AN EVOLVING STRATEGY

LISA SAXTON

WASHINGTON -- The distribution business is changing, and convenience is the key.

Retailers want the convenience of dealing with fewer suppliers, and they want those suppliers to offer more convenience products, according to David Strachan, executive vice president of the American Wholesale Marketers Association here.

As they gather this week for the association's summer convention in Denver, AWMA's wholesaler members will be exploring how they can evolve, and expand, in categories such as grocery, food service, health and beauty care, general merchandise and more.

"As an association, we're fairly dependent on where our membership is going, and where the channel of distribution is going," Strachan said in an interview with SN. "Our members find themselves expanding, and the most dramatic expansion is in these areas of nontraditional lines."

For AWMA members, tradition means candy and tobacco. But in the present, and looking forward, their sales will have to build on additional foundations, such as "everything you'd find in a convenience store, with the usual exception of beer and wine and some dairy products like milk," Strachan said.

"All across the food distribution business, whether it's supermarkets or grocery wholesalers, you're seeing that retail outlets want to deal with the fewest number of suppliers possible," he said. "And our members, whose primary customer base is the convenience store business, are being faced with the notion of expanding their SKUs and expanding their inventory to meet customer needs.

"So the business is changing dramatically and the association's challenge is to try to change in advance of the business, and lead the channel, as opposed to reacting to what the business is doing."

Thus, confectionery is no longer the only game in town for AWMA's distributor members. However, confectionery is far from being a stepchild.

"Confectionery certainly is still a major profit center of our members, as well as for retailers. It's high-margin, and a very important segment of the business," Strachan said.

Indeed, candy and tobacco remain the primary business for the segment of AWMA membership dealing with the supermarket trade.

Currently, Strachan said, supermarkets represent 6% to 7% on average of the total business for AWMA's members. "However, that number is skewed, because if you look at the top 50 traditional candy and tobacco distributors, the supermarket number would be a much higher percentage of their business," he added.

What's more, according to last year's AWMA Distribution 2000 study, members reported that they expect supermarkets to be an area of steady and incremental growth, he added.

There is a class of trade, however, that holds only worry for distributors instead of growth potential. That, Strachan said, is the wholesale club trade.

Clubs, in effect, are refocusing their attention on the wholesale business, rather than the individual consumer segment they've been courting for the last couple of years.

"This is an obvious concern to a lot of our members, because wholesale clubs typically carry top brand sellers," which is the business traditional wholesale distributors can ill afford to lose, Strachan explained.

"Those same products are the ones that offer the highest margin to our members. So if a small retailer says, 'I can get a better price from Sam's on big-selling items. And then I can go to my traditional wholesaler and ask him to fill in,' what you find is that the wholesaler gets his margins slashed. That's the problem that our members face in this, because those top-selling brands actually subsidize the distribution of weaker items."

Strachan said this also creates a problem for manufacturers who have spent years and millions of dollars developing and maintaining a brand. "All of a sudden, they've allowed a mass merchandiser or a wholesale club to treat that brand like a commodity.

"Sam's may carry Snickers only when there's a great price break for Sam's. The problem with that, obviously, is that it educates consumers to shop for price and to ignore brands."

Strachan said the real challenge for wholesalers is to educate their retail customers to the fact that low prices doesn't always mean the best value. "And our members need to do a better job of marketing the value of the service they add to the product."

For instance, a retailer may save a buck on a product, but has not factored in what it cost to pick that product up, warehouse it, merchandise it and take care of returns and stales. "If you purchase from a traditional wholesaler, he or she assumes those responsibilities in return for a higher price."

Learning works in the other direction as well, and AWMA is helping its members educate themselves about their customers. The association formed the Distributors Education Foundation as a vehicle for offering educational products and services to the broadest possible number of distributors, he said.

Along with monthly educational workshops and seminars, the foundation has created a successful computer simulation game for warehouse management.

"We thought the big customers for this would be distributors," said Strachan, "But, in fact, we're finding manufacturers use it the most. They send people to these simulation exercises for the purpose of educating their sales force."

In October, AWMA plans on unveiling a similar computerized tool relating to convenience

stores. "The purpose there is to put distributors in a position to better understand their customers in the decisions that they face every day.

"They get a chance to see how these decisions work over a simulated three- to five-year period. Decisions such as, 'Should we expand? Should we add gasoline to the product mix?' "

Education was also the stated intent of the federal government's labeling initiative. But one of the offshoots of the Nutritional Labeling and Education Act is of major concern to everyone involved in the distribution channel: the issue of labeling and liability. Strachan said AWMA is keeping close tabs on this in its role as the industry's representative in Washington.

"I think it's fair to say if you're a business trade association, you can't afford to overlook any government issue," Strachan said. Labeling and liability is a hot button, especially because a number of AWMA members are in the rebagging business -- they take manufacturers' confectionery products and put them in their own packages or in specialty packages, such as pegboard items in a supermarket.

"They now are responsible for putting nutritional labeling information on that bag, even though they haven't manufactured the product," explained Strachan.

"The whole area of product liability is a source of continued concern for everybody in the distribution business. "The association has been a longtime supporter of reforms in product liability laws. And we don't see this whole area getting any better until those laws are changed."

If there's something wrong with a product, the consumer will sue everyone in sight: retailer, distributor and manufacturer, Strachan said. "But our contention is that there needs to be some limit to the liability that anyone has to accept. There needs to be a national liability standard that's applied, rather than these outrageous awards that seem to become more common every day.

"And we obviously, as do all small business associations, have a concern about health care reform and how that's going to impact small businesses' ability to compete and ability to maintain a qualified, compensated work force."