Retailers are taking a hit on certain commodities as a result of high fuel costs.
Margins on fruits and vegetables are being eroded by fuel surcharges tacked onto produce shipped by truck, rail and air.
For several reasons, retailers have been reluctant to pass on those charges to customers, but that could change.
"I think for months we thought, or hoped, it was temporary and that we'd just ride out the storm," one retailer said last week. "But with what's going on in the world, right now in the Middle East, I don't see fuel [prices] ever returning to year-ago levels."
The hope that fuel costs would come down was one factor delaying retail hikes. Yet some commodities are so price sensitive, retailers believe the market simply will not tolerate an increase.
"There's no way, for instance, I'm putting the price of bananas above 59 cents, no matter what," said Dean Balzum, produce director at Kowalski's Markets, St. Paul, Minn.
Already, Balzum said, his margin on bananas has been reduced by almost 5%, as he holds the retail price steady.
"Sure, we have a contract that would ordinarily keep the price I pay for bananas the same for a year, but there are clauses in there that make exceptions. One refers to an act of God, such as damaging storms, and another to fuel costs. We've had two fuel-related increases this year."
Balzum, like others, is looking at other categories to see where he can pass on fuel surcharges, and, even more important, where he can cut his operating costs.
"We're looking at lighting, and maybe cutting down the number of [produce] deliveries a week, things like that," Balzum said.
Indeed, sources told SN they're creating new efficiencies wherever they can as fuel costs mount and an ongoing shortage of truck drivers worsens.
The shortage and new federal legislation that limits drivers' time on the road also are adding to the cost of transporting goods. Wholesalers are consolidating routes, mixing loads where it makes sense and sometimes dealing with bigger produce houses to cut down on multiple and out-of-the-way pickups.
Growers and shippers, also have found ways to cut freight costs, ultimately reducing their customers' costs. Duda Farm Fresh Foods, for instance, has contracted to source crops closer to customers.
"With the economic pressure of high transportation costs and the competitive pressure to bring fresher product to market, we have been making supply agreements that enable Duda to source crops regionally closer to our customers," said Rick Alcocer, vice president of sales for the Oviedo, Fla.-based company. "This type of solution allows us to offer our customers a delivered product that has the benefits of both less freight cost and a fresher product as well."
In some cases, companies have expanded their logistics departments, implemented new technologies and initiated collaborations with other companies.
Meanwhile, retailers are trying to determine what to do that's best for them and their shoppers. In markets served by lots of supermarkets, grocers fear price hikes could drive customers to their competitors' stores.
McCaffrey's, a three-unit, upscale independent based in Langhorne, Pa., near Philadelphia, has been particularly reluctant to pass on fuel surcharges to customers. In that market, most retailers are still absorbing fuel costs in the produce arena, a local industry observer said.
McCaffrey's, like Kowalski's, is looking to save money in other areas to offset fuel surcharges.
"We have not passed on the charges to customers, but we're tightening screws wherever we can, everywhere but service," said Tony Mirack, McCaffrey's produce buyer and merchandiser. "We will not cut back on labor hours. Service is what we're about."
McCaffrey's and other chains are focused on creating more efficiencies.
"We're having more management meetings to look at every aspect of the department. We want to see where we can be creative in cutting waste," Mirack said.
"From trash pickup to water usage, tightening inventory and cutting number of deliveries," he said. "Right now, we're getting fresh produce delivered seven days a week. We could consolidate two days' worth into one day's delivery."
Penn Traffic, which owns and operates 112 corporate stores under three banners and supplies 128 franchisees and independents, is working on increasing efficiency, said Marc Jampole, spokesman for the Syracuse, N.Y.-based chain.
"We just hired a professional with lots of experience in the industry who will devote his time to analyzing our business processes to make them more efficient," Jampole said.
Naturally, fuel surcharges vary depending on locations and how far the load was hauled.
Chris Hummer, produce director at Day's Market, Heber, Utah, said the added cost has not been significant enough for him to raise retail prices.
His supply cooperative, Associated Grocers of Salt Lake City, has taken cost-saving measures itself.
"Where possible, we're mixing loads more than ever before. Combining loads of different commodities," said Bill Price, Associated's director of perishables. "We're also redoing our routing and condensing loads. For instance, instead of sending out two trailers, we'll send out a trailer and a pup where we can. We're also putting all dry goods on a truck by themselves so we don't have to use refrigeration on that truck."
Partial loads are a thing of the past, he said.
"We're spending more time at the shed [to fill up the truck]. Two years ago, we'd take what they had ready, maybe 18 pallets of broccoli," Price explained. "Now, we'll wait or fill up the rest of the space with cauliflower."
Such measures reduce mileage, but there are other costs to contend with.
"We're getting more competitive with outbound drivers' wages. We have to when other companies are awarding sign-on bonuses. The driver shortage isn't getting any better and that'll eventually add to the cost of goods," Price said.
While retailers told SN they have no complaints about fuel surcharges, they do have definite ideas about how they want to see the charges indicated on their invoices.
One retailer said he's not happy with a lump sum surcharge being added at the bottom of an invoice that covers several commodities.
"That makes it difficult for me to know how much to pass on for each product," he said. In fact, he has asked his vendors to add increases by case, and they are doing so.
"I have no issue with the charges," he said. "We all go to the pump. We know it's costing, but the hard part is knowing how to pass it on."
Mirack at McCaffrey's said he prefers just a lump sum fuel surcharge, which he can then divide by the number of cases, no matter the commodity.
"That gives me an average per case and then I could decide which products it'll affect," Mirack said. "You can't just run out and raise retail prices. With produce, you have to see what the market will bear."
No matter how shipments are transported, fuel increases are top of mind for the industry.
Some trucks, such as those with cold plates that don't have to be cooled with diesel fuel en route, can present an advantage, and there are decided fuel savings, too, in rail freight.
Johnson Refrigerated Truck Bodies, Rice Lake, Wis., feature cold plates that are charged overnight by electricity and then placed in the truck body so refrigeration doesn't have to be generated by diesel fuel.
But that company also is seeing its customers taking very proactive measures to save fuel. They are, for instance, being diligent about retiring older equipment in order to run their trucks more efficiently, said Greg LaFrance, director of sales/marketing, Johnson Refrigerated Truck Bodies.
Meanwhile, Union Pacific Corp., Omaha, Neb., the largest railroad company in North America, is gearing up to haul more refrigerated food, officials said. While only a small percentage of Union Pacific's revenue comes from transporting fresh food, the company expects to get a larger chunk of that business.
"Naturally, the fresh produce we transport is the hardy type like potatoes and carrots," said John Philp, Union Pacific's assistant vice president, food/refrigerated products. "Potatoes are big for us. We haul potatoes directly to Kroger in Cincinnati. Other shipments go to rebagging facilities in various parts of the country. There are significant savings because we're more fuel efficient."
Emphasizing that Union Pacific will be ready when demand picks up, Philp said the company has purchased 1,500 64-foot refrigerated cars in the last year, the first new refrigerated cars the company has bought in more than 20 years.