The Breakdown

Explaining Southern California's economy

How Wal-Mart's sourcing, pricing challenges neighborhoods (poll, photos)

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This story is part of a series on the disruptions to local small businesses expected in the community of Altadena when a new Walmart Neighborhood Market opens next year. To read the rest of the series, check out the links at the end of this story.

Wal-Mart is expanding its grocery business in Southern California, opening smaller stores inside buildings that have been vacant for years. As a result, communities previously untouched by Wal-Mart are trying to compete in a pricing war with the nation’s largest retailer.

Part of Wal-Mart’s advantage is size—the retailer has more than 4,000 stores in the U.S., including 154 locations in California that sell groceries. That equates to a lot of buying power with suppliers, who are willing to cut Wal-Mart a discount in exchange for the larger volume of sales, said USC professor Jenny Schuetz.

Farmers are among the suppliers contracting with Wal-Mart. During peak season, Santa Maria farmer Juan Cisneros delivers 1.5 million to 2.7 million strawberries a day to the retailer, his biggest customer. Half of his roughly 600 acres for strawberries are dedicated to growing three varieties for the company.

“We can get more money because we get a long-term commitment and [that] helps me grow my business so I can make money,” Cisneros said.

Related: How Wal-Mart distributes strawberries to 200 stores

Cisneros said he's been selling produce to Wal-Mart directly for two years, allowing him to hire 100 additional workers to deliver more strawberries for the retail giant.

The situation is different in Altadena, where Leticia Vega struggles to keep her small convenience store in business. When her store, Nuevo Poncitlan Meat Market, opened in 1992, it was the only grocery store in the area. But several years ago, a Super King opened across the street and a new Walmart Neighborhood Market opened in March. 

“As much as I would want to lower my price, it’s pretty much impossible,” Vega said.

Her market used to sell vegetables like zucchinis, carrots and potatoes, but last spring, Vega took out the produce shelf because she couldn't compete. 

"Because they purchase bulk, they may be getting it at 25 cents a pound and I may be getting it at $1.40," Vega said. " I wish I had the power to actually compete, but I don't."

In the past, more farmers sold their fruit to middlemen, who took a cut of the profits. (Story continues below poll window.) 

But Wal-Mart is so large it can buy half of a farm's entire crop. The farmers cut out the middleman and share the savings with Wal-Mart, which pays less. 

USC professor Jenny Schuetz said when it comes to pricing, Wal-Mart is super-sized.

"So they have these big warehouses in central locations and then they can send shipments out from there and the network of distribution centers allows them to serve the entire market area pretty efficiently," Schuetz said.

Wal-Mart said in February that it has more than 40 centers to distribute groceries nationwide. 

Strawberries picked one day, in Walmart stores the next day

Workers start at 6 a.m. gathering strawberries in the field at Juan Cisneros' farm, Better Produce. Once loaded, a truck takes the fruit to the farm's cooling facility, where the berries are dropped to a lower temperature. Later, the strawberries are taken to Wal-Mart's distribution center in Riverside. The berries are delivered to Walmart stores in California the next day.

And once the strawberries are inside stores, managers can drop the prices below cost - if they spot competitors selling the berries for less.

Shelly Wallace, who works at the Santa Maria Walmart Neighborhood Market, said every Wednesday she checks the ads of other stores and sends an employee to check shelf prices at those stores.

“We can reset (the price) immediately as soon as we see something that somebody may be competitive with us,” Wallace said. “We can go out within five or ten minutes of looking at the ad and immediately drop the price.”

Bentonville, Arkansas-based Wal-Mart uses  its own team of produce buyers located strategically across the country, like Yolanda Ramirez. 

"We can actually go look at the product. We can taste the product. We have that direct relationship rather than have someone fly to Bentonville, to have the conversation with the buyer," Ramirez said. "I'm literally strategically placed three to four hours away from any growing region in California." 

Ramirez tracks all the berries Wal-Mart buys from farmers. 

She's based in the Valencia office, one of eight global and local buying offices in the U.S.

Ramirez was once a farmer herself. She said dealing directly with chain stores is the only way to make money in the business.

But she said it's hard for small farmers to get their foot in the door.

"So you rely on selling to brokers, wholesalers and you know that when you do that, the product ends up selling to the chains anyway," Ramirez said. "You're just not seeing the end result or the end return."

Ramirez said Wal-Mart pays competitive prices for strawberries, but declined to say exactly what that price may be.  

She said Wal-Mart lets the farmers know in advance how much they need. If the berries don't meet the company's quality standards, the farmers' berries will get rejected. 

“We will give out, ‘Here’s what we’re going to take in terms of volume for the next eight weeks,’ where a typical chain store might look at you and say, ‘Here’s what I want for the next two weeks,’” Ramirez said.

That system works for farmer Santa Maria farmer Juan Cisneros. 

"I know what I'm going to sell and for how much I'm going to sell," Cisneros said. "That's the difference--the long-term comittment."

But sometimes a deal with Wal-Mart can come at a cost, said Charles Fishman, author of  "The Wal-Mart Effect." If Cisneros were to lose Wal-Mart's business, he would have to reduce the acres he farms. 

"It's always a cheery relationship in the beginning, but Wal-Mart's mission is very closely focused," Fishman said. "Whatever product they are delivering, they want it to be reasonable quality and they want it to be cheap."

Altadena market owner Leticia Vega is making adjustments to compete with the new Walmart Neighborhood Market and its lower prices.

“They’re too big. You can’t compete,” Vega said. “They will wipe you out. People will want to get their money’s worth. Why buy a pound of tomatoes at $1.29 or $1.39, when you can get four pounds for $1?”

Bruce Peterson, a produce consultant and former senior vice president of perishables at Wal-Mart, said Vega can't match Wal-Mart's prices. 

"You can't take Wal-Mart head-on with exactly the same thing they do," said Peterson. "If you're going to sell the same zucchini that Wal-Mart sells, it's highly likely they are going to sell it cheaper than you, so sell a different zucchini." 

Vega gave up on selling produce at her small Altadena market last spring. She now plans to focus on expanding the sales of her homemade tacos and burritos.  But, she'll be competing with another big retail chain nearby - Taco Bell. 

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