MASTERS OF THE HOUSE

STEPHEN DOWDELL

Private-label "master brokers" certainly get a rise out of people. They prefer to avoid the spotlight, but nonetheless continue to attract both strident criticism and enthusiastic praise for their influence on the private-label grocery business.

The two biggest firms, Daymon Associates, Stamford, Conn., and Marketing Management Inc., Fort Worth, Texas, declined to comment for this story. But interviews with retailers, wholesalers, vendors and industry watchers shed light on both the modus operandi and the impact of this class of middleman, which is also known as the in-house broker.

Grocery chains and wholesalers made it clear that the brokers play a vital role in making store-brand programs more sophisticated and profitable. What's more, with the prevailing winds favoring private-label expansion, there is a good chance their role will grow in the near future.

Daymon and MMI dominate the business nationally. After them the field drops off to firms that operate in a similar vein but are more narrow in scope.

The classification of "in-house broker" is discouraged by the brokerage houses themselves, but much of the trade still uses the term to describe how they operate. They have planted themselves snugly within the workings of the private-label programs at dozens of companies, including Fleming Cos., Ahold and American Stores.

About 80 Daymon employees are camped inside Fleming, for example. A call to the private-label department at Fleming's Oklahoma City headquarters is likely to net a Daymon employee on the other end of the line.

While master brokers are contracted as sales representatives for private-label vendors, they function primarily as service providers to retailers, wholesalers and buying groups.

Daymon and MMI employees help plan and execute store-brand strategies, from setting product specifications and designing packaging to procuring, pricing, marketing and merchandising.

They present options for new items and category plans, backed up with market data. In the stores, they make sure the merchandising gets done. On trade show floors, they escort the private-label buyers from booth to booth.

The industry's critics -- primarily independent brokers, and especially those who serve private-label principals -- say the setup is a that of a servant with two masters, both vendor and customer. Meanwhile, local brokers' established relationships are disrupted, they argue.

The phenomenon has already attracted one high-profile lawsuit, filed against Albertson's, Boise, Idaho, and Federated Foods, Arlington Heights, Ill., for interference in the businesses of 13 Boise brokers.

While that suit is pending, another is about to be filed. A group of local brokers in the New York metro market are reported to be poised to file suit against MMI and Wakefern Food Corp., Elizabeth, N.J. Both groups are being represented by The Watje Firm, Minneapolis.

"I don't know if we can hurt Albertson's bad enough with this litigation, but we are going to make them sorry they interfered with the Boise brokers' relationships," said Galen Watje, president of The Watje Firm. "And I don't know if we can hurt Wakefern, but we are sure going to try."

Executives at the buying end see it quite differently. They said the master brokerage houses are indispensable, and offer a fast, easy and effective way to become a more sophisticated store-brand marketer. Some examples:

· Fleming Cos.: "What do they do that we can't? My answer is nothing, if we had the time and the overhead to do it ourselves," said John Huffman, senior vice president of procurement and sales. "But it is real important for us to keep our overhead low, and at the same time have strong brands. It's a real supportive role."

· Harris Teeter, Charlotte, N.C.: "Without MMI we have essentially two people committed to private label in our organization," explained Ed Cook Jr., director of controlled brands. "We clearly feel like our business is underdeveloped in controlled brands and private label, and have made a big commitment to ramping that up. We certainly could not do that with our existing structure, without MMI."

Critics, however, contend that sometimes master brokers also provide retailers with money portioned out of the brokerage commissions they get from vendors.

The funds presumably are intended to be used to support private-label marketing efforts, but Watje said the arrangement often becomes a retail profit center. Other sources confirmed that the commission rebates are part of the equation.

"The deal is that they offer something back to the retailer, either in services or money," said one observer close to the scene. "The money is not the biggest thing. Daymon, for instance, is a huge business, about a $1 billion company by now. "They've been that successful because they offer services. Most retailers do not have the ability to manage their own private-label business. You have to have command over hundreds of categories. That's too much to handle, or would be too costly for many retailers to acquire the expertise," the observer said.

"It is not something that companies talk about very much," said Gary Giblen, managing director at Smith Barney, New York. "What are they really offering to retailers? Well, it is really a bit of everything needed to run a good private-label business.

"There is also the issue of brokerage commissions getting, to some extent or another, back to the retailer," Giblen continued. "But is it little more than a kickback system? That's a tough question."

Burt Flickinger III, retail industry consultant with A.T. Kearney, New York, said there are two basic motivations driving buyers.

"It splits into two parts of the wishbone. One part is chains and wholesalers that have moved to in-house brokers to try to come up with another three quarters of a percent or so of profits, and bypass the established system," Flickinger said.

"In the other part, you have got the more advanced chains, moving to in-house brokers as part of a plan to combine the in-house broker's sophisticated category management with expanded marketing and advertising and consumer research to develop strategic new brands, new departments and new categories."

Flickinger speculated that probably less than a quarter of buyers working with master brokers would fall into the latter "strategic" group. "The rest of them," he continued, "are taking the unfortunate attitude of, 'We don't care how long we have been in this or that buying group or relationship. Let's dump them and get that extra partial penny.' "

As Flickinger sees it, some buyers also seek to exploit the master broker. "Retailers go to Daymon, let's say, and are impressed by their capability. They also see Daymon's yacht anchored on the East River, the expensive suits, the extravagant entertainment expenses.

"Then they go back to chain headquarters and decide to use Daymon, for just as long as it takes to get a strong program going and develop their own capabilities inside. At that point, they will continue to use Daymon but will have much better strategic leverage."

Not everyone's view of these relationships is so Machiavellian.

Tuck Jasper, president and chief executive officer of Shurfine International, Northlake, Ill., attributed a good part of recent private-label gains to the brokers' efforts, "mainly because the brokers focus on getting the job done at retail. They get new items authorized, ads planned, displays built, shelf sets in place. They have been very effective at it," Jasper said.

Crucially, the brokers were available as a resource when, in the 1980s, private label's potential as a strategic tool began to be recognized by more people, particularly at the upper levels of chain management.

Offering the right solution at the right time has allowed the big master brokers to exert a lot of influence, but they don't extend everywhere. Major chains such as A&P, Safeway and Kroger -- each with well-developed private-label businesses -- do not filter their programs through Daymon or MMI. In addition, many of the chains that are allied with a master broker still maintain ties to other private-label sources.

Some markets may be reaching saturation, leading to the sticky wicket of serving two competing retailers. "Can they serve in the houses of feuding retailers simultaneously? It is a problem they are starting to run up against as they seek growth," said an observer.

Still, private label's growing status in the competitive strategies of supermarket chains could keep master brokers in peak demand.

Watje, president of the law firm bent on derailing the master broker train, told SN he expects the vendors themselves to eventually bring down the brokerage houses. Suppliers could sue master brokers for "not making it clear they are representing the buyer, and could ask for their commissions back. The in-house brokers are constantly making the statement that they are not representing the buyer, but I think a jury will find that false."

However, other industry sources said the master broker train has too much going for it to be slowed by litigation.

"National brands have been getting tougher. There will be more of a need than ever for many operators to have someone to help them run an effective private-label business," said one analyst.

"Kmart and Wal-Mart are going to be big players, a major impact on what goes on in the private-label industry. Using technology to analyze syndicated data will become more important. And Daymon is really good at helping us analyze those categories," said Fleming's Huffman.

"I don't see it being transitory," Cook at Harris Teeter predicted. "I see the need for that layer of service being magnified, as the industry grows the private-label business into more esoteric areas and smaller categories which require even more expertise and management of the details."

Said Jasper of Shurfine, "The in-house thing is going to keep busy, and will grow into other retailing as well. It's too bad they are private companies; they'd be a good buy."