LAKE BUENA VISTA, Fla. -- Manufacturers must sit down with wholesalers and work out a revised trade promotional system to make up for any loss of inside margins as a result of the industry's Efficient Consumer Response initiative.
Otherwise, wholesalers will not stop the practices of forward buying or diverting, and thus hamper the industry's quest to streamline operations and implement ECR.
That was the pointed message delivered by Victor Orler, associate partner in Andersen Consulting, Chicago, at the National-American Wholesale Grocers' Association's annual convention here. He spoke at a workshop titled "Making ECR Work in the Wholesale-Supplied System."
"Manufacturers need to work out trade promotion profit-weaning programs with wholesalers to move forward with ECR. This is not a very popular message among manufacturers. But it is a reality," Orler said.
"You may not like it, but if you are going to move forward with ECR, then manufacturers need to sit down with wholesalers short term and work out new [funding] programs. Because the competitive realities today simply do not allow [wholesalers] to raise their fees automatically to cover the costs of doing business," he said.
The issues of eliminating forward buying and diverting, and how to handle trade promotional dollars overall in the distribution channel, are among the most critical issues facing the industry today as it strives to boost operating efficiencies.
"Promotional practices is the biggest issue we have to overcome.
The cost-saving associated with moving toward ECR will not offset what wholesalers lose in terms of inside margin or trade promotion profit," Orler said.
To solve the problem in the short term, Orler urged manufacturers to set up what he termed "performance planning allowance rebates." These programs would be "an allowance or rebate that rewards efficient buying behavior. The wholesaler, for his part, would agree to stop all forward buying or inbound or outbound diverting, pass on to retailers 100% of any trade allowances, provide product movement data back to the manufacturers, and open the books and have an open and honest relationship," Orler said.
Manufacturers, for their part, must come to an agreement whereby the elimination of inefficient practices (such as forward buying) "would have no negative impact on the wholesaler. I don't think any wholesaler is trying to [financially] gain from this. They are just trying to remain the same," he said.
Such a revised system, he said, would benefit both sides. "It would reduce product surge and warehouse handling costs, and shift the focus from buying to selling," he said.
Orler also cited the need to establish a system that would encourage greater pass-through of trade promotion dollars to the retailer, and ultimately to the consumer, where they belong. "Trade promotion pass-through to the consumer is also an issue. This is a hard number to quantify, but there have been some industry estimates that for every dollar spent by a manufacturer on trade promotion practices, only about 30 cents is passed along to the consumer.
"Obviously that creates a major issue. This is where a lot of inefficiency occurs and is a big concern from the manufacturer's standpoint," he said.
Manufacturer response to Orler's suggestion, however, was less than enthusiastic during a spirited question-and-answer period following his talk. "The promotion planning allowance rebate, or promotion program rebate, in effect would have to be available to all competing customers. So wouldn't that just maintain the status quo of what exists today? Isn't the real issue how do we drive costs out of the system, not just create another cost?" one manufacturer asked.
Another manufacturer also questioned the appropriateness of such a system. The program, he said, "would have the same effect across the entire customer base within a particular trading area. You would have to offer the same program to everyone. So I don't see how it would help the overall wholesaler-supplied system. Isn't it replacing one cost with another?"
Orler replied, "it will help because it will take away any incentive for wholesalers to forward buy or divert."
Several manufacturers questioned the legality of such a system. "I think you are running into some major legal issues by saying you can have one percent for one customer and another percent for another customer all within one trading area. I don't see how that works," one manufacturer said.
Orler replied, "The issue is how you structure the trade promotion in the wholesaler-supplied system, not that you pay them more. For one wholesaler it might be 2% [for this program], and for another wholesaler it might be 3%. But the bottom line is that you are giving everybody 10% [in total], and that is really all the government wants," he said.