HUGHES SET TO EXPAND CONSIGNMENT BUYING TEST

ELLIOT ZWIEBACH

IRWINDALE, Calif. -- Hughes Family Markets here this week plans to expand a test program involving consignment buying following a six-week trial with two direct-store-delivery vendors.

Hughes began testing consignment buying at two stores in mid-October in an arrangement with Dreyer's Grand Ice Cream, Oakland, Calif., and an unidentified packaged goods manufacturer, said Mike Shultz, senior vice president at the chain.

The chain is now negotiating with additional DSD vendors to take part in the program, which will be expanded to eight more stores beginning this week. If successful, the program may soon be rolled out to all 54 Hughes' stores, he said.

"It's a win for Hughes because, instead of carrying $5,000 to $10,000 of ice-cream inventory in each store, we have virtually no dollars tied up in inventory and we're able to defer payment while earning interest on that money that we can use for other purposes," Shultz said.

"The vendor wins because he's getting daily updates on what's actually selling at each store, so he can gear his inventory to each store's specific demographics and use that information to improve his overall distribution," he added.

Shultz disclosed Hughes' consignment program during a presentation at the Food Industries Sales Managers Club of Los Angeles and in follow-up interviews with SN. He declined to name any additional vendors expected to sign on to the program, but said Hughes hopes to attract suppliers representing a wide diversity of product lines, including snack foods, bread and other items. "We want to run into whatever hurdles are out there and overcome them now and then branch out into any categories

we want."

Under the consignment program at Hughes, the retailer does not have to pay for products until they are purchased by the consumer and scanned at the front end. Hughes, in turn, electronically transmits funds owed to participating suppliers once a week.

Tests involving buying on consignment are rare, and somewhat controversial, observers told SN.

Safeway, Oakland, Calif., initiated a consignment test program at a handful of stores two years ago, but abandoned the effort within a short time. Safeway officials declined to comment for this article.

But Mike Corby, Dreyer's director of DSD development, said his company was one of the participants in Safeway's consignment program, which ran from December 1993 through June 1994.

"Everyone felt the Safeway program went well, but the decision by Safeway to end the test was based on the feeling internally that it could spend its money better in other endeavors," Corby told SN.

Dreyer's is now taking part in the consignment program at Hughes "as a way to increase cost utilization. Over the years, costs have escalated on both sides and the time windows for deliveries to stores have diminished," he said.

"One benefit of consignment selling is that, because we own the inventory, there's no invoice to be signed, and we're no longer required to check it in with store personnel. That's the biggest reason we decided to participate.

"Another reason is the high cost of operating [frozens] trucks, which must be maintained at a minus-20-degree temperature. With consignment selling, we're able to make better utilization of our fleet because we can run the equipment far more hours," Corby said.

Other retailers and manufacturers said that buying and selling products on consignment holds some potentially large benefits -- as well as substantial pitfalls.

"Consignment buying can make the system more fair and equitable, because it gives both sides a better indication of what will sell and allows each to focus more on the selling process," said one retailer, who asked not to be named.

"It's a natural extension of continuous replenishment and the manufacturers' preference for a performance-based deal system. Manufacturers who say deal money will only be paid for performance must offer programs that support the consumer part of the equation," the retailer said.

"What often happens, though, with performance-based allowances is the retailer ends up overstocked, which means either he didn't execute properly or the manufacturer had a lousy program to begin with," he added.

A high-ranking packaged goods manufacturer, who also requested anonymity, said that most suppliers will probably be quite hesitant about participating in consignment programs.

"The advantage for retailers lies in the area of cash flow, because they don't have to put out money to buy products until they get money from the consumer. That gives them more control," he said.

"They can be tougher on manufacturers about introducing new products, because they have little to lose if the manufacturer puts out something that doesn't sell," said the retailer.

Most observers said that manufacturers of quick-turning lines are the most likely candidates to give consignment selling a try.

"With conventional payment terms usually running at 15 to 30 days, manufacturers of items like beverages, snack foods, dairy products and ice cream, which turn very quickly, may be paid quicker if they're selling on consignment than they would be with more conventional terms," said another vendor.

"There may be some truth to that," Hughes' Shultz said, "but we've not yet experienced that [as an issue] with any of the manufacturers we've negotiated with."

Said another retailer, "A high-turn item will always be replenished more quickly, and store inventory will be lower as a percent of sales. But with a slower mover, the inventory level at the store will be higher, which means a longer time till payback and therefore a greater risk for the manufacturer."

Shultz stated that the primary savings from consignment buying come from Hughes deferring product payment already on its shelves until merchandise is scanned at the front end.

As merchandise is scanned, data is recorded and stored and then tallied at the end of the week, when the funds due are transferred electronically to the vendor -- without any paperwork.

Sales information is also generated daily as items are scanned, and vendors can use that information to develop the next delivery -- again, without the need for any paperwork, Shultz said.

"With no paperwork, the vendor can generate an order in advance, based on the specific needs of each store, pull and palletize that order and make deliveries to the store at any time, without being restricted by the shrinking amount of backdoor receiving time. And he can deliver the merchandise directly to the shelves or store it in the back room," Shultz said.

The ultimate goal for goods bought on consignment is zero inventory. However, each store must build up a safety stock, "which we have to refine as we go along -- you can't go to zero immediately," he said.

According to one industry observer, consignment selling represents a significant step forward from the standpoint of Efficient Consumer Response.

"It offers a format for getting product through the system quicker, fresher and cheaper because there's less inventory. But if the system were abused and people were forced into it before they fully understand it, it could die a quick death," the source said.

Manufacturers most likely to be willing to try consignment selling "will be those who are very enlightened and committed to redefining the supply chain and getting products delivered on a just-in-time basis. But there are only a handful of companies in that position."