SECOND SERVICE 1994-10-17

CHRISTINA VEIDERS

Service merchandisers are at a crossroads. The way they distribute and merchandise nonfood products is being examined by an industry looking for better service and ways of eliminating costs. With the National Association of Service Merchandisers phasing out this month, its membership has the chance to merge with other associations and deal with the realities of a new marketplace.

Those realities include:

Servicing and getting products into diverse and highly competitive retail channels.

Becoming cost-efficient in delivering and executing in-store services.

Applying sophisticated technology and marketing techniques in delivering the right products to appeal to the specific demographic needs of the local market.

It is believed that by meeting these new market realities -- and backed by the strength of two healthy industry associations -- service merchandisers will emerge stronger than ever in the efficient distribution of goods to the marketplace.

Gary Ebben, president of NASM, Chicago, envisions the service merchandiser of the future as servicing regional and independent retailers with sophisticated, value-added distribution.

"They will become category managers in understanding product movement and all data communications that occur at store level. They will be seasonality specialists. They will be responsible for getting products into the store quicker and removing deleted products faster," he said.

High-volume direct buying chains will be serviced by those service-only organizations that work mainly for the manufacturer in executing a variety of in-store merchandising, promotional and marketing services. These service-only firms -- now growing rapidly in strength and numbers -- do not take possession of any goods.

The service-only organization is in a "unique position to be of equal importance to all phases of distribution," said Rick Tilton, president of the General Merchandise Distributors Council, Colorado Springs, Colo.

One such company is Product Replenishment Systems. Formed in 1988 as an offshoot of Scholls, a wholesale distributor based in St. Paul, Minn., PRS is an in-store service company that performs a variety of service functions for a number of retailers and manufacturers in different trade channels.

David Smith, president, explains that there has been a significant lack of labor commitment on the part of both retailers and manufacturers.

"There's a huge gap that needs to be filled," he says. "We see tremendous future potential because of a retailer's desire to continue to cut back their costs and because of a manufacturer's desire to also cut back on their costs and make the headquarters calls.

"The lack of information at store level, the lack of people to provide it and the actual service work [in-store] has provided a tremendous opportunity for us," Smith adds.

The two NASM distributor members "have a wonderful place in the future because they will have to do it all for both the smaller retailers and those large direct buying chains," says Ebben.

In recent years, however, the independent service merchandisers, who were largely responsible for building the nonfood side of the business within the grocery channel, have been shrinking in number due to consolidations and mergers, often by grocery wholesalers. Also, new retail formats and the rise of mass merchandisers have created intense price pressures at retail, forcing grocery retailers to scramble to stay competitive in nonfoods.

Retailers have made efforts to protect their gross margins from further erosion. Cost-cutting measures and direct buying by the larger chains have resulted in a decline in the use of the traditional service merchandisers.

A casualty of all of this is the service merchandiser's very own association, the National Association of Service Merchandisers, which will hold its 15th and final convention in Palm Springs, Calif., Oct. 27 to 30. At that time, NASM members officially will vote to dissolve the association and split its net assets between GMDC and the American Wholesale Marketers Association, Washington.

NASM members said what has happened to their organization is a reflection of what is occurring throughout the mass retail industry. It is part of continuous consolidations, and blending of functions and even retail formats. All of this has evolved into a highly price-competitive market in which the cost of goods and services has become a critical issue for both manufacturers, distributors and retailers in all channels of distribution.

"Our challenge -- both in the convenience products area and general merchandise, health and beauty care area -- is to prove that the lowest price isn't necessarily the lowest cost. That's our challenge and that's a program that NASM has been struggling with as much as we have," says David Strachan, executive vice president and chief executive officer of AWMA.

Pat Carrico, president of Richmond Master Distributors, South Bend, Ind., admits that service merchandisers became noncompetitive. But in facing today's new market realities, he contends that they have begun to fight back.

"Service merchandisers have learned how to drive the costs out of the system to become competitive. As the technology interfaces with that, they're going to be in a strong position and have a strong case for driving retail dollars and minimizing the investment," Carrico says.

Smith of PRS adds: "We think the future of the industry is going to be technology-based. The ability not only to send the merchandiser into the store to perform merchandising functions, but also to gather data and transmit that data back to the manufacturer or retailer to act upon."

Service distributors have begun to unbundle their many services to meet their clients cost concerns.

For example, presently about half of Millbrook Distribution Services' total dollar volume is made up of unbundled service offerings. According to Bob Sigel, president and CEO of the Harrison, Ark.-based service merchandiser, it used to be that 70% of the company's revenue was based upon full service.

"Very rarely were we unbundling as many things as we are now as we try to identify the cost drivers of our services.

"Retailers are asking what are the value-added services that you can provide to help me be that much more efficient. Retailers are more focused on efficiencies rather than at the esthetics of service and the quality of the service," Sigel says.

To that end, the role service merchandisers perform may prove vital to the industry's efforts to eliminate costs from the distribution system and better serve the needs of the consumer.

"The rack jobber-route salesman was and, in a sense, remains an example of a form of Efficient Consumer Response. What we thought was becoming outdated may be coming back into fashion," says Randy Douglas, vice president and executive director at Power Force, Chicago.

"With all the industry focus on ECR, the traditional food industry rack jobber's full-service program can be a viable option and product source just at the time we need it up on the rack," says Jim Key, nonfood direct-store buyer at Community Cash Stores, Spartanburg, S.C.

At the heart of the ECR movement is category management and activity-based costing, according to Ebben.

"That is what we have been doing for years. We manage categories for retailers; buy it for them; distribute it in less than full case quantities; merchandise it and take it back for them" if it doesn't sell, Ebben explains.

"In the ECR environment, when people begin to do their measurements, they will see that some of the departments that our folks run and manage for them in an outsourcing mode is the most efficient way to handle it," he says.

Bill Bartels, senior vice president, corporate, at Spar Group, Tarrytown, N.Y., said a key component of the ECR initiative is efficient assortment and selection.

"It really precedes the whole category management process. Once retailers select the proper items and they have clues for gaining knowledge on the assortment process, they define the category differently. Many times this is done on a demographic or micromarketing approach.

"The whole issue of getting the right product replaced on the shelf or reset on the shelf becomes important and basically that's what we do well," Bartels says.

"There are some in the industry that think those rack jobbers that will survive will be essentially niche carvers," says Jim Clary, vice president and general manager at Petco Marketing, Specialty Marketing Group, Springfield, Mo. "Certainly one of the major concerns of a rack jobber is being responsive to what the retailer wants, whether it's complete service, drop-ship, cross-docking, limited service. The service merchandisers must be flexible." Dan Van Zant, supervisor and buyer of general merchandise and HBC at Ray's Food Place, Brookings, Ore., says service merchandisers have been able "to address the concerns that our wholesaler can't handle, mainly in fashion-oriented items.

"As our stores cover a broad customer base, our service merchandiser can tailor our mix of fashion-type items to our retail customer base," he adds. It's the "points of distribution" that manufacturers shouldn't forget about and concentrate on, according to Ebben.

"NASM members put their products in many stores around the country and in many smaller stores that manufacturers' management, sales force and brokers never reach," he says.

However, Ebben contends that the growth of private-label products will turn manufacturers' attention back to the value-added distribution services merchandisers can provide to enhance their branded products.

Everyone agrees that the need exists for functions performed by the service merchandisers to build volume in branded products.

"Branded mangers will begin to value the fact that service distributors can place their products and brands in lots of retail channels. They will come back and look at points of distribution as being important, and that's what our people do best," Ebben says.