, will feel some of Wal-Mart’s seismic impact. As with the giant bookseller Barnes & Noble, whose choices now affect which books are published, Wal-Mart’s buying decisions are beginning to creep back up the supply chain to influence what’s actually produced. In some cases, if Wal-Mart doesn’t want the product you make, then, well, you might as well not make it.
Because each Wal-Mart stocks about one-third fewer food items than the average 30,000 to 40,000 of most supermarkets, the squeeze is on suppliers to grab some of those spots. “Wal-Mart carries only the number one and number two national brands,” notes Richard Kochersperger, a food-marketing expert at St. Joseph’s. “They don’t want the flavor that’s unique—they don’t need that.” Or, in the words of one Wal-Mart store manager in Bentonville, “If it’s not turnin’, it’s gotta be goin’.”
The result is that food manufacturers are shrinking their lines: Heinz eliminated 40 percent of its items globally over the past two years; Kraft got rid of about 11 percent of its items in 2004; for General Mills, the number was 20 percent; and the food giant Unilever eliminated some 735 items. Some of what’s vanishing is merely different sizes and flavors, and Wal-Mart is of course not the only reason companies are slimming down—manufacturers say they would be doing this anyway, to gain efficiencies. But, says David Merrefield, editorial director of Supermarket News, there’s no doubt that the apple picking is due to “the competitive nature of food retailing now, and certainly a large portion of this could be put at the feet of Wal-Mart.”
Will we miss all our choices? It depends, really, on whether you’re hooked on that seventh brand of mustard when now there are only six. Still, it’s unnerving to think that Wal-Mart shoppers are, even to some small extent, determining what the rest of us can buy. Wal-Mart, for instance, has led the charge to “case-ready” meats, which are prepackaged at the slaughterhouse (allowing Wal-Mart to dispense with well-paid in-house meat cutters). Other supermarkets are following this lead, meaning that a finer mince, or a cut that is anything but the supermarket-designated standard, is becoming an endangered species in the average store.
Even more alarming is the issue of quality. Wal-Mart meat contains up to 12 percent water, salt, and preservatives (by weight), a formula that renders lean cuts juicier, while unfortunately diluting their original taste and driving up the salt content. This trend, too, has been followed by other supermarkets, since they can no longer afford to carry meat that is not enhanced if Wal-Mart’s watered-down version is selling for less.
“Wal-Mart is an agent of the consumer. Nothing more and nothing less.” This is Bruce Peterson again, in his Wal-Mart office, responding to questions about the quality of the food he offers. “We don’t discriminate against customers, deciding for them what we should carry. They decide for us.”
About a year ago, Peterson—or his customers—apparently made the decision to opt for cheaper organic milk. Organic Valley’s chief competitor, Horizon Organic—which had recently been bought by the $10 billion food conglomerate Dean Foods—had allegedly cut its prices considerably, and Siemon says he refused to “play that game.” (Horizon denies that it reduced its prices.) The news that Wal-Mart was dropping a third of its business with Siemon arrived in an e-mail. “It was all numbers,” he says. Realizing that the writing was on the wall—that the pressure to push down prices while maintaining a steady supply might just overwhelm his company, especially since it could barely keep up with demand as it was—Siemon decided to pull out of Wal-Mart altogether. “The Wal-Mart buyer was absolutely stunned,” says Organic Valley’s chief marketing executive, Theresa Marquez. “No one had ever called him up to say that.”
It’s hard not to interpret these events as a victory for price over quality. Unlike Organic Valley’s farms, which average 65 cows each, Horizon sources a good part of its milk from highly efficient factory barns, including the roughly 5,000-cow Aurora Organic Dairy, in Colorado. Critics say that Aurora slips through a loophole in the federal organic law, and a complaint has been filed with the USDA (by the Wisconsin-based Cornucopia Institute) alleging that the dairy rarely—if ever—lets its cows out to pasture. (Aurora claims that all its cows pasture, but will not specify if this happens during the milking life of a cow or, for example, only during its infancy.) The problem with cows that don’t eat grass, experts say, is that their milk contains 80 percent less of a powerful cancer-fighting agent—conjugated linoleic acid—than does milk from grass-fed cows. In addition, cows that forage have been shown to have significantly more vitamin E and other essential antioxidants in their milk.
Horizon’s milk meets the USDA standards for “organic,” but Wal-Mart appears to have opted for a milk that, like so many of its products, makes some definite compromises in order to meet the bottom line. Maybe that doesn’t matter so much for plastic mugs and dish mats, but with food, the implications for people’s health are worrisome.
Organic Valley, meanwhile, now has the dubious honor of being one of the few companies to bet that it can swim upstream, defying the gravitational wisdom that all companies must row with Wal-Mart to get to the big sea. The quandary of which way to swim epitomizes the essential problem of mass-marketing food. Smaller producers often sell items that are rare and of high quality—the heirloom tomato, the artisanal cheese—but supplies are neither vast nor consistent enough to satisfy the requirements of giant retailers like Wal-Mart. The mass marketers need constancy, not the variability that springs up with nature’s fickle seasons. Maybe Organic Valley will patch together enough family farms to take on Wal-Mart again. Maybe Wal-Mart will decide there’s some merit to buying milk from cows that spend their milking lives in the open air. Or maybe the chain will hit a rough spot and stop growing at the rate of 240 Supercenters a year, on target to dominate 35 percent of food sales by 2007. Maybe.
In the meantime, we will increasingly be eating according to mass-market tastes, shopping in massive Supercenters, and living in the world that Wal-Mart built.
Wal-Mart Facts
- Approximate number of customers worldwide who visit Wal-Mart stores every week: 138 million
- Percentage of U.S. households that made a Wal-Mart purchase in 2002: 82
- Percentage of U.S. food sales attributed to Wal-Mart in 2003: 15
- Percentage expected by 2007: 35
- Average percentage decrease of grocery prices in U.S. markets entered by Wal-Mart: 14
- Minimum number of U.S. supermarkets that have closed since Wal-Mart entered the grocery business in 1988: 10,000
- Minimum number of (mostly union) U.S. supermarket jobs that have been eliminated in that time: 12,000
- Percentage difference in labor costs at a Wal-Mart Supercenter vs. at a unionized supermarket in the same U.S. locality: 20 to 30
- Percentage difference in price of groceries: 15 to 30