The Produce Business explained with 3 Formulae

The Produce Business explained with 3 Formulae

This article headline could have been rewritten as follows…“Negative Correlations of Competitive Attributes in the Produce Business”. In doing so, very few of you would have clicked on the link and would be reading it by now.

I do not pretend to write an academic paper based on an econometric study that by means of iterations find statistical meaningful formulae of correlation (causation relations or its absent) but rather, to reveal that these relations exist and that the following observations are the fruit of my experience (pure empiricism).

In addition, they are not only a fruit of my experience since they shape “a sort of natural laws” of the business because they are widely perceived by the professionals of the industry.

The following laws enunciated as formulae combine 3 factors: Volume, Price and Quality.

The first one of them would be enunciated as follows: “Any company that produces large quantities (Volume) to low prices (Cheap) will struggle to offer quality products (Quality) “.

This is one of empirically relations easier to observe in the industry. The Produce business is typically a business of “rotation”. The companies profit from very frequent trade operations that provide a very small margin and so the resources are obtained by means of a large volume. It is a constant challenge to achieve larger volumes that allow the companies to secure sufficient resources.

The larger volume, on the other hand, implies the adoption of a low pricing strategy (Costs Leadership Strategy) that guarantees that the whole crop production is sold. And since this is a business of complex multivariate outcome (many variables to be under control simultaneously), the management usually focus on operational simplification that in turn disregard attention to detail, due to the standardization process, and hence lowers quality in the medium and long term.

Apply all shades of grey you might want and you will find the majority of companies (specially the leading ones) included in this definition. The leading companies have a great size that allow them to continue investing, supply large volumes (and so, Service), cannot sell to prices superior to the average of the industry while they suffer to maintain high quality standards.

The second law would read this way: “Any company that serves high quality products (Quality) to low Prices (Cheap) will not be able to produce large quantities (Volume)”.

This is the classical example of a new company or a small family-owned enterprise that finds itself on the verge of a transition. This is by definition, a disruptive company. Its products are cheap and are perceived to be of a high quality. This attractive combination gathers the attention of the buyers. Many are going to be attracted by the exceptional value of these high quality products at limited prices. You can call it disruptor, the bee’s knees, you name it; but normally, it will not last.

Their success will make them to reconsider their size and as they grow the complexity and the difficulty run them will grow as well. Further investments will take them to another level of costs that only achieve viable amortization with higher volume and by following this avenue they will end up by complying with the first law.

It is also possible to just maintain their size (low volume) that combine with a high degree of efficiency (low costs) allows them to continue with their formula but the continuous consolidation of the companies in the industry condemns them to a slow irrelevance.

Another alternative for this type of companies is to evolve towards compliance with the third and final law

Finally the third law would say: “Those companies that are capable of producing high quality (Quality) articles with a large volume (Volume) will hardly be able to sell with low prices (Cheap)”

This is the case of the “Produce true Specialist”. It has evolved towards the medium or large size keeping high priority to excel in the operational processes and the high quality of its products. This high efficacy search forces them to manage an ample complexity at the expense of efficiency. They are effective companies but their operating costs are higher than the sector average. They are therefore obliged to seek above-average prices in the market to keep operating.

Based on Mckinsey’s theory of Value Equivalent Line (V.E.L) we would say that they move up the line. To continue to capture value, they need to keep adding relevant attributes to their products and services. In this sense, they are also leading companies since the relevant attributes they incorporate at an early stage will also be demanded in the future to volume leaders and small specialists.

Needless to say that there are exceptions to the rule (For example: there are companies that have disrupted the market with Volume, Price and High Quality). But all these exceptions are in an unstable equilibrium. That is, in the process of market homogenization that fosters open competition all these exceptionalities tend to converge, in sufficient time, in one of the 3 previous laws.

2018-12-11T15:44:25+00:00July 24, 2017|The Blog|0 Comments

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