Do you believe Sarah did enough preparation or research for this deal? Is there any additional information she could have done that would have greatly improved her chance at a successful outcome? If so, what?

Sarah Talley and Frey Farms Produce: Negotiating with Wal-Mart (A) Frey Farms Produce (Frey Farms), a family owned and operated supplier of fresh fruits and vegetables headquartered in Keenes, Illinois, began providing products to local and regional customers in the early 1980s, selling primarily through independent grocers in rural Illinois. The company became known for its pumpkins, watermelons, cantaloupes, and fall ornamental produce. Sarah (Frey) Talley (who would later become CEO of Frey Farms Produce) began selling pumpkins at the age of eight. 1 Brothers John, Leonard, Harley, and Ted later joined the company. In 2005, the Evansville Courier observed the success of Frey Farms had made "28-year-old Sarah Frey-Talley one of the youngest high-volume pumpkin producers in the United States." 2 Background Frey Farms had promoted its "Homegrown Freshness" to local and regional customers early on, and continued to emphasize its commitment to providing fresh produce products as it began to serve retail and independent customers in the United States. 3 The company had begun to reach "customers by way of direct store delivery routes and shipments to major distribution centers, 4 shipping products from "strategic...locations in Illinois, Indiana, Missouri, Georgia, Florida and throughout the Midwest." 5 Frey Farms' rapid growth was further accelerated in 1997 when Sarah Talley, then 19, negotiated the supply of Frey Farms' pumpkins, melons, and fall ornamental produce to retailers such as WalMart, which were just entering the produce business at the time. Other leading grocery stores and independents were soon being supplied by Frey Farms. By 2005, the Evansville Courier had taken note of Frey Farms' rapid growth and success: At the company's sprawling operation north of Poseyville, Ind., millions of cantaloupes and watermelons are picked, loaded into cardboard containers and shipped to grocery distribution centers.... The Freys manage their massive operation from offices in Indiana and Illinois. Workers sit in front of computer banks, directing shipments of produce to distribution centers across the United States. Melons picked out of the fields in Southern Indiana are loaded onto semis and are on their way in a matter of hours. 6 Planting the Seed with Wal-Mart Wal-Mart's Entry into the Produce Market Sarah Talley recalled that Wal-Mart was just beginning, in 1997, to expand its hometown Division One stores into "Supercenters" that, consistent with the retailer's philosophy of servicing all customers' needs in one store, would offer groceries and fresh produce. 7 Its entry into the produce and groceries markets was a turning point for Wal-Mart, which was already servicing millions of customers annually with non-consumable retail lines. Negotiating to Supply Pumpkins to Wal-Mart At the time she approached a local district manager at Wal-Mart to discuss selling pumpkins to their local division one stores, Sarah Talley was selling pumpkins and produce on a wholesale delivery route. "I stopped in at a local Wal-Mart lawn and garden center," she recalled, "and spoke to the district manager and offered to sell pumpkins. It all started there on a small scale. I started to deliver pumpkins to local division one stores." As Wal-Mart was building more distribution centers to support the conversion of its Division One Stores into Supercenters, Sarah Talley contacted the regional produce buyer at the Olney, Illinois distribution center. A major focus of these buyers was to offer Wal-Mart customers locally grown, fresh produce at fair market prices, which was precisely what Frey was already doing. Sarah Talley recognized that a number of negotiating challenges lay ahead. To achieve logistical efficiency and accommodate Wal-Mart's commitment to "Every Day Low Prices," Frey Farms would need to source produce from local or regional growers, and negotiate with these growers to satisfy Wal-Mart's product needs. Frey Farms was also perhaps less strategically positioned than its competitors in terms of product differentiation and available resources. "As a young company, what Frey had to offer really wasn't a whole lot of different than our competitors," reflected Sarah Talley. "In fact, many of Frey's competitors [-including agribusiness powerhouse such as Del Monte-] had personal jets or fancy helicopters to show produce buyers their fields and crops, and high tech harvest equipment that Frey didn't have." Sarah further recalled the uncertainty she faced as a young CEO with respect to how the company and its leadership would be viewed by Wal-Mart. She smiled. "I was 19 when we began serious business with Wal-Mart... For Wal-Mart to award a lofty chunk of business to a company where the president was a 19-year-old may have seemed ludicrous to some." 8 Sarah Talley would have to consider carefully how to approach these challenges if she was to successfully negotiate with Wal-Mart over time. Negotiating Fourth of July Watermelon Prices "The elves at Christmas aren't as busy as we are around the Fourth of July.... Today, we've got trucks headed out to New Jersey, New York, Pennsylvania, and Ohio and everywhere in between." 9 Watermelon and the Fourth of July Independence Day Market The Fourth of July, Independence Day in the United States, is one of the biggest holidays for watermelon sales in the United States. As a supplier of watermelon to Wal-Mart, Frey Farms carefully forecasts each year the number of watermelons it needed to plant to meet Wal-Mart's projected buying volume. For the retail giant, having an abundant supply of watermelons prominently on display - at competition-beating lower prices-is a major Fourth of July holiday priority. The Market Situation in 2005 But in 2005 growers in all parts of the key watermelon producing states faced extremely harsh growing conditions. Conditions had been continuously poor in Georgia where Frey Farms grew its first crops of watermelons, and even worse in Florida where the company grew its primary crop. The situation was further aggravated by pests and disease, which struck watermelon crops across the country. With the industry facing a shortage of watermelons, prices increased dramatically throughout the United States. Watermelon shortage during 2005 4th of July sale Watermelon Seasonal Variability Watermelon exhibited distinct seasonal variability in terms both of consumption and growing season. The United States Department of Agriculture characterized the seasonal variability of watermelon: Watermelon consumption is seasonal, rising with the onset of warm weather, peaking around July 4 th, and declining during the summer and fall. Watermelons are a traditional 4 th of July special among grocery stores.... Florida, California, Texas, and Georgia, respectively, are the leading watermelon-producing states, accounting for two-thirds of U.S. output.... U.S. watermelon production is highly seasonal, peaking from May through August and declining through December. The season begins with production from Florida, followed by output from Arizona, Texas, California, and the southeastern and south-central states. Florida is the only domestic source of watermelons from December through April, and then only in small quantities. Although Florida growers harvest watermelons during virtually every month, the peak harvest occurs during May, June, and early July.... Watermelons prefer a long, warm growing season and are, therefore, produced primarily in the southern half of the United States... The major production perils affecting watermelons include excessive rain, excessive heat, and, in non-irrigated areas, drought. Excess rain during any stage of growth can reduce watermelon yields. Excessive heat and direct sunlight increase the likelihood of yield losses due to sunscald or sunburn, which causes yellowing of the rind. Drought may reduce watermelon yields by diminishing plant growth, limiting the development and size of the melons, and can exacerbate losses due to sunscald. Bacterial fruit blotch, a relatively new watermelon disease in the United States, is also a major concern. It is thought to be a seed borne disease, and its symptoms include brownish scabs and eventual souring of the flesh. Yield losses can be substantial in infected fields.... Considerable variability exists in watermelon prices within the year, due mostly to seasonal changes in the volume of production. The prices that growers receive early in the season, when Florida is the principal source of domestic watermelons, may reach 10-15 cents a pound. Prices usually reach their lowest point, at around 45 cents a pound, during July and August, when watermelons are available from a wide number of sources.... Watermelon prices follow a very distinct seasonal pattern during the primary U.S. shipping season, declining during May and June as shipment volume increases, remaining relatively flat through August, and strengthening during September when supplies dwindle.... 10 Negotiating the Price of Fourth of July Watermelons Frey Farms' vice president of sales had been in advance contract negotiations with Wal-Mart for supplying watermelons for the June 1 through July 4, 2005 contract period. But each time he resubmitted the contract for the price of the company's watermelons to reflect the increase in market price, his Wal-Mart counterpart bluntly rejected it as: "too high." Further price negotiations failed to close the gap. With no agreement on a new Jun-July contract, Wal-Mart would face paying market prices during the big Fourth of July period. The VP related the situation to Sarah Talley. Wal-Mart's regional buyer at the time had dealt in watermelon sales before, but was new to the Wal-Mart organization. Sarah Talley recalled the discussion of the price of "Frey's watermelons and the acceptable price points to both parties, which were very different because watermelon prices had been going up and Wal-Mart needed the prices to go down." There was still a wide chasm in price points between Frey Farms and the Wal-Mart buyer. Sarah Talley knew that negotiating this contract with Wal-Mart was important to her business, but she also knew that she would only be able to supply a fraction of the watermelons demanded from Frey's sharply reduced crop in Georgia and at a price still deemed too high by the regional buyer. The only alternative was to procure the melons needed to satisfy Wal-Mart's volume requirements from the western shipping region, for example, from Arizona. But procuring from the western market to supply regional markets for the southern and eastern United States would incur significantly increased transportation costs. How, Sarah Talley wondered, was she to put in place--in advance of the Fourth of July holiday--a new contract that reflected the reality of the market conditions and price needs of Wal-Mart's customers? She knew that not only would watermelon sales be at their highest during the Fourth of July, but demand would be elevated during the summer months that followed and supplying the produce would be unusually difficult and expensive this year. How could she meet the needs of her vitally important customer on a profitable basis? Facing both a limited market supply of and increasing market prices for watermelons, Sarah Talley contemplated how to approach Wal-Mart's regional buyer, who had not been to the field to see the situation first hand. She decided to approach negotiations with the buyer in a "straightforward and respectful way," explaining the situation in the field, the adverse weather conditions and abnormally high pest and disease exposure that has beset the watermelon industry. But despite her explanation, the regional buyer insisted on an unacceptably low price at which a contract for watermelons had to be struck. In support of his position, the buyer asserted that conditions could change dramatically in June in advance of the July 4th holiday. Now what? Growing the Relationship Co-Management While negotiating the price of watermelons was but one of an endless series of such challenges, Sarah faced a much more fundamental negotiation challenge. Co-management was a concept developed by Wal-Mart in the late 1990s to facilitate the buying process by enabling key Wal-Mart suppliers to act as "co-buyers," that is, to manage their own inventory and co-manage products sourced from other suppliers. She explained: Several years ago Wal-Mart pioneers came up with a wonderful concept of what we now call "co-management." This is where suppliers jointly manage the business, sharing the responsibility of meeting goals, meeting margin, sales, inventory levels, etc. For instance, each commodity has a buyer. There are several co-managed suppliers that work directly with the commodity buyer putting together sales plans and continuously coming up with new ways to effectively manage the business. At times this can be very challenging as produce co-managers deal with highly perishable products. Maintaining inventories is a challenge in itself, let alone being responsible for margins, sell through, sales plans, etc. Co-management was viewed by Wal-Mart as a way of establishing relationships with particular suppliers with which it wanted to do a great deal of business. Recognizing that co-management represented an important opportunity to grow her business with Wal-Mart, Sarah Talley wanted to move her company in the direction of co-management. But the process wasn't as easy as she thought. "I don't recall ever having negotiations that didn't go well with Wal-mart," she observed. It's probably rare, but we have always been able to work through things. Although I do remember one challenge.... It was my desire that Frey would grow alongside Wal-Mart and become a co-managed supplier partner. After voicing our interest to become a co-managed supplier partner, we received resistance from a certain Wal-Mart category manager who said "co-management is for our mega suppliers; it is an investment in time, people, and money." The Situation in the Field Not only did Frey Farms fail in its bid to become a co-managed supplier, but it found itself a third party supplier no longer negotiating directly with Wal-Mart but instead working under much larger co-managed Wal-Mart mega suppliers of the products Frey had previously sold directly to Wal-Mart. "At the time," Sarah Talley recalled, Frey was selling four different commodities to Wal-Mart, and for those four different commodities, at any given time, we could have up to six different companies co-managing our products. We had a run of three to four years selling our product to Wal-Mart and we were working directly with our Wal-Mart regional buyers. So we were hesitant to sell our products to the mega co-managed suppliers because we had been going direct for several years. This is because co-managed suppliers incur extra costs such as inventory management, staff, and management systems that we didn't have. The mega co-managed suppliers at the time would pass these overhead costs to Wal-Mart by charging a higher price for the same product. The additional overhead costs charged by the mega supplier also ate into Frey's profit, as mega co-managed suppliers would offer Frey Farms less money for the same product, which they would turn around and sell to Wal-Mart for the higher price. Frey Farms had no way of knowing what additional fees were being charged on top of the price by mega co-managed suppliers to Wal-Mart. The mega co-managed suppliers offered Frey little choice on price, but the supplier's price ate into Frey's profit; Frey would get less selling through a comanaged mega supplier than it would if it sold directly to Wal-Mart, and Wal-Mart, for its part, would end up paying a higher price for the same product. We were dealing with suppliers that really didn't understand the uniqueness of our business. Frey was a supplier producing fruits and vegetables raised in the Midwest. The suppliers co-managing Frey were from the East Coast or the West Coast. When a company the size of Wal-Mart enables certain suppliers to have influence over the rest of the supplier community, it's possible to inadvertently create monsters. Many of the initial co-managed suppliers took advantage of fact that they had this influence over smaller suppliers. Sarah reviewed the situation as it had unhappily evolved. From what had appeared to be a xcellent direct supplier relationship with Wal-Mart, Frey Farms Produce had received a negativ esponse to its proposal to become a co-managed supplier. Instead of successful negotiations nove "up", and despite her vigorous objections, Frey had moved "down" in the hierarchy uppliers. What negotiating approach offered the greatest odds of improving this situation