FD Buyer: How About an Exit Strategy?
Commentary by Warren Thayer
Through a special arrangement, presented here for
discussion is a summary of a current article from Frozen & Dairy Buyer magazine.
Many
supermarket buyers say they are more than happy to take on new items. The problem
is the support they get from manufacturers helping make room on the shelf.
Manufacturers, some buyers say, may give 25 percent off retail to make the
products go away, sometimes raising this to about 50 percent after a couple
of weeks. Some will pick up cases of discontinued items in the retailer’s
warehouse.
But often, the buyers told FD Buyer confidentially, manufacturers
seem oblivious to the problem, or figure the retailer can just send old product
to the reclamation center. With sizeable allowances, manufacturers figure retailers
should take care of the delisted products, but retailers argue that this is
not the purpose of allowances.
Overall, manufacturers, some buyers vent, are
fixated on speed to shelf and getting product there in time for TV and FSIs,
but aren’t delivering a
workable exit strategy so the product can be on shelf in a timely manner. The
real issue, as one buyer put it, “isn’t speed to shelf. It’s
speed to scan.”
For their part, manufacturers said they’re tired
of being the bank for retailers who claim they can’t afford to take
product off their own shelves. Some retailers hit them up for slotting fees
of $35,000 and $50,000 per SKU, or $100 per store, while street money is off
the charts.
As one manufacturer explains it, retailers expect broker teams
to do the in-store work. But with such little support from retailers, the broker
teams are underfunded and sometimes poorly trained. “The simple fact
is, it can take upwards of four weeks to get all the re-sets done in a market,” he
says.
That means consumer ad campaigns sometimes arrive before new products
can get on the shelf. Some manufacturers say that retailers take high margins
and lots of “funny money,” but won’t invest in their own
personnel around these inventory needs within their own stores.
As another manufacturer
put it, Walmart makes less margin than supermarkets and doesn’t have
its hand out for vendor money all the time. He added, “They
use their own store personnel to implement new frozen planograms — IN
A WEEK!”
Discussion Question: What’s a better way for retailers and manufacturers
to work together to get new products onto the shelf and get the old ones
removed in a timely manner?
The most effective exit strategy for manufacturers and retailers is a pre-arrangement on mark down funding and a projected time table. Almost any other approach is unbalanced and unprofitable for either the manufacturer or the retailer.
Without question, in a ‘consumer-centric’ world, the retailer is in the power seat, as they are at the point of decision for the customer that both parties share. The balance of power has, in a number of cases, swung too far to the retailers side of the ledger. In those instances, LISTENING and SHARING IDEAS gets bypassed.
Far too often, too many retailer buyers are over-investing in the negotiation phase in working with manufacturers. Keeping an open table of communications on shared objectives and sound discussion between manufacturers and retailers will deliver a better result for the end-consumer.
The answer is always in the room. Retailers have to be certain that they are keeping an open mind to listening to some of the hugely productive views that manufacturers can deliver on the topic of ‘Exit Plans’.
I am a big Frozen Food and Dairy fan. Even if you shop a super food footprint of 85,000 square feet plus, there isn’t enough shelf space to accommodate old and new products.
The end cap might be a solution to feature new products. I see other end caps in these big stores with discontinued items marked down for immediate sale.
I think there might not be a happy balance between new private label items and new national brand products either in limited frozen and dairy or center store. For example, recently Great A&P introduced an entry level line, Food Basics for meats, dairy, deli, potatoes and veggies, and food pantry basics, while its Home Basics line includes paper products, detergents and cleaning aids. These lines are comparable to Topco Associates ValuKing entry lines. But something had to give since store space is not infinite. Smart Price was eliminated to make room for Food Basics and Home basics.
When manufacturers offer lots of “funny money” it follows that it can be used in funny ways. So why is it offered?
Suppliers need shelf space for new items and that space has to come from space retailers vacate by discontinued items. But each entity has a different objective. To improve upon this situation, a common-interest objective would have to be created.
It will likely never happen, but if the costs to place a new item on the shelf and the cost of eliminating a deleted item were rationalized with half the costs–and half the revealed profits of both entities–were split equally on such projects then perhaps a better methodology could be developed. Think about it!
Testing…testing…testing. When new products come along the key question is how to locate them within the context of existing planograms. Retailers should work with their suppliers to establish a controlled test with at least three approaches. The first should mimic the supplier’s recommendation. Remove the old product and place the new product in a prime location. The second should emphasize the new product, but still leave the old in prominence. The third should place the new product in a neutral position.
Using your BI system, set up the boundaries of the test including which stores, which controls, over what time period. Your suppliers should help you fund this. Then carefully look at the change in sales patterns within the category. Look also at the market basket impact. Share what you learn with the manufacturer. Then decide to roll out with full knowledge that you’ve conducted a valid test. Why should you bet the ranch on your supplier’s strategy? The driver’s seat is yours if you sit in it.
Here’s a radical proposal: Why not work together to develop products consumers really want; cut trade promotion down and use the funds to drive sales with the ultimate consumer?
Let’s see…this would reduce R&D costs; hasten speed to market by replacing line extensions with high-demand new items; increase retail traffic and sell-through; better satisfy consumers; and–oh yes–reduce the retail cost of new items making them even more attractive.
Now…what am I missing? Of course! The current model works so well, why tinker with success?
I have never understood why grocery operates as a special situation, as though space were more limited there than in home, apparel, housewares, or consumer electronics. That’s not to say that other variations of pay to play don’t exist in those areas; it’s just been institutionalized in grocery.
Walmart gained a big advantage by eliminating these shenanigans (recently, perhaps re-eliminating a few that were allowed to creep in). Cooperative, whammy-free strategic planning is the answer and I like what Sam’s is doing in that regard through its Joint Business Planning initiative (which I wrote about in a blog posting covering Linda Hefner’s presentation in March). Sam’s isn’t a traditional grocer and that’s why they might be worth emulating.
Hear, Hear for Ryan’s comments! “Speed to scan” means looking at the whole process from the perspective of adding value to the consumer. What needs to be done (by both sides) to make that happen? What needs to be coordinated to make that happen? The current model does not start with these questions.
Within the finite confines of the cooler there is an immutable physical law–for every new item added, there must be an equal and opposite old item deleted.
Manufacturers know this as well as retailers, so whining about whose responsibility it is to cover the task seems childish to me. Close-out planning must be pursued as an integral part of new item planning.
Every new item introduction has a certain amount of lead time. Trading partners must use that time to sell down the unlucky item being discontinued, even if the discounts are steep. If pursued as an orderly process, this offers distinct economic advantage compared with reclamation.
With 85% of new supermarket items introduced in the US failing in the first year of introduction, new product development is definitely an issue here. However, I do not believe that is the crux of the challenge discussed in this article.
Although consumers have short attention spans in a supermarket, those attention spans are no shorter in fashion apparel or other retail segments. I think we make excuses for product failures in grocery. We need to take emotion out of the equation. The approach should also differ by grocery category. For instance, in the center store (I still call it, “Dry Grocery”, sorry) RTE Cereal needs to turn assortment far more often then canned veggies. The buyers/merchandisers need to reflect that and other category characteristics and establish clear metric to identify items to be eliminated (selling less than a case per month per store, for example).
The most important idea here is the listen to the customer, do behavioral and survey analysis to develop (together based on the geo-demographic location of the store) products that the end users want. Again and again, we are hearing that more product choice/selection does not equal higher engagement, loyalty, or increase shopper satisfaction, it actually does the opposite. As I always quote, “Paradox of Choice.”
This is absurd, old-school thinking. Modern retailers charge NOTHING for product placement, and do not expect their suppliers/manufacturers to purchase shelf space in any way, shape or form. The retailer needs to manage their shelf space and end-of-life issues on their own. This is an integral part of their margin picture, and the burden should not be carried by suppliers. Smart manufacturers are using dead net pricing, and properly positioning their products so that retailers can make large enough margins within a great pricing structure and handle all of this within their store. There are no “allowances” for slotting fees, warehousing fees, etc, in the online world, and brick and mortar retailers need to be taking a lesson from this if they expect to survive in a connected world.
Last time I looked, 20-25% of shelf space in grocery stores is occupied by private label. I often encounter out-of-stocks on national brands (especially if they are on sale) but almost never see Private Label products out of stock. If shelves were set based on real sales everyone would be better off.
The problem here is the retailer, in spite of the best efforts of manufacturers. Every business in the USA seems to be able to deal with risk except the grocery retailer. The grocery retailer wants the manufacturer to pay a slotting fee to put the product in the warehouse and store, promotional fees to display product, sign fees to advertise in store, and advertising fees to advertise the product in the newspaper. The fact is that grocery retailers take no risk, so they keep making bad merchandising and marketing decisions.
Go look at shelf allocation in your local independent IGA or Red and White. They don’t get all the fees the chains do but they do a much better job of managing their shelf space simply because they make their living from sales and not from fees!