NEGOTIATING THE FEE

JAMES TENSER

When L&F Household Products began its pioneering experiment in reforming broker compensation in April 1993, the broker community held its tongue, although the gritting of teeth was audible.

What L&F proposed then and presented to its broker force during last December's meeting of the National Food Brokers Association was indeed revolutionary: a plan to use Nielsen store scanner data to determine broker commissions based on measurement of consumer sell-through instead of warehouse sell-in.

The merits of this particular decision have since been the subject of wide debate: Critics, especially brokers, have raised doubts about whether store consumption data is currently reliable and complete enough for calculating their paychecks. However, there is little dissent about L&F's underlying intent -- to focus performance-based compensation on the consumer purchase.

L&F is hardly alone in subjecting its sales and distribution

chain to fundamental scrutiny. In recent months a host of brand marketers have been rewriting their scripts for broker activity and payment. Some examples:

Nabisco this year has run tests in 28 Information Resources Inc. retail market areas in which it tracked consumption data in parallel with factory shipments on a cumulative basis. Results so far indicate good potential to pay brokerage based on census data for a large portion of the chain all-commodity volume.

Pillsbury did away with a "bonus brokerage" structure this year that was driving brokers to end-of-quarter volume spikes, and folded that money into the everyday percentage. At the same time it identified items with higher profit margins or strategic importance, and now pays higher rates on those items vs. the rest of the line, as a way to encourage broker behavior.

Ocean Spray this year added an incremental brokerage rate of one-tenth of 1% for its brokers who perform continuous replenishment services. It also announced this month a shift of its bonus brokerage formula from one based on performance against sales quota to one based on targeted consumption.

Nestle said it will merge the sales forces of its Frozen Food and Refrigerated Food companies by the end of the year, replacing its remaining Stouffer's direct salespeople with brokers. As reported, the resulting structure will be a hybrid one, with full-service brokers in some existing broker markets, but with Nestle retaining headquarters activities in former direct sales markets.

Johnson & Johnson has reportedly asked brokers to represent several of its consumer products businesses on a "flat-fee" basis instead of commission.

Scott Paper has eliminated its field sales force and switched to brokers for retail service only, while retaining most headquarters sales functions.

Clairol, James River and Ralston Purina have also each "unbundled" broker services, using brokers for retail coverage but retaining headquarters control.

Van Den Bergh Foods and Quaker Oats are each deeply involved in reconfiguration of their broker systems.

What these efforts have in common is the quest for a more effective and cost-effective structure for the field sales activity. Many of the changes include an "unbundling" of the traditional package of broker services, and an attempt to pay for them on an activity-based costing basis.

"What is happening is that, because of the profit squeeze on both the principal and retailer side, people are taking a good hard look at how they come to market. I am convinced that the entire activity is being questioned. The whole selling function is being reviewed," says Bob Schwarze, president and chief executive officer of NFBA.

This widescale re-engineering of the broker function has put pressure on the traditional 3% brokerage fee, which is paid on the basis of cases sold to the retail account. For that slice of net sales, the brand marketer receives a breadth of broker services, including but not limited to headquarters sales calls, local market intelligence, promotion execution, retail merchandising, and recently, information management.

While leading brokers have invested proactively in such capabilities as continuous replenishment programs, or CRP, and consumer behavior data, Ocean Spray has turned the extra incentive into a strategic initiative, says Ken Curchin, national sales manager.

"We have paid 3% of net dollars forever," Curchin says. "With the advent of continuous replenishment, one year ago we began giving our brokers who do CRP an incremental one-tenth of 1% brokerage."

For Ocean Spray, this added incentive is a way to ensure that it attracts and keeps a leading-edge broker force, Curchin adds. It apparently has some beneficial impact -- several brokers queried named Ocean Spray as a thought leader in the area of broker compensation.

Part of the thought process at Ocean Spray, Nestle, Scott and Ralston Purina has been the unbundling of broker services. Beyond extra payments for CRP, this generally means a separation of headquarters coverage from retail service, a prospect that many brokers regard with suspicion.

"We know full retail service is roughly two-thirds of the commission, while headquarters coverage is about one-third," says Vic Del Regno, president of Morris Alper Associates, Boston. "We find it very alarming that in these restructurings or unbundlings, commission rates are being reduced by 40% to 60% to provide retail service only, and at the same time many of the services being requested come close to full retail service."

Del Regno's concerns are echoed by other brokers and allied businesses who tend to see the actions of some of their principals as thinly veiled attempts to simply reduce costs. Their concern may be justfied by this year's headlines, which time and again have reported brand marketers cutting back their direct sales forces and outsourcing in-store service in bids for cost containment.

Beyond engendering fear or resentment in the broker community, some observers argue that the penny-wise deployment of brokers as little more than a detail force may have predictable impact on field execution -- namely indifference.

"Brokers will naturally push the clients which are most profitable," says Chris Hoyt, president, of Hoyt & Co., Stamford, Conn. "Manufacturers are shooting themselves in the foot when they push down costs. They are disabling the broker by pushing down the value-added."

In some cases where economies of scale are sacrificed, unbundling broker services could cost brand marketers more, adds Del Regno. "As professional, progressive brokers, we understand these things are going to happen. Our whole bone of contention is, are we going too far too fast and compensating at fair levels? Activity-based management will prove out a lot of our costs."

Partly because more learning is needed, "we have not unbundled the services in the past fiscal year," says Larry McWilliams, vice president of sales at Pillsbury Co., Minneapolis. "We are still paying on a percentage of sales. Going forward, we may choose to unbundle and follow an activity-based costing principle. The company is studying this now."

Adds McWilliams, "We want them [brokers] to make a fair return on everything we ask them to do. We identify different needs in different markets. In some we need to ask for more and expect to pay more. In others we would ask less and expect to pay less."

The new consciousness about broker compensation is certainly driven by more than simple cost containment, as comments by Pillsbury's McWilliams and Ocean Spray's Curchin suggest. Both companies have evinced a firm commitment to the principles and goals of Efficient Consumer Response, which holds the consumer purchase as the ultimate driver of the supply chain.

One of the more interesting investigations into pay-on-consumption is currently under way at Nabisco Foods Group, which is now tracking sell-in and sell-through data in parallel for 28 IRI retail market areas. "On a cumulative basis, we are finding that they start to track closer together," says Steve Geary, vice president of market development and sales technology applications for Nabisco's Sales & Integrated Logistics Co.

Nabisco, like Ocean Spray and Pillsbury, says it has taken pains to include its broker advisory panels in the entire process of compensation reform. Through effective communication and sharing of goals, these companies are trying to avert reactions like the March 28, 1994, letter to NFBA, in which Joseph Oliver, president and CEO, and Michael Geary, chief operating officer of Pezrow Cos., a metropolitan New York broker, urged the association to take a strongly critical stand against the L&F/Nielsen experiment.

"We believe that if the manufacturer converts to being paid on accurate consumption sales at a given customer, then and only then should we be paid on consumption," the letter said in part.

Observes Steve Frenda, executive vice president of trade services at IRI, Chicago, Nielsen's archrival in the point-of-sale data business, "We are talking about a broker's total income here. This is an extremely important and emotional issue."

He continues, "If that [cost savings] is your motivation for compensating brokers on sell-through vs. sell in, then you are absolutely missing the point.

"Theoretically, the brokerage should not change in totality when you go from a sell-in to sell-through. If what you are doing is a thinly veiled way to reduce brokerage, you're on the wrong track."

Observes Pillsbury's McWilliams, "The idea probably has some merit. But remember that it is the total sales plan that delivers volume. That includes advertising, product quality, product image, consumer promotion, as well as the in-store presence that our brokers help provide. We want to pay the brokers for the activities we ask them to perform, and we will measure those."

McWilliams says Pillsbury is currently studying how to align broker compensation and incentives with internal incentives. "We want to align throughout the supply chain, which includes our brokers."

Geary of Nabisco says his company has similar aspirations. "If we make this move, we will shift our internal sales compensation to a parallel method," he says, adding, "If we go to this, we will only pay on census data. We won't use any sampling data whatsoever."