BEST CASE SCENARIO FOR CASE-READY LAID OUT BY RETAILERS

STEPHEN DOWDELL

New case-ready products are giving the traditional meat department an edge in the competition for meal-replacement sales, said retailers gathered for a roundtable discussion about case-ready's impact on their business.

The retailers -- Alan Warren, director of meat/seafood at Brodbeck Enterprises, Platteville, Wis.; John Story, senior director at Fairway Foods, Northfield, Minn.; Al Kober, meat/seafood buyer at Clemens Markets, Kulpsville, Pa.; and Bob Rowe, director of meat and seafood at Harris Teeter, Charlotte, N.C. -- said that in the future, wider availability of further-prepared items in case-ready form will enable the department to attract younger consumers who have little knowledge of cooking.

"Maybe they know some cooking, but it is using three of the three hundred items I have out there," said Kober. "We have to prepare these things so that the next generation can still buy fresh meat in the supermarket."

Kober and the other retailers were joined by Dee Reviere, director of marketing/case-ready fresh meat for packaging supplier Cryovac, Duncan S.C., to assess the status of case-ready meat in supermarkets and how it is changing, for a roundtable convened by SN last month.

The industry's preoccupation with the home-meal replacement business was one of the factors they said should prod both meat suppliers and retailers to experiment more seriously with case-ready, which has been on the back burner for decades.

On the other hand, they said case-ready technology, whether used for value-added items or not, entails extra costs for both supplier and retailer -- a barrier that obstructs substantial case-ready penetration in meat departments and may continue to hold the segment back until the industry can more accurately compare those costs to the real costs of cutting meat in the stores.

"If you try to simply compare case-ready to a retail packaging cost, it is just never going to fly," said Reviere of Cryovac.

SN has excerpted highlights of the roundtable discussion, the first part of which appeared in the May 19 issue. The discussion continues below.

KOBER: We still have the "meat and potatoes" business; the people who still want to come in and buy raw meat and know what to do with it. But the changing demographics of younger people are changing this business. Maybe they know some cooking, but it is using three of the three hundred items I have out there.

Meat is a totally different department than we had five years ago, and case-ready is a big part of that. And it is so difficult to know what to maintain. Maybe in the Midwest folks still know how to cook, but my kids come over to dinner because they want some real food. A simple thing like mashed potatoes is a real treat to them.

We have to prepare these things so that the next generation can still buy fresh meat in the supermarket. We just picked up products from a company called RMH, out of Illinois. They produce three items that are fully cooked in their own juice and packaged in Cryovac film, and you microwave it. The people that tried it love it. There is a pot roast, a sirloin tri-tip and a rib steak, like a prime rib, fully cooked in natural juices.

WARREN: Well, I have found some items like that, too, from a different manufacturer, but using the same technology. And I think that is an indication that there are packers out there looking at it. Sure, it's been a long time coming, and like Bobby said, maybe we haven't demanded it enough, but I think that is starting to change.

STORY: We as an industry seem to want to deal with it as an issue of price and price only, and that is an excuse as far as I am concerned; in other words, in any of these products, those people are scurrying to get into those items, but they are not doing very much market research in the beginning to find out if there is real value there or the opportunity for real value.

KOBER: Meal replacement is one of these buzzwords; and every industry out there has focused just about all their new research in this area. But the percentage of business that is available, compared to the percentage of new items that are out there, means no one is really making it, because it may be 10% of the meat business and we have offerings for 50%.

STORY: Retailers commit abuses, too. Take bacon that is precooked, nonrefrigerated, etc. We want to attach to that the same margin value of a product that is raw and completely different.

KOBER: Well, you guys fight that mentality and so do I all the time. It is the difference between gross-profit percentage and dollars. Accountants, banks and it seems like everybody that runs companies, are thinking about just one thing.

We've just gotten a new vice president of operations, and after 40 years, someone in that type of position is hearing what I am saying about this issue. He said, "What good are percentages if you are not making any money," and I thought, 'Whoa, finally!'

Tell me how much money you want me to make. I'll make that for you, but let me do it my way. The mentality is, you still have to make that gross-profit percentage, even when the labor is already in the product; we have to change that thinking if this is going to be successful.

STORY: Al, you are just so right about that. The question is, how do we do this as an industry? We have to set new standards for productivity, for evaluation of success and profit, different measurements for running the retail meat department than we have today.

KOBER: What is the cost of a back room, to put in a new store, probably close to $100,000?

ROWE: Minimum.

KOBER: Plus, you are paying the rent for nonsales space. In our area, we are making the back room smaller and smaller all the time. We cannot afford to pay the rent on production and storage area.

How do you factor that in, the savings, if you are going to build three new stores and you are talking $300,000 in back-room equipment that you don't need? What if you could get it all outsourced and have the same kind of product?

ROWE: Perhaps you misunderstood me. When I said it was a million dollar decision for Harris Teeter to do case-ready ourselves, I meant that we would lose a million dollars in revenue going to case-ready pork.

KOBER: You must have cheap labor, then.

ROWE: About $6.25 in our back room. If you do the math, let's say we elected to go to case-ready tomorrow. We are going to pay 10% to 15% more for the product. Now, our pork margins are going to be severely impacted because the customer is not going to really know the difference, and she is not going to want to pay more for it.

How much am I going to save? Am I going to eliminate jobs? If I average three or four boxes of pork loins per store a week, is that going to cut a meatcutter out?

The problem is we are seeing case-ready items show up in ones, and two's and it is a matter of timing. When is it going to happen that I see real labor savings?

Right now, the cost of operating my meat business isn't decreasing; it is going up. I am not going to shut down my back rooms, not yet. I have got to make that money out of that counter, that is not going to change. If I start thinking, like a lot of folks are, that I can mark it up for less, then I am going to start seeing red numbers.

KOBER: But if you are paying $15 to $18 an hour for labor, and you can get a house to do it for $8 to $9 and cut your labor in half, that is where the savings is, not even counting the consistency that you can get by having basically one person do it.

ROWE: I guess we don't have the same kind of labor issues as many of you have.

WARREN: With the pro formas that I have put together, though, I come out really close, if not ahead, by putting in case-ready pork. When you take the labor situation out of it, and the supply situation out of it -- really, if you can calculate the true cost of labor, I mean you calculate the nonproductive hours, the breaks.

KOBER: Do you do time studies?

WARREN: Yes. And basically we figure we are talking about 45 minutes of a manhour cutting and wrapping. If a store is averaging 12 to 15 cases a week, you can figure it out. When you track that out of the equation and put that on a pro forma -- right now we are cutting about 38% of pork; when we go to case-ready it will be down more like 24%. You start to get a picture of the savings and the costs.

KOBER: But how do you get that past your chief financial officer, does he buy into that?

WARREN: Well, we are under discussion about that. But here is the thing. You are also going to get higher quality, more consistent products. Don't forget that one, that's a big one that needs to be factored in. And also that means you are going to pick up about 6% to 7% in sales, because of eliminating your out-of-stocks.

KOBER: That's right. We are doing tests and that is one of the main things we want to look at.

WARREN: When you put that all down, you'd be surprised. My figures showed I would make $12 less on case-ready. $12 dollars a week less. Now those are rough figures, but I think we can compensate for that in extra sales.

One of the beautiful things about this is that my meatcutters and my meat managers are for this -- they are not afraid or resentful of it because they know they won't lose their jobs over it. My company will reposition that labor, into grocery stocking, or deli work or demos.

ROWE: Right now, I don't see any retailer, unless they elect to do it themselves, turning to a total case-ready meat operation. But I do think that will happen in the next two to three years; I think someone will develop a case-ready plant that will supply their stores.

STORY: I think that is absolutely true; and there are plenty of companies of two, 11, 25, 50 stores, perhaps regional, that will do some form of that.

I would also say that the big companies have all had that plant experience and they have decided they don't want that investment and are going to find somebody else to do that.

ROWE: I think that will happen with a retailer partnering with a major packer.

SN: What about the quality of the case-ready product you are getting, and how it that impacting the control you have over the level of the quality in your case? Are you satisfied with the quality?

WARREN: I think I can answer that. I mentioned we were getting ready to test the Dubuque case-ready program. They have made a major investment; they bought an old Jimmy Dean plant, expanded it five times, spent God knows how many millions. They have drastically improved their case-ready pork program.

KOBER: Is that overwrap?

WARREN: It is overwrap, in a barrier bag, 12 to a case. You cut the barrier bag and you have four packages. We tasted the same program four years ago, and the quality was horrific. We had every conceivable problem with it -- many of you are nodding because you've seen that as well. Is the quality where it must be at this point? I guess the answer would be not totally, but it has gotten a lot better.

KOBER: I think value-added is a big improvement. Before the industry just thought that all it had to do was cut the product and throw it in a tray and the world would come running. But if it doesn't meet the quality standards of the consumers, then it is not going to work.

ROWE: The experience I've had with the major proteins leads me to believe they are looking at it as a profit motivator, not as a way to provide quality or a service. You would not dream of a poultry processor now taking that approach. But with most of your case-ready pork programs, if you look at your cost per cut, the profit motive is the reason. The terminology for value-added then is more value in their pocket.

REVIERE: But don't you also need to get a true handle on your costs from the standpoint of shrink and out-of-stocks? Do you have a true handle in every one of your stores of those kinds of costs?

ROWE: For our accounting purposes at Harris Teeter, we have a very close idea of what it costs us to run our business. We know what it costs.

REVIERE: And your shrink, in every store?

ROWE: Yes sir. Sure.

KOBER: What if you did a time study on one product in every store, from the time it comes in the back door to when it hits the case. Do you think it would be that consistent?

ROWE: No, there would be a lot of inconsistencies from store to store.

REVIERE: That is the reason I ask that; because I don't think we have a true understanding of that, store by store.

STORY: Absolutely not.

REVIERE: OK. To me, here is an opportunity to try to understand those costs and then have a better picture of the value of case-ready.

ROWE: We have the technology in our systems today to know what each store sells and what they carry.

KOBER: You need the known cost per package.

ROWE: Are you asking have I determined my cost per cut?

KOBER: Per package.

ROWE: It is what you pay for it.

KOBER: But I mean the known cost of that package going into the case, that you brought into the back as a wholesale cut. Here is a pork loin and here is a pork chop, what did it actually cost me to get that particular pork chop into the case?

ROWE: The cost of the meat cut is the saleable yield of the primal, divided by the price per pound that you paid for it. If it is a 95% yield and you paid a dollar a pound for it, it is 95 cents.

KOBER: That is understandable, but I bought a pork loin and this is a boneless pork chop; what did that package cost me?

ROWE: What did that cost you to get it into that tray and into the display?

KOBER: Right -- and you'll never get that cost, you'll never get close because in every store it is going to vary.

ROWE: It is going to take a little longer in some stores to cut it. It is the cost of time.

REVIERE: I don't have the answer, but if you are talking about product consistency, I have got to believe there is an opportunity for a lot of dollars still out there that we are just not tracking.

ROWE: And that is why some retailers will do case-ready themselves in the near future.

REVIERE: We believe we have packaging technologies that can deliver shelf life, and give you the appearance that the consumer is looking for. But until you truly understand what your real costs are, it is going to be difficult.

And we don't know how to get around that, but we are continuing to push. Of course, with that technology comes a cost of the packaging. And if you try to simply compare case-ready to a retail packaging cost, it is just never going to fly. And that is what we continue to run into.

KOBER: Maybe just packaging cost comparisons won't fly, but the final cost of that retail package, when you total in the labor, will make that gap lower.

REVIERE: What I am getting at is that we have some people saying to us, "It will only cost me five or seven cents to tray overwrap steaks today, and your package is 15 cents." Not to mention that we give them shelf life, flexibility, product bloom, no shrink, no yield loss, and they don't have a lost sale when somebody is not there to put it in the case.

STORY: Well, if they tell you that five to seven cents is the cost, then they don't really know what the cost is of what they are doing now.

KOBER: I would defy anybody to be close, maybe within 20 or 30 cents, to telling me what it costs to get that boneless pork chop into the case.

REVIERE: So how do we as an industry try to get a handle on those costs?

STORY: I have been dying for five minutes to ask Alan here what his shrink is, because I know he identifies that type of thing. And I am also going to guess that maybe it is higher than what he thought it was. Would that be right?

WARREN: Probably. We think it is around 7% or 8%. When we go to case-ready, we think we can get that down to 1% or 2%.

ROWE: How do you define shrink now? Is that through your promotional side, through your losses, or pulls and throwaways?

WARREN: That is just throwaways. And we have a markdown program, yes.

STORY: Well the point I want to make is that everything that we do today at retail to produce the kind of product that we think we need to have, we do from the basis of what we think it costs, and we don't really know what it costs. What we forget in this case is how to sell it. I would rather take the people in our back room, and teach them how to be salesmen.

ROWE: If you try to make salesmen out of them, you are going to have to replace some of them.

STORY: That's right. But it's a selling situation we are talking about. There is not a manufacturing company in the world that doesn't have a cost to manufacture a product, and then they transfer that to the sales department; and sure, there is an operating profit to that manufacturing department, and now the sales department's responsibility is to go out and sell that item. And there is cost involved in that and they have to make a profit.

In the meat department in a retail food store, there is a manufacturing plant. Now, do we assess that for what it really costs, and then transfer that out to the meat case, and say, this is the sales department over here, and put in the cost that it takes to do it? Absolutely not! And that we don't is the most ridiculous thing in the world.

ROWE: We have an operating statement for every one of our meat departments. It includes the square footage, its share of the rent, the expense of the cases, the depreciation, the labor and supply costs; it's an operating statement. And you find out just how many departments you've got that made money, and how many did not.

STORY: And maybe some of them you should just shut up, get rid of them. How long have you been doing that?

ROWE: For about a year and a half now. It shows really quickly where your losing departments are and what is causing that to happen -- so you can focus on fixing those that you can; and there are some you can't, and you have those constraints.

KOBER: Well, if operations got a hold of that, they'd probably shut them all down.

WARREN: And all of a sudden everybody is case-ready.

KOBER: I have seen what could be the future, in some stores in Toronto that are totally case-ready, with everything coming into the store. The back room is a refrigerator -- that is all that's there. No meatcutters, no grinders, no block, no salt; all they have is a cooler and the bread racks that the product comes in on. And they seem to do pretty well.

STORY: A lot of the objections to that future are just excuses. "Well, the color of the meat isn't right." But you guys at Cryovac know how to deal with that. Retailers need a better attitude about it. I am not disagreeing with you Bobby -- well maybe a little -- but I don't think we need to bring out bricks and mortar to do it. What you and I need to do is make a partnership with a guy in the production business, and say to him, "You and I can do this together."

ROWE: And I think that is going to happen, too.

WARREN: I would like to address the question of whether we are all satisfied with the quality of the product that we are getting case-ready.

I want to answer that by asking these retailers if they are satisfied with the quality of the product they are putting in their cases right now. And the answer to that is absolutely not. I think we at Dick's have got the best meatcutters in the country. I'll be honest with you; and I think our cases look as good as anybody's, but I can still cull that case based on workmanship problems, miscuts, bloom problems -- every problem that we have had with case-ready as well.

ROWE: 25 years ago, when we still had swinging beef, my meat supervisor said "Bobby, someday this meat will come in and it will all be packaged for you." I have seen a lot of water go under that bridge since then. I've seen the packers streamlining the products as close to being case-ready as you can get without cutting it into steaks and roasts and packaging it. The products I am seeing come in now, though, are a smorgasbord of different packages.

KOBER: Well, are they tray-wrapped, or just coming in a Cryovac bag? Because to me, true case-ready will have to be trayed.