SAN JOSE, Calif. -- Sophisticated category management is doable for the perishables departments, but it won't be easy, and retailers have so far made little progress, said an executive from Kurt Salmon Associates.
"Perishables are worthy of special consideration in terms of applying Efficient Consumer Response," said Shaz Kahng, manager of the consumer products group for Kurt Salmon Associates, a consultancy group based in Atlanta. Kahng was speaking to an audience of dairy, deli and bakery buyers, brokers and suppliers attending the convention of the International Dairy Deli Bakery Association, held here last week.
The KSA group has been instrumental in mapping out strategy for the grocery industry's re-engineering based on ECR. During her speech, Kahng shared some information concerning the extent of the industry's merging of ECR and perishables to date, culled from a retail Readiness Survey conducted by KSA.
Kahng said that for the most part, retailers have left perishables behind in the drive toward ECR. The fresh side of the business, meanwhile, could uniquely benefit from the application of category management and the logistical developments inherent in ECR, she said.
"We have seen category management in perishables is challenging, but possible. Data collection is difficult, but improving," Kahng said. "Activity measurement is crucial."
She said perishables are worthy of more attention regarding ECR because, first, they are the key point of retail differentiation for consumers, giving retailers a great opportunity to gain a competitive advantage by fully using data-based knowledge to manage the category and keep supply fresh.
Secondly, perishables are more acutely subject to "declining value," with a limited window of quality acceptable to consumers. "A box of cereal can remain on the grocery shelf until someone purchases it, but a banana will be salable only to its quality peak," she said.
In addition, the sheer volume of perishables sales makes the prospect of improvements impossible to ignore. The business comprises nearly 50% of total grocery store sales, she said.
Despite such compelling factors, the industry has not rushed into ECR in perishables, however, because of other compelling reasons for keeping perishables, even categories such as dairy and processed meats, on the ECR back burner, Kahng explained.
She referred to findings of the industry's ECR Perishables Committee, which last year identified some of the circumstances that make applying ECR to perishables a unique challenge.
Lack of sophisticated data gathering on product movement is a major one. She said the ECR committee pinpointed the supply chain as a sticking point. The intrinsic perishability of fresh foods makes supply chain coordination a key.
It "differs vastly" from dry grocery in many aspects, such as data availability, quality issues, time sensitivity, seasonality, location of source, temperature sensitivity, handling issues and costs of value-added processing steps.
Kahng said that, at present, the data collection capability is more advanced for dairy and bakery, and less so for meat, deli and produce. Supermarket chains, meanwhile, have loaded their efforts onto the grocery side, where scanning has afforded retailers access to the most reliable sales data.
"Many retailers have made nonperishables a priority," she said. "There are more stockkeeping units there, and the data is easier to capture. In perishables, retailers are not sure what they are selling, only what is being shipped from the warehouse."
For perishables, the cost associated with selling each unit of product is higher. "Relative to dry grocery, the costs per unit in dairy are about twice as expensive in terms of handling on a per pound basis," she said. For other perishables departments it is three to four times as expensive.
That makes activity measurement for handling more crucial. And the most effective measurements go back to the source.
"The entire supply chain must work together to get product to the customer within that limited window of quality acceptance," Kahng said. She quoted research by Pillsbury that showed roughly 15% of perishables are sold at a level of quality that is not satisfactory to consumers.
Kahng referred to a case study in bakery. A retailer was re-evaluating its in-store doughnut program and examined three sourcing options: frozen dough that is fried and finished at the store; frozen and fried at the source, then finished at the store, and totally finished outside the store.
When looking at gross margins only as a measurement, the option of frying and finishing at the store level looked most attractive to the retailer, she said. However, when all costs related to the activity were loaded in, the net margin for the outsourcing option held constant, while margins for the other two options dropped.
"The retailer chose outsourcing. Sales went up and the program had other savings as well. But if the retailer had not done that deeper analysis on costs, it would have made the decision based on other factors, and may not have chosen the outsourced program," Kahng said.