SERVICE CHARGE

JAMES TENSER

What a difference a couple of years can make in the Efficient Consumer Response-driven 1990s.

In 1994 it was big news when brand marketers such as Lever Bros., Dial Corp. and Procter & Gamble said they had cut sales forces and outsourced in-store merchandising tasks to third parties on a national basis.

In 1996, such outsourcing has become widespread, even commonplace, among manufacturers, especially those supplying the grocery trade. With national merchandising companies gaining strength, and brokers and in-store demonstration firms leveraging their local retail ties to compete, brand marketers must sift an expanding array of alternatives to get the job done at retail.

The resultant choices pose complex challenges to marketing and sales executives. But the growing use of merchandising services is being driven by a straightforward economic fact.

"No other marketing activity generates a greater sales return than the incremental in-store presence delivered by timely merchandising support," says Jack Clarke, senior analyst at Furman Selz, a New York investment house.

Words like those quicken the blood of the more than 100 merchandising service firms that are rushing in to offer store-level solutions to brand marketers.

They are also inspiring to three significant industry groups that have been formed since last December: the National Association of Retail Merchandising Services, the Field Marketing Services Association and, most recently, the eight-member Retail Merchandising Steering Committee of the National Food Brokers Association.

NARMS claims 62 members. FMSA, known as the National Association of Demonstration Cos. until the first of this year, boasts 53 merchandising company members. NFBA has yet to tally how many of its 1,300 member broker firms also operate separate service-only businesses.

While there is some overlap among the three groups, NARMS has attracted more members capable of national coverage, while FMSA tends to count more firms with regional or local coverage on its roster.

NFBA membership includes a handful of companies with divisions that provide merchandising on a national scope. Now increasing numbers of regional brokers are unbundling their offerings, says John Owens, president of Alpha One, a division of Sales Mark, Memphis, Tenn., and chairman of the Retail Merchandising Steering Committee.

"Brokers have always provided retail merchandising. It is a cornerstone of their service, which includes headquarters selling, store retailer merchandising and order processing. Manufacturers have traditionally paid them on commission to do all these things," he says.

Adds Owens, "What we are seeing happening is a lot of [brand marketers] that were direct have made decisions that they can call on retail headquarters with their own sales forces, and just utilize the broker for retail services."

Newsmakers

The surging number of players and the rise of the associations are only parts of the picture in the merchandising services industry. In recent months a wave of acquisitions, alliances and business maneuvers has swept over it:

Two brokers, Acosta Sales, Jacksonville, Fla., and Bromar, Los Angeles, formed a joint venture May 1 to handle merchandising services on a national basis in the mass merchandiser trade. Acosta formed a new division, Quality Retail Management, which is handling 34 states in the Eastern part of the country, while Bromar's Resource Project Management division covers the rest of the nation.

Alpha One merged with Retail Support Force, Atlanta. The two companies each retain their own names and operate separately. RSF's focus is against the supermarket class of trade, while Alpha One's is primarily mass, drug, pet superstores and club stores.

PIA Merchandising Co., Irvine, Calif., went public in March on the Nasdaq exchange, raising $23 million in capital.

Spar Group, Tarrytown, N.Y., acquired former Advo division Marketing Force this winter and combined it with its Minneapolis-based Spar Marketing division under the new name Spar Marketing Force.

F.O. Phoenix Co., a $40 million supplier of integrated point-of-purchase services based in Sussex, N.J., acquired FieldFlex, a two-year-old third-party merchandising services firm, in April.

Howard Marlboro Group, an in-store display and fixture design company based in New York, announced a strategic alliance with PIA Merchandising in April.

These news events reflect a quickening of the pace in the merchandising service business. Consolidation moves are coming concurrently with the emergence of new companies.

"The growth in the merchandising area is coming on two fronts," says John Scopa, president of F.O. Phoenix's Conocraft division and a founder of FieldFlex. "Clients are outsourcing their field forces. This is the biggest growth area. They are looking for more effective and efficient solutions.

"The second front is that the nature of merchandising is changing," he adds. "Brand marketers can look at it as a marketing tool. In-store is a line item now."

Says Clinton Owens, chairman and chief executive officer of PIA Merchandising, Irvine, Calif., "In essence, it's a function of outsourcing. Manufacturers are refocusing and reprioritizing. Retail is more important today and going forward than it ever has been. Yet the need to focus on a rapidly and dynamically changing environment is causing management focus to undergo priority shifts." (See related story on Page 27.)

Clarke of Furman Selz, who specializes in tracking marketing services companies, says the total merchandising industry is "approaching $2 billion." That's an estimate, he says, of the expenditures made toward retail merchandising activities by manufacturers, distributors, brokers and retailers -- both through internal resources and outsourced to service providers.

The third-party side of the business is easily half that volume, he estimates, and growing by "about 15% to 20% per year."

He says he sees multiple trends driving the merchandising industry right now, beginning with the overall outsourcing trend sweeping American business. Both retailer downsizing and manufacturer cutbacks are factors.

"It is being driven by better data bases," he adds. "Some of the best opportunities for improvement for the bottom line come from improving the retail execution in terms of both timeliness and quality. In the world of sample data, you are always guessing. In the world of daily data, you can see the impact."

John Owens of Alpha One also cites the consolidation of the buying functions at wholesalers and retailers such as Supervalu, Kroger Co. and American Stores. "Manufacturers put teams together to service retailers. There will be a real shift to coverage based on customers rather than geography."

He adds, "There are roughly 100 companies in the [merchandising] business now. I believe that number will double over the next 18 months. There is tremendous interest by food broker companies. Many provide these services now, though not always through separate companies."

Finally, Clarke mentions manufacturers' efforts to control their coupon and trade expenditures. "Promotion will never go away, but manufacturers are seeking alternatives. In the absence of promotions there is a greater need for third-party merchandising."

In results of its second-annual "Survey of Merchandising Service Practices," Pimms, Minneapolis, confirms the widespread and growing use of merchandising services by brand marketers. In the 1996 survey, 96% of responding packaged goods executives said they offer in-store merchandising services to their retail customers, up three percentage points over a year earlier. Another 4% said they plan to offer such services in the future.

Overall, the use of merchandising continues to increase, the survey said. In 1996, 53% of respondents reported an increase in this activity, compared with just 6% who reported a decrease. (The remainder said they stayed the same.)

The above figures refer to all forms of merchandising activity. The use of "professional" servicing -- in-house or third-party dedicated merchandising forces -- increased by 12 points year to year to 37% of respondents.

The success of PIA's stock offering, which Clinton Owens says was "oversubscribed," may be taken as another sign that the planets are aligned over the merchandising service business.

The company raised a net $23 million from investors who paid $14 per share. The stock's share value as of May 15 was hovering at $28, making the current market value of the company about $178 million.

The stock was gobbled up mostly by institutional buyers, adds Clarke of Furman Selz, whose firm co-underwrote the PIA offering. A $104 million merchandising services company may seem like an obscure target for professional investors, but "Wall Street understands outsourcing stories."

Question Everything

Even for brand marketers who are firmly committed to outsourcing shelf maintenance, reset and surge tasks, the emergence of so many competing suppliers of in-store merchandising services poses numerous questions.

Says Lisa Smith, CEO of Pimms, "There are many different services that companies offer. What do you want? Arms and legs that can slap coupons on packages, or intricate grocery resets?"

Says Coleman O'Donovan, president of Field Marketing & Management, Chicago, "We have a human resources competency and a technology competency. The first means we know how to match the right people to the right jobs. The second means we know the best ways to collect, sift and deliver actionable data/information from the stores."

There are also differing grades of people emerging, he adds. In-store tasks like applying on-pack coupons or arranging vitamin bottles on the shelf require very different physical capabilities than building mass displays out of beer cases, for example.

"We sometimes refer to it as the blue-hairs vs. the burly guys," O'Donovan says.

Says Judy Foley, president of FMSA, "Personally, I would say it is more convenient to use one source rather than work with 20 regionals, but would you get the same personal service?

"We have taken over some accounts that national companies had because they did a poor job," adds Foley, who is also president of JSF Promotions, Farmington, Conn., and CEO of Northeast Support Services.

"But I also see a lot of work the national firms cannot take on. Regional or local merchandising companies can fill that need."

Smith suggests brand marketers answer several other questions when weighing the choices for merchandising services. "How much time and resources are you willing to invest in managing the third-party function? To outsource a national program through half a dozen small companies, someone in the organization has to manage it," she says.

"On the other hand, some companies may already have people managing the merchandising function anyway."

Is the need local, national, account-specific, geographically specific? These are questions Smith says must be addressed by anyone seeking a merchandising company.

"Finally," she says, "do you want a relationship where the third party truly becomes part of the strategic planning and budgeting process, generating and interpreting data? Or is it execution only? There is a huge difference between those two types of companies. That question will really separate the men from the boys."

For brand marketers, that question sums up the fundamental role of the merchandising company. Is is just a provider of labor or is it a knowledge generator?

"Most important is for the client to understand what their own needs are. What caliber of organization do they need? Different organizations are best suited for different things," says Owens of Alpha One.

Says O'Donovan, "At some point, retailers need to look at what are the total system costs associated with having multiple companies [with different and often competing interests] come in to do tasks in their stores.

"On the other side, manufacturers are now looking for low-cost, high-quality services to ensure in-store presence or to meet retailers' requirements. What is the cost-value relationship? It may be good for trade relations, but at what price?"

"Third-party merchandising is not about saving money anymore," adds Smith of Pimms. "It is about focusing your salespeople and brokers on what they are supposed to be doing, which is selling."