Efficient Exit Strategies Sweeten Candy Profits

Developing an effective exit strategy for candy and reviewing product performance regularly can boost profits in the candy segment.

“On a basic level you want to discontinue the slow moving items that rank in the bottom of the category to bring in something new that is going to contribute sales and margins to the category,” said Tom Rosenberger, sales manager for Sheetz Inc., which operates more than 365 locations across six states.

While it sounds like a fairly straightforward strategy, convenience stores lag behind other channels—specifically supermarkets and drug stores—when it comes to discontinuing weak items to make room for new products or proven core brands, resulting in a loss of profits.

According to the “Convenience, Candy & Profit,” study by Kit Dietz of Dietz Consulting (under the joint sponsorship of the AWMA, NACS and the National Confectioners Association), if the nation’s 146,000 c-stores and their distributors worked together to ensure the top 50 SKUs or core brands in candy, gum and mints were always in stock, some $358.8 million in new candy sales could be recognized.

Breaking It Down
“There’s a lot of complexity in the c-store channel because of the number of touch points compared to other channels. You have more than 800 distributors in the channel that supply both chains and independents,” said Dietz.

The drug channel, meanwhile, is able to get a broader level of distribution much faster than c-stores because manufacturers typically sell to chain headquarters, while the c-store channel has more points of decision, sales and distribution.

With less points of decision, the drug channel can quickly exit a poorly performing product by marking it down and moving it out to make room for another item.

“This markdown strategy is important for a c-store because it’s the only way that they can reach the same speed of execution as other channels,” noted Dietz. “Because of all these touch points, if you try to hold the product, wait for the distributor to write a credit, get a pickup request or return the product and get a credit, it takes too long and the retailer loses money.”

C-store chains have historically waited for credit and then returned the product losing out on profit.

“Unless you’re sitting on an inordinate amount of product at the store level it’s better to just mark the product down and move on than try to recoup all the costs associated with returning,” said Sheetz’s Rosenberger.

Implementing a Strategy
Distributors and retailers should work together to identify the bottom 10% of SKUs and flag them for elimination, according to the “Convenience, Candy & Profit,” study. To speed up the process, retailers also should consider the size of the product being removed and replace it with a product of similar size to avoid unnecessary disruption of the shelf set.

According to the study, if a typical SKU stays on the shelf for eight weeks with no movement, it will consume $5.74 in occupancy costs. Assume the retailer returns the product to the distributor and gets a credit for the invoice cost of $8.16 minus, in some cases, a restocking fee. If you subtract the occupancy cost, the net result is $2.74 or a negative margin contribution (loss) of $5.42.

However, using those averages, if the retailer pulls the item from the shelf, puts it in a markdown bin and sells it at cost, the result would generate $8.16. Then shelf space is freed up for a new SKU, which would gain first week sales of $42.24 and a gross margin of $9.85 assuming the average movement of a new candy SKU of 4.8 units per week, with an average selling price of $1.10 and an average gross margin of 47%.

“Retailers cannot afford to have space and inventory tied up with dead or failing items,” said Jared Sturtevant, director of category management for Nice N Easy Grocery Shoppes, which has 83 corporate and franchised stores in upstate New York. Nice N Easy discounts candy that isn’t selling aggressively to move it out, but discourages its managers from giving these products prime position such as counter space. The chain uses speed tables and often seeks vendor support when exiting an item.

A Living Planogram
Dietz suggested retailers strive to make category management a living, breathing entity, rather than something that is static and changed only occasionally. In addition to looking at the planogram annually or semiannually, chains would benefit from constantly identifying poor performers in each segment of the category, so they know in advance which items they can discontinue to make room for new items.

Six weeks before a planogram change, Sheetz, which is self-distributed, flags items for discontinuance and marks that at its company-operated warehouse. Once the planogram change goes into effect, the chain slashes prices on the discontinued items. “Hopefully there is a little less at store level to work through because we’ve already flagged the items at the warehouse,” Rosenberger said. 

In the old days, Sheetz made planogram changes two or three times a year, but these days it makes changes as needed. “We try to time some of them with the launch of new items, especially from the major manufacturers,” Rosenberger added. “When price changes went through last year, sometimes we timed the product changes with the large price changes. Some of the changes we do around the front end are coordinated with seasonal opportunities.”

Developing criteria for when to exit items is essential. When brands offer trials, retailers have an opportunity to make money, and not just on products that are going to be successful long term, Dietz noted. Retailers should have a plan for when a display moves to the shelf and already be identifying what items are going to be moved to make room.

For example, Nice N Easy has a predetermined markdown schedule on seasonal items. “Other limited edition or new introductions are not brought in with the intent to fail. We rely heavily on our store managers to alert us of store-specific dead inventory and we can react accordingly,” Sturtevant said. “Occasionally, there is a total bomb of a product and it is identified very quickly. Our exit strategy is intended to get something out of the product before it has to be discarded or returned. A dime is better then nothing in most instances.”

The chain can easily evaluate each item in real time using scan data. “If the net after the promo is not a positive number, we made some mistakes. Whether the mistakes were quantity, pricing, placement or overall execution comes into play with future decisions,” Sturtevant said. “Most of the time an exiting product doesn’t help sales and hurts margin. The discounted product is replacing a full margin sale more often than it is an impulse purchase.”

Communication is Key
Dietz recommends a greater level of collaboration between manufacturers, retailers and distributors. Distributors want more lead time from manufacturers, so they can communicate things like product dimensions and pricing to retailers well in advanced.

Retailers would benefit by passing their exit strategies up the chain to vendors. “Work that out in advance, so if they do bring an item in that fails there is some culpability on their part too,” Rosenberger said.

At the very least, retailers should keep an eye on candy performance, identify poor sellers as far in advance of new item launches as possible and be ready to institute a markdown strategy. “The farther in advance you can prepare for new
product launches the better off you are,” Rosenberger said. CSD


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