DALLAS -- The need for wholesalers and independents to operate as a blended virtual chain -- and for retail-owned wholesalers to own retailers themselves -- was underscored during a panel session at last week's Food Distributors International Business Conference and Partners Program here.
The necessity to look at distribution and retailing as a unified system was broached during a session that updated FDI's "Strategies 2005: Vision for the Wholesale-Supplied System." The report was previewed at the same meeting a year ago and received a full-scale airing at FDI's Midyear Executive Conference in Colorado Springs, Colo., last September.
Outside pressures on wholesalers over the past year have heightened the importance of the report's recommendations, panelists said. However, the industry response to date has been mixed: some operators have begun to embrace change while others are resistant, panelists added.
Participating in the panel discussion that reviewed the study's findings in light of developments in the industry during the last six months or so were David Donnan, vice president for consumer products practice at A.T. Kearney, Chicago, the group that executed the study together with a joint industry committee; Al Plamann, president and chief executive officer of Certified Grocers of California, Los Angeles; Kenneth Macey, president of Macey's Inc., an eight-store operator based in Salt Lake City; and Greg Knoll, vice president of Efficient Consumer Response initiatives at Lipton, Englewood Cliffs, N.J. The study was co-sponsored by the National Grocers Association, Reston, Va.
Donnan told the meeting audience that the original study arrived at four basic conclusions, namely that:
Wholesalers still represent the largest source of supply in the grocery industry, at more than 37% of grocery-sales dollars, but the share of market is in rapid decline and is expected to continue to do so. Indeed, the share has dropped five points since 1992, largely because of shopping alternatives in the shape of self-distributing chains, mass merchants, supercenters and so on.
Independent retailers are also losing share for various reasons, including success: Some grew and became self-distributing chains. But others were bought by chains or other stores and some went out of business.
Wholesaling is a business that depends on economies of scale that yield purchasing leverage, the ability to cover large geography and the ability to master large-scale logistics, freight and transportation. But because many wholesalers grew by acquisition in the last decade or so, many faced the new cost of complexity that arose as each acquired company added a product roster, a fragmented customer base and, in many cases, too many distribution centers that were undersized for the marketplace. In sum, wholesalers lost their edge as the low-cost product providers.
Meanwhile, consumers changed during the time-pressed 1990s and are looking for convenience and value. But they now have the option to fulfill the search in many different venues, including independent supermarkets, but also self-distributing chains, mass merchants, supercenters, convenience stores, gas stations, drug stores and restaurants. Donnan told his audience that when findings such as these were first made known to members of the joint committee, the reception wasn't altogether good.
"These findings were a bit of a shock when presented to the committee which was made up of manufacturers, retailers, brokers and so on.
"In fact, as we went through the findings of the report, there was denial. They said the facts must be wrong. Then there was anger that the findings must be presented at all. Then some went into a bit of a depression. But, very quickly, we got to the point of exploring new options and ideas and came to the realization that we had better accept these facts and do something about it if we wanted to survive and succeed in the future." From such discussions grew recommendations that the wholesaler-independent system should be considered a channel. One task would be to better manage the cost of complexity through stockkeeping unit reduction and an attenuation of format proliferation.
Information systems also were a challenge, with disparate systems between wholesalers and independents and within wholesale companies themselves. The problem is particularly vexing as compared to the relatively integrated information systems of the competitors to the wholesale-independent system.
And, the report recommended the development of different strategies for wholesalers, depending on whether they were national, regional or niche players.
Meanwhile, though, the industry's landscape has changed some since the report was issued last September.
For instance, Wal-Mart has introduced its own supermarket concept, the Neighborhood Market: "We can expect Wal-Mart to work out the bugs and take these rapidly across the United States," Donnan said.
Moreover, there has been a flurry of consolidation of self-distributing chains, with considerable market share now concentrated in the hands of five players. Wholesalers are buying their own retailers in some cases, to add to their own retail base.
The net effect, said Donnan, is that there has been a "dark side" developing for wholesaling: "We've seen major changes in the last six months. Several wholesalers have taken major restructuring charges. Some have defaulted on loans and others have actually declared bankruptcy. So the change is not over and may, in fact, be just beginning."
Asked to comment on these developments, each of the other panel members emphasized the need to react properly to the rapidly changing world.
Certified's Plamann said that "the report helped to articulate to our channel the challenges that were escalating, such as the consolidation of chains. The value of the report was to give added emphasis to the challenge of consolidation. "We need to be a retail enabler.
We need to develop expertise to enable retailers to maintain business.
"And when consolidation occurs we have been able to pick up individual stores. But we're not doing it in the quantum fashion and that needs to be done. Retail-owned wholesalers have avoided owning retail, but you're seeing them move into that methodology now.
"I don't believe owning retail is a panacea. If it were, we would have done it a long time ago. But it's necessary from a lot of perspectives and it's not until wholesalers actually own retail that they begin to understand the differences in the go-to-market programs between wholesalers and the blended wholesale-retail opportunities. It is a big challenge for us."
Indeed, Certified agreed last year to acquire Sav-Max foods, a seven-store operation in Modesto, Calif.
Lipton's Knoll said the report brought an "awareness of getting common facts and issues on the table. It shows the importance of the cooperation issue and the need for retailers, wholesalers and manufacturers to work together and to identify themselves as another channel. We need to be a little more proactive when we recognize what's going on with the competition."
Independent operator Macey said that it has been "exciting to see the information come out. But I still see some of my peer group in denial; still saying, 'well, it doesn't feel good, doesn't sound good, so we'll just ignore it and someone will come up with a magic fix-all.' That's a little frustrating.
"But, on the other hand, there are retailers who have looked at this and said, 'this is exciting because we have a chance to shape our own destiny now. We can prove to the world that the independent is not ready to disappear.' "
Macey represents an example of an independent operator who is changing and is leading change at its wholesaler, in this instance Associated Food Stores, Salt Lake City. Associated, a 59-year-old company, had always operated with the idea that it shouldn't own retailing, but Macey said that after the presentation of the 2005 report last September, he moved his thinking about five years forward and decided it was time to sell.
He specified that "we were thinking about how to position ourselves for the future, but we had limited resources to grow. We talked to chain-store operators who were interested in our company and in purchasing us. But my thought process is that we are fiercely independent. We have great people, 1,700 people, and that would change if we sold to a chain operator. My goals were to preserve the company, to have it stay intact if that was possible, to protect our people and protect the wholesaler, because we were the largest purchaser. "
So he told his wholesaler that, and asked the wholesaler to consider purchasing Macey's Inc. The wholesaler was "shocked because we asked them to consider something that was heresy," Macey said.
"But I knew, because of this study, I wouldn't be the first to go and the best would go first."
Associated has also agreed to buy the four-unit Lin's MarketPlace, St. George, Utah. Associated agreed to both buyouts in January.