ASMC CHIEF PUTS ISSUE OF MANDATING ON FRONT BURNER

JAMES TENSER

SAN FRANCISCO -- Food brokers are closing ranks to challenge the growing phenomenon of retail merchandising mandates.

The emerging practice -- whereby some supermarket chains designate exclusive or semi-exclusive providers for reset and shelf maintenance work, then bill back their suppliers for the services -- has spurred months of behind-the-scenes maneuvering among retailers, manufacturers and brokers.

The issue came front and center at last week's Association of Sales and Marketing Cos. 1997 Business Forum & Expo here, where Bob Schwarze, ASMC president and chief executive officer, made it the central message of his annual address to the association membership.

"It's no secret that distributors in some markets have begun to institute a series of questionable practices, including billing brokers and manufacturers for the use of third-party retail merchandising services, a trend that appears to be growing at alarming proportions," he said.

"The use of third-party merchandisers -- some of whom are represented in this room -- to do retail work is not the issue. The issue is the unilateral decision by some trading partners to assign retail merchandising responsibilities to a third party and then demand our members and principals pay for it."

In his speech, Schwarze was alluding to, but did not mention by name, recent tests by Safeway's Northern California division in its Hawaii market and Associated Wholesale Grocers in Kansas City as well as merchandising mandate programs now being discussed at major chain operators Food Lion and Ahold.

Most programs grew from a desire to gain more control over category execution issues. With so much effort and investment going into the development of sophisticated category plans and shelf sets, many trading partners are noting with dismay that many programs fail at the point of execution, either due to poor initial implementation, lack of ongoing shelf maintenance or both. All agree that fixing the problem takes money. The question is -- whose?

In a separate interview with SN, Schwarze said, "There is a retail cost involved that was never considered during the development of Efficient Consumer Response. No one ever placed a value on implementation and maintenance in doing the value chain analysis."

A raised consciousness on this very issue led AWG to begin testing a concept it calls SMART (Shelf Management and Reset Teams) in its Kansas City market in March. The wholesaler has established reset and maintenance teams that ensure regular coverage of its stores.

Mike DeFabis, president and CEO of AWG, said in an interview that participation in the SMART program is strictly voluntary. Retailers, brokers and manufacturers have participated in its development.

"We have made a major commitment and we will urge our trading partners to participate. But we want them to come along because it's a good deal for them. Everybody wants to see better retail coverage."

The program is run strictly on a cost-recovery basis, not as a profit center. The 45 SMART team members are either AWG employees or people responsible to AWG, he added.

DeFabis also said he recently agreed to be chairman of a newly formed committee of Food Distributors International, which plans to address the issue of retail coverage during 1998 in concert with manufacturers. (See related story.)

Food Lion, Salisbury, N.C., is also developing a program to expand retail merchandising coverage, working with local brokers and manufacturers. Pam Kohn, senior vice president of merchandising, declined to discuss the work in progress, however she said, "We realize that retail coverage in-store is imperative, and it's important to work as a team to develop the best possible solution. Our goal is to involve the broker community and vendor community as we come up with solutions that will meet our needs for the future."

Alan Noddle, president and CEO of support services for Ahold USA, Atlanta, declined to comment on any work under way at the retailer, however he said there had been "some talk" on the subject internally there.

Similar existing programs at major drug chains such as CVS and Eckerd, and in certain departments at Wal-Mart, designate a third-party merchandising services company to handle reset and/or shelf maintenance work. Costs are then billed back to the manufacturers on a "fair-share" basis.

Safeway's Hawaiian plan, which follows this model, alarmed brokers when it was initiated last June, since they saw it as holding the potential to disrupt their existing relationships with manufacturers. Major manufacturers were also deeply concerned, partly about their broker relationships and partly about potential added costs.

In letters obtained recently by SN's sister publication, Brand Marketing (December, 1997), several manufacturers declined to participate in the Safeway program, citing concerns over Robinson-Patman antitrust regulations, and pre-existing contracts with brokers who provide the same services. Early reports also suggested some broker companies were considering taking legal action.

Schwarze said in his talk that he wished to refocus those in the industry who believed the solution lies in litigation. "We don't need a court of appeals. What we need is an appeal to reason."

He added, "We aren't saying that retailers don't have the right to contract with third-party merchandisers. What we are saying is that there should be freedom of choice with fair and equitable distribution of both work and compensation.'

Schwarze declared the ASMC ready and willing to work with retailers and manufacturers to define best-practice models for organizing retail merchandising work, in a way that is fair to all parties involved and that serves consumer interests.

"I'm also concerned -- and I'm sure it's a concern you share -- that fundamental shelf discipline is going to suffer as a result of pressure to cut costs," he said.

"The cost of this practice isn't just measured in declining broker margins and commissions. It's also measured in declining retail execution; lost sales resulting from out-of-stocks and excessive damage; and perhaps most important -- lost equity with the consumer."

Concerned ASMC broker members met again behind closed doors during the Business Forum in San Francisco, for an update on issues surrounding Safeway's and AWG's programs. Schwarze said in an interview following the meeting that association executives have been reaching out to those retailers to tell them how brokers want very much to be part of the solution.