HAND-OFF STRATEGY TAKING THE FIELD

JAMES TENSER

Forget D-I-Y. For increasing numbers of fast-moving consumer goods companies, the way to go to market is through third-party merchandisers, firms that provide the necessary flexibility and running power to execute in-store tasks once handled by the direct field sales force.

Do-it-yourself field execution, many brand marketers are learning, often proves out to be more expensive and significantly less effective compared with out-sourcing those tasks to third-party service providers.

"Right now, merchandising firms are playing a significant role in the industry. That's only going to increase," says Randy Douglas, vice president of Field Marketing, a Chicago-based merchandising firm.

Says Eric Douglas, creative director at the Sunflower Group, Overland Park, Kan., "The trends as I understand them involve the leaner and meaner manufacturing businesses. If they are to maintain anywhere close to the kind of coverage they would like, they'd rather have people on the project but not on the payroll."

Words like these ring of opportunity for the more than five dozen companies that have stepped up so far to offer in-store merchandising services. And not only direct-sales manufacturers are hiring them. Increasing numbers of brokers, wholesalers, distributors and even DSD manufacturers are catching on to the advantages of third-party service.

"It is more than a billion dollar industry," says Clint Owen, chairman and chief executive officer of PIA, based in Irvine, Calif., which is probably the nation's largest third-party merchandising firm.

While others may quibble about the merchandising sector's total billings (estimates range from about $600 million to $1 billion-plus), the conclusion is no less clear: Third-party merchandising is expanding by leaps and bounds.

Responses from a sampling of the more than 60 third-party merchandising firms identified by Brand Marketing (see accompanying directory) indicate that their service billings are growing in step.

"We've doubled every year for the past seven years," says Ralph Bartolotta, vice president of sales and marketing at Pimms, a Minneapolis-based merchandising firm.

Echoes John Owens, president of Alpha One, the merchandising division of Sales Mark, Little Rock, Ark., "We've grown 35% to 40% per year every year since we formed the company in 1982."

Despite the large number of firms now competing to provide merchandising services, the rising tide appears to be lifting all boats. Michael Kent, vice president merchandising services for the Sunflower Group, Overland Park, Kan., said he projects the merchandising industry will post 25% to 33% growth on an annual basis "over probably the next decade or so."

The market changes that are fostering the growth of this industry sector amount to no less than the fundamental re-engineering of the entire go-to-market system for fast-moving consumer goods.

"There are two dynamics in play," says PIA's Owen. "On one hand, my sense is that Efficient Consumer Response is causing the manufacturer and retailer to really refocus on their priorities. It is also driving them closer together at the top. More energy is being put into top-to-top and strategic directions on both sides."

He continues, "Manufacturers are reducing head counts. So are retailers. Their biggest variable cost is labor. Fewer hours are available within the collective system. The retailer is converting more hours from full-time professional to part-time, less professional, so store conditions are deteriorating. It creates a vacuum."

A preview of a soon-to-be-released survey from Pimms illustrates the ground swell of interest building among brand marketers. The results are based on a response to questionnaires by 62 manufacturers in the grocery, hard line, soft line and pharmaceutical industries.

Ninety-three percent of brand marketers responding said they currently offer retailers some form of merchandiser support. However, just one company in four said they are using merchandising professionals (either in-house or third-party) to handle such tasks as stocking, order writing, new store set-up, store set revisions, POP display building, etc.

Among the companies that use merchandisers, 53% said their overall use of merchandising has increased compared with a year ago, while 40% said they have increased the use of outside merchandisers.

Significantly, among all respondents to the Pimms survey, 75% said they see a movement away from internal merchandising of their products and toward a third-party service organization.

The Pimms research corroborates a finding from Brand Marketing's own State of the Union survey, conducted at the end of 1994. In that poll, 65% of brand marketers responding indicated they already were using outside merchandisers for in-store service. Another 4% indicated firm plans to initiate the practice during 1995.

Such findings lead Pimms' Bartolotta to project bullish growth for this emerging industry. "What is the potential market? I've made estimates of between $3 [billion] and $5 billion," he says.

Bartolotta reached his conclusion by looking at combined all-commodities volume in mass, food and drug -- now roughly $600 billion annually in the United States -- then "factoring down conservatively." Ultimately, he believes, a fair estimate of the merchandising service business will amount to between 0.5% and 1% of the total all-commodities volume.

But many brand marketers also distribute their products in other trade classes, such as supercenters, clubs, convenience stores, home centers and automotive outlets. In the Pimms research, among brand marketers that use third-party merchandising services, 86% said they used them for grocery retailers. Discount stores/mass merchants were indicated by 61%, while 56% indicated drug/HBA stores.

While those results reveal some strong penetration in several trade channels, they also show room for growth in those channels. Meanwhile, more brand marketers are catching on to opportunities outside of food, drug and mass.

"More of our distributor members are looking to merchandisers to help them with coverage," says David Strachan, president of the American Wholesale Marketers Association, an organization of wholesalers and manufacturers that primarily serve the convenience store industry.

He explains, "Assume a wholesaler is trying to get the business of a 100-store chain. The retailer says, 'Great, be our distributor, but here are a couple of conditions. First, provide us with our entire line -- we need a single source supplier.' This means the distributor must carry more [stockkeeping units].

"'Secondly,' he tells him, 'You must service all 100 of our stores.' Traditionally a wholesaler might be regionally oriented, so he turns to service companies to give assistance in those areas he cannot cover economically."

Before its dissolution last November, the National Association of Service Merchandisers, an association of jobbers, mainly in the household and personal care categories, boasted about 34 "service-only" members. After weighing proposals from the AWMA, the General Merchandise Distributors Council and the National Food Brokers Association, the NASM service-only firms voted this year to ally with AWMA -- at least for now.

The service companies were granted a seat on the association's board of directors, and the group voted last January to hold a major educational forum in conjunction with the AWMA Summer Exposition in Minneapolis, July 20 to 21.

Adding to the sense that this industry has yet to hit its stride, the National Association of Demonstration Companies voted unanimously this year to redefine its membership requirements to encompass in-store service companies, says Judy Foley, the association's president.

"We have to grow," she says. "The only way is to change and bring in the other parts of our industry, which is in-store services. The merchandising business is a big part of it."

In the just-published 1995 NADC membership directory, a dozen or more third-party merchandising firms are listed among the associate members. Sampling and demo companies are sharply attuned to the opportunities since the success of their programs often depends on adequate display and merchandising.

Foley, who is president of JSF Promotions, a Farmington, Conn., demo firm, also is a partner with her daughter Laura Foley Choma in Northeast Support Services Inc., North Reading, Mass., a new third-party merchandising firm.

JSF is one of several dozen firms in the sampling and demonstration industry that have launched full-fledged, separately staffed in-store merchandising arms in the past couple of years. The trend spells more change in NADC's future: "We will be changing our name," Foley says.

"It costs manufacturers about $60 per hour to do in-store tasks. We do it for one third of the cost," says Connie Piscopo, partner in In-Store Associates, a regional merchandising firm based in Columbia, Md.

Piscopo also is president of National Merchandising Network Inc., a confederation of 35 regional service companies based in Pennington, N.J., that provides national merchandising coverage. The network was formed this year.

"The timing is super with lots of companies downsizing, and their remaining sales reps having their territories expanded," she says.

For brand marketers who are experienced with third-party merchandisers, the motivation of thrift is at least matched by the desire for improved store coverage.

Says Betty McKenzie, president of Store Master, a regional merchandising firm based in Buzzards Bay, Mass., "Manufacturers tell us they need people there or they would lose business to competitors. It is good for retailer relations, and helps protect their business."

She adds, "One vendor told me that at least one retailer said, 'If we're not there, he could very well be kicked out of carrying that product."'

Adds Gary Ebben, a former NASM executive and now a consultant to AWMA, works with the service organizations. "It isn't necessarily happening because it is cheaper, it is happening because it is really more effective," he says.

Says PIA's Owen, "It begs the question: 'How many things can you do and do well?' In many industries companies are putting energy against their top priorities. When they out-source some other aspect to someone else who can do it as well or better, at the same price or less, it becomes attractive to do so."

In consumer goods retailing, there is a tradition of service-only merchandising that dates back to the 1940s. PIA's grocery and drug store business in California dates back that far. And savvy grocery manufacturers have regarded effective merchandising as a competitive ace in the hole in certain market segments.

General Mills, for instance, has used outside merchandisers for two decades to help maintain an in-stock advantage in the breakfast cereal aisles of smaller, urban food stores, says Laura Peters, vice president of the Peters Group, Chicago, which counts Big G as a client.

Similar special-use merchandising has been employed for years by cosmetics, ethnic hair care and housewares companies to attain full assortments at inner-city retailers, adds Jane Spiteri, president of Core City Merchandising, a New York-based firm that specializes in urban markets.

Douglas of Field Marketing says brand marketers' attitudes have changed dramatically since 12 years ago when he entered the business with the then-nascent firm Powerforce, now a division of Actmedia. "The challenge at first was trying to tell people what we did and who we were. Today, companies build it into their sales and marketing budgets."

A wave of field force re-engineering a year ago resulted in some of the first national merchandising contracts among companies in the household and personal care categories. Over a period of a few months, Lever Bros., Benckiser Consumer Products, Procter & Gamble, Dial Corp., Colgate-Palmolive and S.C. Johnson all either expanded previous relationships or entered into new national contracts.

Says Kent of Sunflower Group, "The right-sizing of companies, not only in consumer packaged goods but also among manufacturing companies in general, is limiting the size of sales forces and turning a lot of work over [to third parties]."

The trend has been evident to food brokers as well. A handful of full-service firms have created service-only arms in the past year or two, responding to demand from their principals to unbundle their services. Many more brokers are themselves employing third-party merchandisers to help them with physical store coverage.

"Brokers can't take on all the work. They don't have enough people," observes McKenzie of Store Master. She said an increasing fraction of her business was being booked directly from brokers, who, like direct-sales manufacturers, are reluctant to ask highly paid, computer-literate sales professionals to perform store detail work.

Says Bartolotta of Pimms, "More shelf technology creates more demand for modifications at the shelf. Execution is less sexy and glamorous. The NFBA has sensed a migration [of members] toward embracing information technology and away from the physical handling of goods."

For similar reasons, a few manufacturers of store-door delivered products are reportedly making use of third-party merchandising services as a way to free route drivers from physical merchandising chores, which sometimes impede their ability to sell greater volume.

Service-only firms report heavy activity in this area by major snack food companies. Others mention tests now under way with soft-drink bottlers.

Kent attests to the level of interest among DSD companies in merchandising services. "We do a tremendous amount of merchandising -- such as refills and fixture setups -- for Frito Lay and other DSD companies," he says.

For DSD vendors, the value of using outside services results from "giving back selling time to the organizations so they can focus on what their key responsibilities are," Kent adds.

"I think an industry that is consolidating generally will have mega-retailers, mega-manufacturers and mega providers of various services to the community," predicts Owen.

Predicts Kent, "Probably in a year or two, five to 10 major companies will control 80% of the business."