EXECUTION SHORTFALL

Mark Hamstra

Many leaders in the food-distribution industry seem to agree that problems in the current sales-agency system create sub-optimal retail conditions.

The consolidation of regional brokerages into national sales agencies has left many retailers without the service levels they previously enjoyed as the agencies invest more of their resources into functions like category management and promotional planning to work more closely with the increasingly centralized retailers. That leaves fewer resources for executing resets and performing other labor-intensive roles at the store level, which some retailers say is hurting their merchandising efforts.

While some in the industry said they hope to create a national dialogue on the topic and perhaps create a standard set of best practices for the agency-retailer relationship, others said they see solutions evolving on a market-by-market basis. Many retailers in the past two years have rolled out more structured programs to work with sales agencies, but those vary widely and have had mixed results.

At the Grocery Manufacturers of America conference in White Sulphur Springs, W.Va., earlier this year, a panel of wholesalers complained that the service they receive from brokers is inadequate, especially for many of the smaller, independent retailers. Wholesalers voiced similar complaints two years ago at the annual gathering.

Retailers and sales agencies themselves agree that retailers are being underserved in the current system.

"I think the relationship between [retailers] and the sales agencies, like everything else, is in a state of transition," said Chip O'Hare, president and chief executive officer, Johnson, O'Hare, a regional sales agency based in Billerica, Mass. "You've got an old system that had a very significant amount of service provided to the customers, and I think the old ways are being challenged, primarily by the Wal-Mart model and nationalization of our industry."

Several industry sources said pressure on manufacturers by Wal-Mart Stores, Bentonville, Ark., to keep costs down has been one of the forces that has driven suppliers to reduce the rates they pay to the brokers, sometimes to 1% of sales or less. That has left brokers with little choice other than to reduce the low-margin services that they traditionally have provided to retailers, such as assisting in category resets and supplying personnel to help restock shelves during store remodels.

Although most larger chains have reached agreements with sales and marketing agents that enable the work to get done through some reallocation of both sides' resources, many lower-volume independent stores in certain markets, especially those in rural areas, are having difficulties getting the service levels they need to keep their stores merchandised effectively.

"There's just not enough money to do it," said Gary Chartrand, chairman and CEO, Acosta Sales & Marketing, Jacksonville, Fla., which along with Advantage Sales & Marketing, Los Angeles, and Crossmark, Dallas, comprise the three national sales agencies. "It's an industrywide problem. The demands from the retailer are more than what the industry is willing to pay for. That's where we get caught in the middle."

After SN's report on the wholesaler panel's complaints about brokers at this year's GMA conference, Chartrand said he sent representatives from his company to all three wholesalers on the panel to explain how Acosta allocates its investment in retail.

"My feeling is we need to educate them on where our resources are being spent," he told SN at the time.

Jim Borders, president, Crossmark, said the current situation requires that sales agents make tough decisions about what services to provide.

"Sales agencies and retail service providers don't have unlimited resources to deploy against every issue in every store," he told SN. "So the real challenge today is knowing what to do, where to do it, when to do it, and what skill set to deploy."

One wholesaler, who also asked not to be identified, said that in addition to reduced service levels from sales agencies in the form of fewer store visits, the quality of those store visits also has declined.

"They send in people who've never been in the store and don't know anything about the store," he said. "There used to be regular people coming in who knew the stores."

Another source in the brokerage industry suggested that some wholesalers should take on more responsibility for providing service to their independent stores, as the national brokers have had to shift their resources away from that function.

Many of the nation's regional sales agencies lay blame for the dysfunction of the current system squarely at the feet of the three larger, national sales agencies that were created through consolidation in re

cent years.

"What's happened is that our industry has nationalized and the national brokers have a different vision of the future than what existed 10 years ago," said O'Hare of Johnson, O'Hare. "Unfortunately, that vision has involved a significant decline in revenues as a percentage of sales, and there's a classic squeeze going on in the system."

The national brokerages, he and other regional brokers said, are saddled with debt and overhead from their roll-ups that have left them with high overhead costs. Those increased costs are coming at a time when many manufacturers are trying to reduce the fees they pay the sales agencies.

Although the rates paid to sales agencies by manufacturers vary in structure, many now pay something in the range of 1% to 1.25% of sales, brokers and others say. There are several large manufacturers that pay less than 1%.

The in-store programs that retailers have designated for fulfillment of traditional broker services like category resets sometimes cost more than 1% of sales, one broker said, so "you're underwater before you open your doors on Monday morning."

Mark Baum, executive vice president, GMA, agreed that store-level expertise has been sacrificed in the modern world of food brokerage. He attributes the resource shortfall at least in part to the overuse of category management by retailers, which has created a need for more frequent resets.

"There's been a tremendous amount of pressure at store level, so you have an increase in the amount of work to be done and a decrease in the amount of available resources to get it done," he said.

Sales agencies, under pressure to cut costs, have increasingly turned to third-party merchandising companies that hire part-time workers to do store-level work, he said.

"As people started devaluing the activity, it went to those who could perform the activity at the lowest cost, so I think we lost a lot of the productivity and efficiency of seasoned retail sales and merchandising personnel," he said. "If you have someone who's been at retail for 15 years and knows their stores and their territory wall to wall, and knows exactly what to do when they get there and may even be able to allocate time or other value-added in-store activities, there's a lot more value to that than from a part-timer who has to read a three-by-five card when they go into the store to know what it is they have to do."

Baum said the sales agencies have been collaborating more in partnership with their manufacturing clients than they had in the past to provide "turnkey solutions for retailers."

"On the one hand, I think there's a much more strategic relationship than there has been, much more sharing of information," he said. "I think we're seeing levels of transparency and information sharing that did not exist until recently."

The agencies, Baum said, have made large investments in category management and promotion planning, so that in effect they are providing those services on behalf of retailers. He said the progress that has been made at the headquarters level in terms of coming up with strategic plans for implementing promotions and creating merchandising displays has not translated to the store level as the sales agencies lack the personnel to properly execute the programs.

"Where I still think there's some disconnect and a lot of work to be done is, unfortunately, on the implementation side of the strategies that have been created at headquarters," he said.

Although brokerages see themselves as performing more category management services and other high-margin work at the headquarters level, some in the industry predict that the sales agencies will shift more and more of their focus toward providing retail services.

"With retail consolidation, brokers are losing more and more of their headquarters coverage along the way, so their business is drifting toward more of a retail model," said Don Stuart, partner, Cannondale Associates, Wilton, Conn. "I think brokers need to rethink their business model in terms of retail being the dominant source of growth and revenue in the future."

According to Cannondale's annual report on category management, retailers and manufacturers regard execution at store level to be very or extremely important. Some 95% of retailers said this, and 94% of manufacturers.

"The greatest consumer insight is meaningless if it isn't translated into effective execution at the point of purchase," he said. "The biggest area of need from a retailer perspective, and the widest gaping hole, is execution at retail, so sales agents need to figure out how to better fill that need," said Stuart.

Some retailers said they have been able to adjust to the new reality.

Ron Pearson, chairman and CEO, Hy-Vee, West Des Moines, Iowa, said he thinks his stores receive adequate attention from the sales agencies, although that attention is not as store-focused as it once was.

"We certainly don't see the kind of old-fashioned brokerage service that we used to see, but we see improved knowledge of products, and they're aggressive about getting new products into the stores," he said. "We feel they're accomplishing what we want them to accomplish."

Much of the in-store work that previously had been done by brokers now is being performed by Hy-Vee management personnel, he said, although he added that making up for lost broker coverage hasn't necessarily required Hy-Vee to hire additional staff.

Many of the nation's largest retailers have been seeking to come up with their own solutions, which have had mixed reactions among sales agencies. Many of the nation's

largest retailers -- including Safeway, Kroger, Albertsons and Ahold -- have all created programs that dictate when certain stores or categories within those stores are scheduled to be reset, and the sales agencies have to route their personnel to the stores at those times to satisfy the retailers' needs.

"The retailing community is trying to add organization and structure to the process of cutting in new items," said Borders of Crossmark. "In some cases the old traditional resets that we used to do no longer exist. Now we're doing it almost on a store-by-store basis, as the sections are reset to the approved planogram.

"You have to give the customers [retailers] a lot of credit," he added. "Understanding that resources are limited, they continue to search for ways to maximize every available resource. It's all about determining what activities deliver the greatest return."

Some of these programs work well, brokers said, while others have made life very difficult for the sales agents. In fact, complaints about the demands Safeway has placed on sales agencies prompted the Association of Sales and Marketing Companies, now part of GMA, to write letters to Safeway complaining about the program.

One regional sales agency, which asked not to be identified, said Safeway's program is especially difficult for smaller brokers to comply with because it allots such a small amount of time in the stores for brokers representing small product lines.

"It's a no-win situation for the vendor community," the broker said, describing some of the time limits as being a matter of a few minutes in each store.

"How do you go in and make a call on that?" the broker asked.

Safeway could not be reached for comment on the program.

O'Hare and others said the focus of the national sales agencies on providing more headquarters services has opened up opportunities for smaller, regional brokerages to step in.

"We're trying to perform up to the standards that we believe were established by the industry a long time ago," O'Hare said. "I hope we're right."

Pearson of Hy-Vee said he doesn't think any type of national model can evolve from the current patchwork of systems that brokers and retailers use.

"I think it's going to be different in every market," he said. "There's not one system that's going to work for the whole country."