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U.S. Fresh Produce Markets: Marketing Channels, Trade Practices,
and Retail Pricing Behavior
Carolyn Dimitri, Abebayehu Tegene, and Phil Kaufman
Agricultural Economic Report No. (AER-825), September 2003
U.S. markets for fresh fruits and vegetables have been transformed
in the past decade. Consumers are purchasing more produce, more
exotic varieties, and more convenient portions and packaging.
The implications of consumer demand filter through the marketing
chain. The foodservice sector has stepped up as buyers of fresh
fruits and vegetables, while merchant wholesalers have declined
in importance. Retail companies have grown larger, with mass
merchandisers (e.g., Wal-Mart) more active in food marketing
and supermarket chains undergoing mergers and pursuing acquisitions
of new stores. Purchasing strategies have also changed, with
retailers and wholesalers now asking grower-shippers to provide
additional services and fees, including marketing fees and inventory
services.
These new trade practices have raised concern among grower
associations about whether the fees and services are the result
of industry evolution or reflect the ability of larger retail
companies to increase profits at the expense of growers. To
address these concerns, the grower associations asked the U.S.
Department of Agriculture to study produce market relationships,
leading to a major study by the Economic Research Service. A
new report, U.S. Fresh Produce Markets: Marketing Channels,
Trade Practices, and Retail Pricing Behavior, synthesizes the
publications from this research project, including two newly
released technical reports by academic experts on market structure
issues.
What Is the Issue?
Given the broad changes occurring throughout the produce industry,
analysis of market relationships at any one level requires consideration
of the entire industry. The absence of data on new trade practices
and on prices paid and received throughout the marketing chain
helps explain the wide gap in perceptions among industry participants
about the existence of market power. Recognizing the links across
the industry and the gaps in data and information, the overall
project had three major objectives:
• To develop a comprehensive overview of the produce
industry, including consumption and retail sales trends, markets
and market channels, and the changing structure of produce buyers.
• To identify and characterize the types of trade practices
used in the produce industry, including fees and services, forward
contracting, and marketing strategies.
• To analyze supplier-to-retail price margins for evidence
of market power.
How Was the Project Conducted?
To analyze, from farm to table, an industry as complex as today's
produce industry, ERS consulted with experts in the economics
of produce markets and market structure analysis. ERS worked
with researchers at Cornell University to assess changing produce
markets and market channels, per capita consumption and retail
sales trends (including value-added produce), and retail consolidation
trends between 1987 and 1997.
Limited public information challenged the study's second objective.
(Most firms typically do not reveal the details of transactions
between shippers and buyers.) As a result, ERS worked with collaborators
from the University of California-Davis, University of Florida,
and University of Arizona to interview and collect primary data
from selected small-, medium-, and large-scale shippers of Florida
grapefruit, California and Florida tomatoes, California and
Arizona lettuce and bagged salad, California table grapes, and
California oranges. Shippers were asked about the share of sales
accounted for by the largest produce buyers, various pricing
strategies, including fees, services, and contracts, and the
extent of fees charged as a share of sales. Grocery wholesalers
and retailers were interviewed about changes over the past 5
years in their use of fees and services and the number of employees
in produce buying positions.
ERS contracted studies from the University of California-Davis
and Arizona State University to assess the pricing by retailers
for some fresh produce commodities in selected markets. Working
with ERS, both research teams gained access to detailed data
on retailer pricing and sales that underpin the statistical
analysis. However, neither team had direct access to data on
retailers' actual costs and fees. Instead, they applied economic
theory and statistical methods to estimate costs. The techniques
applied by both teams give a range of costs and, consequently,
their estimates of the extent that retailers are exerting market
power has lower and upper bounds.
What Did the Project Find?
Per capita consumption of fresh produce increased 12 percent
during 1987-97 and retailers have responded by increasing the
size of their produce departments. Fresh-cut produce and prepackaged
salad sales have grown rapidly and the number of nationally
branded products is expanding. Largely since 1996, the share
of grocery store sales accounted for by the top 4, 8, and 20
food retailers nationwide has increased through mergers, acquisitions,
and internal growth.
Advance pricing arrangements, contracts, fees, and services
are becoming more common. In 1999, short-term contracts accounted
for 11 percent of total commodity sales (grapes, oranges, grapefruit,
and tomatoes), and long-term (annual or multiyear) contracts
for 7 percent. Lettuce sales mechanisms in 1999 were similar
except that all contracts were long term. Bagged salad shippers
indicated that annual or multiyear contracts are the standard
for retail sales. Similar consolidations are occurring among
wholesalers.
Volume discounts are the most commonly imposed fee. Slotting
fees—paid by suppliers to ensure shelf space—are
not used for bulk items such as tomatoes, lettuce, and oranges,
but are used in the bagged salad industry. Requests for marketing
services from produce shippers have increased, with 77 percent
of requests reported as new between 1994 and 1999. According
to shippers, the most common service requested is third-party
food safety certification, followed by returnable plastic containers.
Retailers cite the top three service requests as private-label
produce items, category management, and electronic data interchange.
Across the products analyzed, a wide variety of pricing strategies
were observed among retailers, indicating that retailers have
some control over produce prices. However, there was no evidence
of coordinated pricing or collusion among retailers. Analysis
of retail and wholesale margins found that retailers do influence
prices paid to fresh produce shippers and prices charged consumers
for some commodities. Retailer ability to hold shipper prices
below competitive prices was found for grapefruit, red delicious
apples, and lettuce, but not for tomatoes, grapes and oranges.
Consumer prices were estimated to be above competitive prices
for red delicious apples, fresh oranges and grapes, tomatoes,
and lettuce.
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