Value the Middle
January 1, 2007
Value the Middle
By Renee M. Covino
The distribution channel is a critical, but often silent, link between manufacturers and retailers; now, the channel speaks out for better partnerships and a redefinition of its value proposition.
They are intentionally in the middle. The middle, in fact, defines their very existence; however, sometimes the middle can get squeezed. Distributors in the candy and snack arena are facing tighter margins and SKU proliferation; some are being pushed out of existence. But those that are surviving have a message to retailers and manufacturers: they are in it for the long haul, and they have much-needed ideas on how the entire supply chain process can be improved for the future. They are asking for a redefinition of their value proposition and enhanced partnerships, for starters. They are positive about the future, and they want everyone to win. Is everyone listening to them?
Perhaps silent for too long, distributors are projecting a stronger voice to the industry. Offering their views exclusively to Confectioner magazine on several key topics, including ideas especially for the candy and snack arena, is a trio of distributors, collectively with nearly one hundred years of experience in the distribution industry.
Howard Stroud, with 36 years total in convenience distribution (Sav-A-Stop, Southland Corporation, McLane and Grocery Supply), his most recent 13 years have been with Grocery Supply Company as its director of merchandising/purchasing.
Founded in 1947, Grocery Supply Company (GSC) is a wholesale distributor for the convenience store industry. It expanded to its current location in Sulphur Springs, Texas, in 1965. It serves over a quarter of the country including the following states: Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Oklahoma, Mississippi, Missouri, New Mexico, Tennessee and Texas. GSC remains a family owned and operated business, adhering to a simple slogan: “Big enough for the job, small enough to care.” It defines its dedication to customer service to mean it will work with customers, one-on-one to meet specific needs.
Mark Davenport, active in the industry for the last 22 years, is president of J.T. Davenport and Sons, Inc., of Sanford, N.C. He has/is currently serving on several industry boards including the American Wholesale Marketers Association and the National Association of Convenience Stores.
Established in 1917, J.T. Davenport and Sons, Inc. is family owned and operated as a single warehouse facility. It services the Southeast market area, including North Carolina, South Carolina, Georgia, Maryland, Ohio, Kentucky, West Virginia, and Virginia. The company services about 2,000 convenience stores with a full line of convenience store products, as well as marketing, technology and field support.
Alan Abraham, a graduate of Michigan State University, joined his family’s business in 1970. Today he is president and CEO of that company, S. Abraham & Sons, Inc.
Based in Grand Rapids, Mich., S. Abraham & Sons is celebrating its 80th anniversary this year. The company distributes convenience products to retailers in seven Midwestern states — Michigan, Indiana, Ohio, Illinois, Wisconsin, Minnesota and Kentucky — from distribution centers in Grand Rapids, Milwaukee and Indianapolis.
Here is what the three discussion participants had to say about several key industry topics.
On the primary challenges they face this year:
Davenport: “No doubt, it’s the increasingly competitive environment and margin pressures.”
Abraham: “I agree, margin pressure is the key challenge. We can manage through expenses, but the margins are falling faster than the expenses can be reduced. We need to redefine the value proposition of our relationship with our customers.”
On the key ways in which retailers can better partner with them moving forward:
Davenport: “Our customers need to work with us more on planogramming stores based on good data and not so much on vendors buying shelf space.”
Abraham: “We’d also like to see them value the grocery wholesaler for what we bring to the relationship. Once the two of us come to an understanding, we can work together to build the relationship, grow our mutual business, and take costs out of the supply chain.”
Davenport: “Yes, and we also need their help in eliminating duplicate items, providing better SKU management and higher ROI per SKU. In a perfect world, I would like to see retailers stop the selling of shelf space and utilize more information-based decision-making generating from consumer demand.”
On supplier modifications that would help achieve a more reasonable profit and ROA:
Davenport: “We provide manufacturers with a lot of important values and benefits that we are stressing this year, including speed-to-shelf, information resources, and a most efficient distribution source. In return, I would love to see more clearly defined exit strategies for new items, as well as more realistic growth-type programs.”
On balancing core confectionery/snack items vs. the major influx of new products in the candy/snack arena:
Abraham: “SKU proliferation is a problem. Most stores are set to a planogram, which can only be updated once or twice a year. Counter space is limited for the new introductions. Every new standard bar seems to have a corresponding king-size bar hit the market very quickly — and they all do not warrant space on the planogram. Likewise, the limited editions introductions are out of control. The concept was creative and increased sales early on.”
Stroud: “The influx of new items is balanced with the stability of the core items through promotion and placement. Manufacturers blitz both retailers and wholesalers with various placement programs for new items. We offer our customers a new item rack for temporary placement of new confection and snack items. In addition, many retailers have various secondary locations throughout their stores for feature placement.
“We also have quarterly and weekly promotional publications touting the availability of these new items. The majority of the retailers have 8' to 12' of in-line or permanent counter placement for core items with annual or semi-annual resets to move successful new items to the core space. Speed-to-shelf is certainly an issue for new items for the manufactures, and exit strategies for slow sellers are equally an issue for the retailers.”
Davenport: “All category core items are managed as such; they are stable, predictable items that are managed with an emphasis on service level, turns, and product lifecycle analysis. New products are wholly different in nature; here, the product gets a lot more scrutiny on performance including reorders and points of distribution to our customer base. We monitor for trends (monthly) to make sure the sales are sustainable and not just a result of force outs. If reorders are not present within 90 days, the item gets addressed as to its viability going forward. An exit strategy from the vendor on any new item is required, i.e. a guarantee with a time frame with some compensation to cover cost of failures. Confectionery manufactures who are not willing to stand behind their products shouldn’t expect the wholesaler to do so.”
On their recommendations for retailers to increase candy sales and profits in a generally under-optimized set:
Davenport: “First off, they need to make sure core items are in planograms and in stock. Then, utilize off-shelf displays to maximize points of interruption. Finally, they should take advantage of first-ship on new items, and include a ‘fast track’ program that pre-authorizes the wholesaler to ship new, hot items as soon as possible.”
Stroud: “I agree. They need to better utilize secondary placement and displays. I would also add to that — they should take advantage of multiple pricing strategies, for example, offering two king size bars for $2. I’d also like to see our retailers better display and promote holiday candy; this is very under-utilized.”
On the changes they have seen take place in the industry and what they think of its future:
Davenport: “Growing up in the family business practically all of my life has allowed me to experience the many good, and sometimes, not so good, things occurring in our industry. It is still a very social- and people-oriented business with many perks and opportunities that many other industries do not enjoy. On the other hand, I see less and less loyalty from both sides of the channel, being driven by the consolidations and pressures on everyone’s bottom line.”
Stroud: “We have seen many changes take place over the years, as well: the consolidation of retailers, manufacturers and brokers; the declining of margins for all parties; the loss of traditional sales in groceries, health and beauty care, and general merchandise, and the increasing dependence on tobacco sales with declining margins in that category, especially; the increase in foodservice and snack sales, and the very creative store designs away from the traditional box stores.”
Davenport: “Speaking of consolidation, I believe continued consolidation at the wholesale level is inevitable, and will be beneficial for the wholesalers who survive and grow. They will become more cost-efficient for the entire system and help stabilize the industry from unacceptable profit margins.”
Abraham: “Two changes that have affected our business directly over the years have been the emergence of the convenience store industry and technology. Traditionally, we have always had the independent retailers, the grocery stores and drug stores. The convenience store, however, has brought more structure, organization and stability to this industry. Technology has been the catalyst for change. Keeping up with technology and making smooth changes has been the challenge.”
Davenport: “Technology has, and will continue to have, a tremendous impact on our operations and services provided. Information to and from the customer is critical; accurate and efficient distribution operations are essential, and we need support and flexibility in reports — back office support, field/store level support — are all very important with many IT solutions that get to the opportunities. Identifying opportunities at each store level by collecting and managing data, identifying distribution gaps, as well as potential erosion in account sales — is imperative to this business.”
Davenport: “Overall, I think our industry is extremely resilient; while the number of distributors may, in fact, decrease — our business practices and continued evolvement will make us stronger and a better group of suppliers.”
Stroud: “I, too, see the industry having a very good future. It will pivot off the retailers — the larger retailers will continue to expand and the independents will do well to adjust to the changing consumer demographics. Those who do not adapt may be forced out of the market.”
AWMA Study Backs Distributors
Despite the fact that they bring tremendous value to the convenience-store channel, distributors have been getting the shaft.
“They continue to experience declining and disappointing profits, returns on investments and assets, and yet they face the need to constantly do more to attract and hold their customers,” reports a study by the American Wholesale Marketers Association (AWMA). Released late last year, the study is titled, “The Distributor Value Equation.”
It’s so bad that “distributors would get better returns by selling their businesses and putting all their money in T-bills,” states Kit Dietz, owner of Dietz Consulting LLC, which conducted the study on behalf of the AWMA.
But this was not a study with a conclusion of gloom and doom — quite the contrary. The idea was to turn things around for distributors by making the industry more aware of their plight, reminding the industry of their value, and most importantly, offering ideas for better partnerships.
“One of the main reasons we wanted to do this study was we believe that distributors bring tremendous value to the channels they’re doing business in, especially the c-store channel, but that value is not always recognized by manufacturers or their retail customers,” begins Scott Ramminger, president and CEO of the AWMA.
As an example of that value, he mentions that, “we’ve seen a lot of candy manufacturers cutting back a number of their field sales people and assigning out some of the legwork on new product introductions to the distributors, who are in the stores all the time. This is just one small part of their value, but when you add everything up the way we did in the study, it’s always surprising, and you realize what the industry takes for granted.”
Ramminger also summarizes that “what distributors do on a daily basis sounds simple, but it’s pretty involved, and they operate on such slender profit margins. So we were trying to bring these issues out to the front and get the idea out that all people in the supply chain — manufacturers, distributors and retailers — should be working together as partners to try and find the most efficient way of getting products to the market.”
“Distributors, retailers and manufacturers need to be engaged in these key issues,” agrees Dietz. “Manufacturers need to step up to the plate and/or distributors need to take pricing action on their own and mark things up; what I’m recommending is establishing fixed markups.”
“One of the things I’d like to put out to candy manufacturers, particularly — we’ve all seen how some of the candy sales have moved at club stores, the bigger packs, etc., but certainly the lifeblood of the industry is new products, and where they get that trial is in the single bars, the single pack purchases — and that’s the forte of the distribution community,” maintains Ramminger.
In the case of SKU proliferation, manufacturers in the study agree this is a problem; major brand executives reported that they are aggressively assessing their product mix and are reducing SKUs significantly. Nevertheless, the study suggested that SKU rationalization on the part of manufacturers would help distributors improve efficiency and reduce their costs.
Snack and candy players should stay tuned — Ramminger foresees a follow-up study in AWMA’s near future — focusing on the snack and candy categories.
Distributors Face Profitability Problems
In AWMA’s “Distributor Value Equation” it was highlighted that “the most serious problem facing distributors comes down to dollars and cents — to profit.” The study cited The 2006 Hershey Industry Performance Analysis (HIPA), conducted by The Profit Planning Group, which shows that the financial results of convenience store distributors rank 75th in a list of 75 industries examined. “Thus, it is not surprising that in this study, the ability to turn a reasonable profit — and all that this represents — was ranked as the most important challenge by virtually every company that participated,” reported the AWMA.
Sources: The Distributor Value Equation, 2006 HIPA (Hershey Industry Performance Analysis), The Profit Planning Group, Dietz Consulting LLC