Outsourcing Is In

MARK HAMSTRA

While food retailers and their suppliers have been resilient in the weak economy, one would be hard-pressed to say they have thrived.

Advantage and Crossmark formed a joint venture called Shopper Events that provides sampling at Wal-Mart.

That description, however, does fit the sales and marketing agencies that act as go-betweens among retailers and vendors.

Following the path predicted in a 2006 report by the Grocery Manufacturers Association, sales agencies have benefited from a shift toward outsourcing a variety of the functions that traditionally had been performed by suppliers.

“We have just seen some of the strongest top-line growth in our company's 50-plus year history,” said John Saidnawey, president and chief operating officer at Billerica, Mass.-based Johnson, O'Hare, one of the larger independent sales agencies. “Outsourcing is definitely in, for the obvious reasons.”

The trend is “benefiting everybody” in the sales-agency space, he added. “Sales agencies overall have seen an increase in services requested. It is an expensive proposition to place your own sales team in some of these accounts.”

A more recent report on the outsourcing trend published by GMA, Bain & Co. and the ASMC noted that CPGs estimated an average savings of 23% for companies that outsource retail activities to sales and marketing companies.

More and more CPG companies also look to outsource more of their headquarter sales calls, and create hybrid models in which dedicated sales teams at the manufacturers divvy up certain aspects of the retailer relationship.

“We are seeing more and more hybrid models today than we ever have,” Saidnawey said. “A CPG company might say they want a direct team at company A; however, they want them supplemented by the broker, whereas in the past it would be strictly direct.”

Robert Hill, president of Jacksonville, Fla.-based Acosta Sales and Marketing, agreed that sales agencies have benefited across the range of services they provide as CPG companies have sought to cut their costs through outsourcing.

“People who have not outsourced before are starting to outsource, and people who have outsourced some are outsourcing more,” he told SN. “The bottom line is we provide an efficient and cost-effective model across a number of activities, so we are really encouraged about the agency business.”

Dividing agency skills into four buckets — headquarter sales coverage, in-store retail services, marketing services (including analytics and insights) and customer service — Hill said agencies are seeing “a healthy level of activity across all four of those pillars. It's not just retail that's getting more outsourcing play, it's across the board.”

Acosta itself, the largest of the sales agencies, has seen a 20% growth in top-line headcount in the past 18 months as the company has staffed up to meet the increased demand, he said.

Likewise, Los Angeles-based Advantage Sales & Marketing has added about 10,000 workers in the last 18 months, according to Sonny King, chief executive officer.

“The recession has played into our hands, because as companies look to cut costs, we're the way to do it,” he said. “[Some of the biggest CPG companies] have continued to outsource more, and existing clients have looked to ramp up their outsourcing, and that has been good for us.”

In some cases, economic pressures have forced retailers to cut back on the amount of personnel they have available to maintain in-store displays and perform other functions, creating a need for CPG intervention and an opportunity to provide outsourced services.

“As retailers cut back, the stores need a little help,” said King.

Like other agencies, Advantage is also picking up more headquarters calls, particularly at small- and medium-sized companies.

“We can do it more efficiently and effectively,” he said.

Some CPG companies are even adding sales agencies to cover some of the big food retailers that have been struggling, he noted, “so we are getting a lot of the big accounts as well, even with some of the bigger manufacturers.”

One of the main areas of growth for the company — and a significant impetus behind the company's ramp-up in personnel — has been the addition of in-store food demonstrations to its roster of services.

The company formed a joint venture with Plano, Texas-based Crossmark, called Shopper Events, that provides demos in Wal-Mart and Sam's Club.

The new partnership uses a team of trained personnel in a sophisticated presentation that includes not only food preparation and sampling, but also collateral materials about the products for customers.

“That's a whole new area for us,” King explained.

Joe Crafton, president of Crossmark, also cited the addition of the joint-venture in-store demo business as an important factor in his company's growth, although he, too, said the general shift toward outsourcing has been a boon.

“Consultants and the smart players are recognizing the value of outsourcing, so we are seeing suppliers that traditionally had a mentality of, ‘If you want it done right, you have to do it yourself,’ moving to very specific use of sales agencies,” he said.

“Large companies that had traditionally done it all themselves are looking more to agencies to help with some of the tasks, and small companies that believed they were doing the right thing by taking 20 or 30 companies direct are realizing that to do the job they originally intended, they should really be taking about half a dozen.”

Some suppliers have reclassified more of their retail accounts to be agency controlled, Crafton said, and others that had never used agencies at all have begun doing so.

As the recession first took hold, however, some CPG companies actually cut back on some of the in-store project work they were outsourcing, although that work has since been coming back, he explained.

“Around this time last year we saw an uptick in general outsourcing, and a downturn in general project work,” Crafton said. “Since then they have come back to project work, but last year was tough on projects, and I think it was due to the work being classified as nonessential.”

CPG companies looking for places to cut costs canceled some of their in-store project assignments that they traditionally would have called upon agencies to perform, he explained, such as implementing timely rollouts of new products to all accounts.

“With a blockbuster new product, for example, 60% of stores might get that product out on the shelves without any assistance, but historically a company might have their sales agency to close the gap on that 40%.”

Forgoing that extra service, he said, was able to get companies through a tough stretch in the economy, but was not the right formula for the long haul.

“It's like brushing your teeth,” he said. “You can skip it a few times, but after a while it will rot your teeth out.

Another tailwind for the sales agencies, Crafton said, has been a shift in the ways some promotional funds are being spent, with more attention being paid to using in-store promotions as an important part of the marketing mix.

“Some companies are saying, ‘If I am spending $500 million on consumer advertising and struggling to get an ROI from a 30-second commercial, and struggling to get an ROI from an FSI coupon, then I am going to take some of these consumer dollars and turn them — not into trade dollars — but in-store marketing dollars.’”

A large CPG company, for example might decide that a “retail blitz” of in-store implementation is more valuable than a mass-media campaign or a coupon drop, especially if the ROI is “tangible,” Crafton explained.

“So marketable brands are starting to buy project work and retail execution in lieu of out-of-the-store advertising, and that has really been a boon to us. Would you rather have an extra facing on the shelf, which is in-store advertising 365 days a year, or would you rather spend money on an old media, 30-second TV commercial, which has for some brands proven to have a low return?”

Even with several factors playing in sales agencies' favor, however, Crafton pointed out that the companies continue to have to cope with increased demands from their clients.

“It's not as simplistic as saying a bad economy is good for sales agencies,” he noted. “We've had to find ways to be more efficient, and give more value to the client, be more transparent with our clients about how they are spending their money, and give them some control over how that money is spent.”

In addition to adding in-store demo capabilities, sales and marketing agencies also are expanding by adding other services and expanding in new retail channels.

“We also see growth in retailer solutions,” said Crafton. “Forever the agencies have focused on the needs of the supplier, but there's a need to bring the retailer in on the planning of the program, to make it a mutual win, and we are having refreshing conversations with retailers. We are able to bring in the resources that suppliers have to help retailers where they need it.”

Crossmark now has 26 retailer clients, he said.

In addition, sales agencies are expanding more and more into alternate channels of retailing, including club stores, drug stores and convenience stores.

Crossmark, for example, acquired a convenience store sales agency, which made it one of the leading c-store specialists, to go along with its leading drug store services business.

And although the company does not provide all the in-store retailer services functions in club stores that it does in supermarkets and other retail venues, it is providing audits of displays for club operators, Crafton explained, allowing store operators to improve in-store execution.

Industry Relations

The sales agencies agreed that while retailers and CPG companies in many ways have pulled together during the economic downturn, there have also been increased tensions in some ways.

Retailers ramped up their private-label offerings, which bit into the sales volumes of second- and third-tier brands in some categories, and others embarked on SKU rationalization programs that further cut into branded presence on the shelf. In addition, retailers have been waging an effort to reduce prices and looking to vendors to help them do so.

“Certainly retailers emphasize private label more during tough economic times, but manufacturers are fighting back,” said King of Advantage. “Last quarter was the first quarter in a long time that private label actually lost share, and that was mainly because of heavy promotions by the vendor companies.”

Growing the top line is a challenge for all trading partners in an economic downturn, Hill of Acosta explained.

“I think there's a spirit of collaboration in trying to stimulate shopper behavior,” he said. “We are all trying to convince the shopper to buy more, shop more often and buy bigger baskets. And we are all trying to sell solutions — integrated marketing programs to help them stimulate purchases.”

The industry is eager, Hill said, for more growth in its base volume, as opposed to volume driven by promotion.

“What everybody's hungry for is to have good, baseline purchases off the shelf and not sell everything on promotion,” he said.

Sales agencies can play a role in driving that growth, he added, by providing more data and insights around shopper behavior to their customers.

“We spend a lot of time and energy trying to understand the right vehicles and programs and strategies in this environment,” he said.

With regard to the growth of private label, Hill said Acosta has accepted that retailers are going to try to grow their own brands, and in fact sometimes works store brands into meal-solution promotions involving branded product.

“So, we are not trying to fight City Hall, so to speak, but understand that private label is going to be a part of retailers' strategies,” he said, noting that some of Acosta's clients are also makers of private labels. “People are acknowledging the environment, and the way the shopper is shopping, and the way the consumer is using products, and not trying to be blind to the realities of the marketplace.”

Crafton of Crossmark noted that a certain amount of tension always exists between retailers and manufacturers.

“The retailer is thinking about what's best for the category and what's best for their brand, and that's always going to be there,” he said. “The tension comes from pressure by the retailer to continue to lower prices in a down economy,” and then asking for suppliers to fund the cuts.

Crafton also said he doesn't believe that private-label growth in the U.S. will ever reach the higher levels that the products enjoy in Europe, for example, because of Americans' faith in brands.

“A brand is a promise,” he said. “But if it's a name you never heard of, there's a question of what that promise is.

“With some products, such as milk and cheese, people are used to the private label, but in other cases the brand is a simplifier, because it lets people know what they are getting.”

King agreed that a major source of tension between suppliers and retailers has been the pressure to reduce prices.

“There are a lot of little price wars going on in pockets of the country,” he explained. “It's not a national price war, but there are a lot of local wars with buy-one, get-one-frees and half-price sales, and other things that everyone is trying to do to fight the tough economy.”

In some cases, suppliers are helping fund those types of promotions, and “in some cases they are resisting,” King said. “I think if you are the No. 1 or No. 2 brand, you don't have to play, but if you are below that, you have to play to protect your market share.”

King agreed that the downturn has been tough on both suppliers and vendors, with more units being sold on promotion.

“Retailers are fighting the same problem, with traffic holding up but dollar sales declining, and that's not a good situation, because you still need to staff the stores the same, to have enough people to put customers through the registers.

“And, of course, with manufacturers selling more units at lower costs, it's pretty hard to protect the bottom line.”