Delivering the Goods

Winning Over CPG Customers

 


According to a new study commissioned by MEI Computer Technology Group Inc., there is an increased emphasis on improving trade promotion effectiveness, as consumer packaged goods (CPG) manufacturers look to bolster the value and return on their trade spend, and capture wallet share from consumers.

 

Despite the current climate, nearly half of all respondents (42%) said they will spend more on trade promotions in 2010, while only 8% said they would spend less.

This represents a clear shift from last year, as nearly the same number of CPG firms (38%) said they were planning to reduce their spending due to the unfavorable economy in 2009.

Retailers are also putting pressure on CPG firms, as they continue to take every possible deduction in order to maintain their profits. In fact, respondents were tied on what posed the biggest business challenge when dealing with retailers.

Pressure to buy down price and retail execution/remaining in compliance to promotions were cited by nearly a third (31%) respectively, followed by pressure from store brands and SKU rationalization.

To make the most of their trade investments and to better meet the needs of consumers and retailers alike, one-third of CPG companies said they would use packaged trade promotion management (TPM) software this year in order to improve business performance.

“Trade Promotion software helps improve control across the organization by providing a centralized system for planning, executing, reconciling and analyzing trade promotions,” said Lorne Schwartz, CEO of MEI. “Today, the national brands are struggling to compete against store brands which often results in CPG firms having to either buy down price or risk being rationalized out of the category altogether. By leveraging TPM software, manufacturers can manage their business the way they want and make well-versed, critical decisions confidently, which results in improved profitability.”

With all of the competition convenience store retailers are facing these days, they can take some comfort that they are not going at it alone. Wholesalers and suppliers have a vested interest in their success. Quite simply, when retailers succeed, the folks that produce and supply their products also succeed.

Of the three primary modes of store distribution—wholesalers, direct store delivery (DSD) and self-distribution—convenience store retailers interviewed said they were satisfied with their wholesaler partners, but expressed some concern about the unfair competitive advantage other retail channels are getting from select DSD suppliers.

The primary areas of concern expressed by marketers were price differentials on core convenience items and pre-priced products, both of which hurt margins, profitability and seemed to benefit supermarkets and drug stores.

For example, convenience stores in major markets throughout the country pay sometimes 25% more or higher on items like bottled water and other packaged beverages even when the products are coming directly off the same truck at neighboring competitive stores.

“The price disparity creates a steep unfair advantage for our competitors, yet the issue doesn’t seem to get nearly the attention it deserves,” said the president and CEO of a mid-sized Midwestern convenience store chain who declined to be identified because he is fiercely involved in trying to change the current pricing structure.

“In many cases, supermarkets and drug stores are paying much less for a case of water than we are despite coming off the same truck,” the executive said. “As an industry, I don’t understand how we stand for this. There needs to be a backlash to eliminate the advantage our competitors are getting. As an industry, we have the buying power to change the economics of the situation, but we don’t.”

Operating Leaner and Smarter
Ironically, the same competition that keeps so many retailers awake at night is also partially responsible for the strong market share many storeowners currently own. That’s because the competition has made the industry smarter and more dependent on emerging technology to quickly react to market demands.

With less than a dozen stores, Jim Callahan, director of marketing for Geo H. Green Oil Inc. in Fairburn, Ga., said he is a realist when it comes to dealing with his wholesaler, Eby-Brown.

For nearly 10 years, Callahan has been with Eby-Brown, as a result of an honest relationship and a willingness to compromise. “Eby genuinely treats me as if I’m the buyer for 600 stores instead,” he said. “Certainly there have been occasions when they couldn’t do exactly what we’ve wished, but we’ve been able to compromise to keep both sides satisfied.”

That’s the support Callahan expects from his partners. As a result, he confidently furnishes Eby-Brown, as well as all of his key vendors, with leads that result in new business. In return, he said, when he needs something, there is always a partner available to help.

Going at it Alone
Once chains reach a certain size and mass, they can begin looking at self-distribution to seize more control of costs in the supply chain. However, this requires a hefty investment in building a distribution plant and a truck fleet. The upside, though, is that self-distribution gives large chains a little more power over things like delivery times and allows them to incorporate perishable items, like a bigger foodservice menu, to their on-hand inventory assortment.

Companies considering going this route need to have critical mass, as found at chains like Sheetz, Valero, QuikTrip and Wawa. Operating a distribution center doesn’t have to create a schism between retailers and wholesalers.

Take Valero Energy Corp. in San Antonio, Texas. The company operates nearly 1,100 convenience stores across the country, but has been self-distributing to about 500 units in Texas since April 2005. The center is supplied and operated by Core-Mark International.

Valero’s decision to open a distribution center had nothing to do with wholesaler conflicts. It was about trying its market stretch and concentration to gain efficiencies within its network of stores. “We were receiving multiple deliveries [wholesale and DSD] a week leaving small, perishable loads at our stores,” said Hal Adams, the oil company’s vice president of retail merchandising. “We saw an opportunity to combine those deliveries into one truck with our traditional grocery and dry goods. By doing this we’d increase the freshness of our products and save stores time—receiving one delivery instead of five.”

While retailers reported satisfaction with self-distribution and their wholesaler relationships, managing DSD has proved to be a little more challenging for many c-store retailers that lack the size and volume of Valero.

Common complaints with DSD deliveries usually come down to two things: lower margins and loss of control for retailers. Retailers make lower margins because the DSD vendors price their own items, often stamping it right on the package so it can’t be changed. As far as control is concerned, it’s completely out of the retailer’s hands.

Another less talked about factor is DSD driver turnover, which negatively impacts merchandising. At Green Oil, Callahan said DSD manufacturers have panned out well “with the exception of those companies that elect to franchise out routes rather than keep them company operated,” he said. “In those cases, deliveries are hit and miss, and we lose that direct control we have with an actual company employee. This results in lost sales for both sides.”

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