The last issue this tutorial wants to introduce addresses changes in the grocery industry.

Over the past few years, there has been a high degree of consolidation in the grocery industry. A handful of grocery companies such as Albertsons, Safeway and Krogers have bought out numerous smaller companies in an effort to remake themselves as companies that cover almost the entire company. While there are numerous factors driving this trend, one common argument is that these companies are preparing themselves for increased competition from Wal-Mart.

Wal-Mart, a multibillion dollar company based in Arkansas, is primarily a retail chain that serves rural areas. Because of its highly efficient operation, Wal-Mart is able to offer a very broad variety of goods at low prices. Not only does it sell many of the major brands in many goods, it also develops its own brand (of comparable quality) which it can offer at lower prices. Over the past couple of years, Wal-Mart has been developing special stores which include groceries in them. Success at developing this model and its application on a national scale would create a virtual "one-stop" shopping opportunity for consumers. Even more important, the size and scope of Wal-Mart gives it significant clout in purchasing from suppliers.

One way that Wal-Mart is beginning to transform the grocery sector is by negotiating a fixed price for agricultural goods which tend to fluctuate in price with changes in the growing season. In a traditional grocery store, a consumer would notice that the prices of many food goods would change over the course of a year -- when a commodity is in season, prices tend to fall to coincide with the easy availability of the good, when a commodity is out of season consumers are accustomed to paying more for the good either because of its relative scarcity or because the good must be imported from abroad. By negotiating a fixed price that can be passed along to consumers, Wal-Mart forces the suppliers to get a secure, year-round supply, thus transferring much of the price risk to suppliers. The benefit to suppliers is that they have a contract with a very large customer and do not need to spend as much time cobbling together enough small buyers to sell all their supply. This approach tends to force suppliers to use a contract farming system to ensure their supply. In this approach, a farmer signs a contract with the supplier to Wal-Mart to grow a certain amount of an agricultural commodity at a given price over a given period. Again, this passes on some of the risk from the supplier to the farmer but, at the same time, the farmer does not have to worry about what the market price will be when he or she makes the planting decisions.

Given this approach that Wal-Mart seems to be taking, many of the consolidating grocery companies are doing is trying to adopt similar approaches -- but a company has to be relatively large to make this successful. A potential result of consolidation of the grocery industry and the continued entry of Wal-Mart is that the grocery companies are increasing their market power relative to their suppliers. They are becoming what in economics is called oligopsonists. When there are only a few firms that purchase specific resources or goods from a large number of suppliers, these firms are called oligopsonists. This means that these few firms can negotiate lower prices for supplies than they normally could if there were more competitors in the grocery industry.

In the case of the avocado industry, the emergence of a Wal-Mart with a grocery (or any national grocery company for that matter) has the potential to increase avocado consumption in areas where it is low. Again, national groceries would probably negotiate lower avocado prices with packers but the upside would be that total purchases would increase, thus potentially benefiting producers. Nonetheless, the true beneficiaries would be the packers and other value-added operators. They would be in a position to try to adjust their products to specifically address the needs of their national customers and profit from larger contracts. In addition, for a company like Mission Produce with subsidiaries in other countries, they would be in a position to guarantee a year-round supply of avocados at a fixed price that smaller packers might not be able to offer. This reinforces many of the value-added issues already addressed as well as the trade issues.

This concludes the review of some critical issues facing the avocado industry.

The last section of the tutorial quickly summarizes what has been covered and provides some useful links for further investigation into some of topics covered.