FD Buyer: Wholesale Dilemmas
Commentary by Warren Thayer
Through a special arrangement, presented here for
discussion is a summary of a current article from Frozen & Dairy Buyer magazine.
It’s
a tricky road ahead for wholesalers with both risk and opportunity as the
market evolves, according to Paul Weitzel, managing partner, Willard Bishop,
the Barrington, IL-based consultancy. While the trend is still for major chains
to gobble up independents, “I think we could see an easing
of consolidation as people try to get closer to shoppers. If that happens,
more independents will crop up and they will need wholesalers. Everyone is
still looking for scale, but a lot of people have found that bigger didn’t
always mean better,” he
said.
This could mean fewer big retailers, and perhaps even some spin-offs
of small chains down the line. Of course that’s conjecture at this point —
and in this poor economy people are focusing on efficiencies. For wholesalers,
Mr. Weitzel pointed out, fuel prices and SKU rationalization are key issues.
Let’s
take fuel prices first. The move to consolidation has led to fewer DCs serving
larger areas than before. But as the economy improves, you can expect fuel
prices to rise. If fuel hits $4 a gallon again, there will be pressure to keep
borderline DCs open to stay closer to customers.
But SKU rationalization is
the biggest issue here, since independents want more variety so they can differentiate.
Mr. Weitzel said 60 percent of SKUs in a typical DC cover 95 percent of demand.
The trick, then, is to slowly convert the other five percent of demand into
your core assortment.
The more you can cut away unproductive SKUs, the better
you can leverage your assets and build ROI. Everyone knows how Walmart had
to backtrack on its reduction in SKU counts since customers rebelled at loss
of their favorite items. “People
have learned you have to be smart about SKU rationalization,” Mr. Weitzel
said. “You can’t just take 15 percent cuts across the board.”
But
in a flat sales environment, growing profits calls for cutting costs — and
slow inventory is an obvious cost and drain on working capital. Not only that,
fewer SKUs in the warehouse can mean tighter pick zones and better labor efficiencies.
Mr. Weitzel suggested wholesalers measure the cost of carrying specific items
and reflect this in menu pricing. Helping retailers maintain shelf compliance
on planograms can also help weed out slow movers. “None of this is easy,
but it’s important,” he noted. “It’s all a delicate
balance.”
Discussion Questions: What are the risks involved in wholesalers’ own efforts at rationalizing SKUs? Should wholesalers be setting themselves up to serve larger retailers at the possible expense of independents?
Rationalizing SKUs is always an important ongoing challenge but wholesalers survive when their volumes are kept alive.
If the trend to get closer to the shopper intensifies, it is possible that more independent retailers could arise but unless the potential projects out to be a greater economy of scale, wholesalers should work to win new customers with high and steady volume requirements.
The article is based on the supermarket industry but is applicable to others as well. The c-store industry is undergoing the same consolidation as supermarkets and the wholesalers there face the same issues. The major difference is that fewer companies self distribute in the c-store world.
With regard to fuel, most contacts have a fuel charge schedule so as the price of fuel rises so does the delivery fee (although few retailers actually check these and other ancillary charges). This makes it relatively simple to handle.
SKU rationalization is another matter. Most of the larger c-store wholesalers have instituted rules regarding required number of turns or days of inventory that they will carry for products. If a desired item doesn’t fit under those guidelines then the retailer may be asked to drop the item or be willing to pay a larger up charge for it (assuming they are on a cost plus contact). Depending on their contract, retailers are able to locally source selected items to meet local demand and/or get their primary distributor to carry it for them.
The issue for independents depends on where they are located. In most cases, they are found in or near cities. They augment the items they buy from their wholesaler (assuming they even use one) by buying items from a wide variety of sources including Sam’s, Costco, and BJ’s.
Here’s an idea. Instead of cutting inventory on SKUs with low demand, how about thinking about how to stimulate demand for those borderline SKUs (40% of the assortment, according to the article, for Pete’s sake)? I see wholesalers as being in the perfect position to re-imagine grocery retail, taking advantage of exactly those marginal SKUs–in other words, the long tail. Why couldn’t a distributor offer an eCommerce capability to its independents, sort of “special orders on steroids”?
You can’t cut your way to growth, and at RSR we consistently saw over the last year that retailers are looking for ways to drive revenue, more so than continue to cut costs. In that kind of environment, you’d do better to turn the question on its head, and try to figure out what it would take to move a marginal SKU into the mainstream, rather than figuring out which customers would be mad if you cut it.
If wholesalers cut the SKUs independents need for differentiation (or think they do) then the indies will be forced to specialty distributors for them–at a significant upcharge. Why not keep the SKUs and the business with a two-tier pricing system (similar to, but simpler than the “cost-plus” contracts Steven Montgomery mentions)?
Here’s the tricky part of this for distribution, as contrasted with the retailer themselves. For the shopper, there is no optimum number of SKUs, and it is NOT about what they want to buy. I buy a few books per month, mostly from Amazon, primarily because I figure that anyone with 50 million SKUs has the one I want. There is no way I am interested in all those SKUs, but I am ATTRACTED to them. There is a huge difference between attracting shoppers and actually selling to them.
It’s true that 40% of the SKUs only provide 5% of the sales, but that ignores the amount of store traffic ATTRACTED by those 40%, even if they are not selling. The sensed, or apparent SKU count is what attracts shoppers to the store. Of course the distributor is one step removed from this attractive force, and the retailer is unaware of it, unless a shopper complains about a missing item. Neither of them SELL shoppers anything, simply supplying and stocking shelves. Shoppers do all the selling to themselves–that’s what self-service means.
I recommend “The Misguided Bobbing of the Long Tail” for further commentary on this issue.
I agree with Ben Ball’s comments regarding upcharging for products that do not turn at the rate of “core” items. Wholesalers have made it very easy–and unproductive–to keep slow-moving SKUs in their inventories and not charge enough to cover inventory carrying costs and the labor required in picking and distributing the bottom tier items.
Similarly, the frequency of delivering these same slow-movers and allowing retailers to order in “eaches” has placed more margin pressures on wholesalers. I think a new approach is required that rewards retailers for prudent inventory management and passes on costs of poor habits and over-reliance on wholesalers to hold the inventory bag.
This is has always been a balancing act for traditional wholesalers (SKU rationalization), really nothing new here.
However, all the PR and industry momentum from the large chains announcing significant focus/efforts in this area has presented wholesalers with a unique opportunity to:
1) Collaborate with their largest/most influential retailers to negotiate high level assortment decisions–e.g. single vendor/contract agreements for slow moving (high cost) categories like spices, cosmetics, etc.
2) Same as above, focusing on categories/core items where brand consolidation is justified…do you really need 4 brands of cake mix? 2 brands of baby food? 4 brands of paper towels/bath tissue? etc.
3) Move more of the slow moving items to ‘specialty’ status (or even specialty DCs) where higher storage/handling fees can be applied (rather than outright delisting if justified).
After all, this last point (#3) is one of the benefits a traditional wholesaler DOES provide and their retail base DOES need–uniqueness and depth of assortment versus the plain vanilla mega-chains.
Look at UNFI and Tree of Life–they have built successful businesses around what some would say are 100% slow moving items…and these folks are sometimes secondary suppliers to many of the traditional wholesalers’ retail base.
It’s a balancing act that requires traditional wholesalers and their independent retailers to work closely together in order to remain viable entities going forward as the local/neighborhood market is no longer a ‘safe haven’ for indies–just last week Walmart announces plans for rapid deployment of the 30-40,000 sq ft footprints and Tesco announces that it will continue to invest in the Fresh & Easy format.
Yes, it would be key for manufacturers to take the initiative with SKU rat, as it would be for them to be more preemptive about shoppers and retail in general. In order to prove ideas, whether it’s about how to display and merchandise items or whether or not an item should even be there, it’s optimal to go into the retailers office with primary research–but then, even more importantly, to give honest feedback from that research–what to eliminate, what to feature, how to display it, how not to–no matter how painful.
The writing is on the wall though: eventually, manufacturers will have to go direct to the consumer, online, or physical. The more that happens, the more interesting retail’s going to get!
I see little risk in self-rationalization which we’ve been suggesting to our supplier clients for quite some time. If suppliers don’t self-rationalize based on their intimate knowledge of their own business, then retailers will do it for them based on [whatever].
The brand overhaul that P&G recently executed with Pantene is a great example. Self-rationalization was part of the story; however, P&G went on to transform Pantene’s brand architecture from product promise, to packaging, to in-store merchandising.
Also, rationalization is still discussed as a manufacturer/supplier dynamic when in fact retailers have begun to struggle with it internally as they take their own brand building to the next level. Once private brands are up and running, the brand teams are increasingly put in the position of “selling” laggard items that they believe are critical to the overall brand story to productivity-driven merchant teams. The brand teams got buy-in for the launch vision; however, maintaining the integrity of the initial brand vision isn’t a given once sales start rolling in (or not)!