THE FUTURE OF PARTNERING

JAMES TENSER

On the eve of its 25th year, the General Merchandise Distributors Council is building its future on a foundation of earned trust.

An organization that links distributors with manufacturers of general merchandise and health and beauty care products, GMDC sees itself as uniquely positioned to influence how nonfood products are brought to market in coming years.

The opportunity, say executives of member companies, derives from the group's tradition of constructive interaction. It is reflected in its meeting formats, and proven out by the quality and influence of GMDC's educational and research programs.

For its various classes of members -- manufacturers, traditional distributors, wholesalers, chain retailers and, lately, service merchandisers -- GMDC serves as a dynamic template for strategic partnering in the 1990s and beyond. It embodies, in a sense, a mega-alliance.

"Any association with that kind of constituency really has a huge responsibility to help build alignment," said Dean Skadberg, director of industry affairs at Procter & Gamble, Cincinnati, which participates in the association's HBC Advisory Council.

Observers agree that the group seems to have consistently met this challenge.

"The quality of management there impresses me more than any other trade organization I've dealt with," said Norm Loringer, national business development manager at Colgate-Palmolive, New York. He also praised GMDC's "credibility with management." "When they do speak, they are credible and the trade listens to them en masse," he said, commenting wryly on how rare it is for any large diverse group to form a consensus.

Leon Galitzen, senior vice president of strategic business development at Confab Cos., a Baltimore-based maker of store-brand HBC products, is also a supporter. "GMDC is working well in trying to alert and make the industry aware of what it needs to be competitive, and maintain and plan for future growth," he said.

Galitzen maintains that more supermarket chains are using GMDC's services "because of the effectiveness with which relationships occur between retailer and manufacturer."

The alliance trend also may be helping to curb some of the most confrontational practices of chain retailers, suggested Larry Robison, vice president of sales at Foster-Grant Group (formerly Bonneau Corp.), Dallas.

"The grocery business used to pit one supplier against another. Now there are more partnering opportunities. We are signing contracts, long-term agreements, where we partner up and share information. In many cases we have exclusive agreements with retailers."

W. Scott Roberts, vice president of business development at Gillette Co., Boston, agreed: "The partnerships, collaborations, alliances, the forum of the trade show with its appointments and interface -- I think all that has given people a little more leverage on distribution, display, pricing and promotion as relates to their businesses."

GMDC President Rick Tilton said his group has focused on critical issues of mutual concern to manufacturers and distributors, and has used them to guide its educational and research activities. He enumerated several:

· Industry consolidation.

· Efficient Consumer Response.

· More sophisticated use of scan data.

· Erosion of margins.

· Emergence of service-only merchandisers.

· National brands vs. store brands.

· Nontraditional distribution channels.

Like many on the wholesale side of the business, Dick Swain, president of Valu Merchandisers, a wholly owned subsidiary of Associated Wholesale Grocers, Kansas City, Kan., sees consolidation as a key trend driver in nonfood. "One of the issues which acutally has been addressed is what is happening on the whole-saler/retail-chain side due to all the consolidation going on in the industry," he said.

"GMDC has addressed that through opening up its doors to allow others into the organization. We also addressed this issue several years ago when we allowed the supermarket chains to come in." He credits the group's board for recognizing early what has been happening in the industry.

According to Tilton, as the wave of consolidations continues, the roles of manufacturers, wholesalers, jobbers and brokers are going to change as well. With the emergence of strong companies that specialize in in-store service and resets only, a new equilibrium, founded on new alliances, must be created in nonfood.

Referring to the megamergers engineered by wholesalers Fleming and Supervalu, Gillette's Roberts observed, "I think that branded manufacturers are probably better off with a little more of a fragmented industry. We like broad distribution. In a less concentrated retail scheme, the more people you deal with, the better your distribution."

Swain of Valu Merchandisers identified another challenge posed by consolidation: "How do we address the issue of the amount of people in much larger buying groups and employing category management? How do we assist those people in being productive at our conference?

"Until about a year ago we never had that kind of challenge. Now that category management is becoming a reality, we are incorporating category managers into the meeting schedule so they can participate," he said.

The solution was to permit wholesalers and chains to set up separate tables for each of their category managers as well as for their headquarters people. "The whole way we do business is changing. It is important that the board continue to address these changes."

CATEGORY MANAGEMENT PIONEER

In Skadberg's view, HBC and general merchandise present unique needs under Efficient Consumer Response. That means GMDC plays a special role in fostering ECR and its underlying discipline: category management.

GMDC "shares the responsibilities with other associations, whose members would include wholesalers and distributors, to help develop an alignment between all the training partners that is needed for ECR to strip out inefficiencies in the distribution system," he said.

"In order for all this to work, we have got to have all the trading partners working together and trusting each other. Retailers and wholesalers together can play the key role."

Confab's Galitzen said GMDC has been a pioneer in working on ECR and category management, partly due to the necessity created by nonfood competition with the alternative format retailers.

"I think, in their way, the mass merchandisers were involved in category management before anybody else," he said. "They attempted to eliminate redundancies and duplication that would add costs to the manufacturer. They were also first with electronic data interchange, first to analyze and attempt to use electronic funds transfer for invoice payment and continuous replenishment, with distribution, logistics, electronic bills of lading, and advance notification. That was before anybody called it category management."

With its members facing such a serious challenge, said Loringer of Colgate-Palmolive, GMDC tends to be on the cutting-edge with respect to the initiatives of ECR. "It is trying to get wholesalers to focus on those issues that will keep them competitive."

Loringer said the group's education programs can have a significant impact on industry issues.

His company was one of many involved in developing a manual on category management that has been widely used among distributor companies. He calls the result "a very positive step for trying to keep the GM/HBC wholesaler in perspective."

Said GMDC President Rick Tilton, "We are playing an active role in ECR participation to make sure our end of the business is up to date on what is going on. It would be awfully easy for nonfoods to slip behind.

"People are at so many different levels relative to ECR. Many companies are quite sophisticated and move ahead a lot; others [have] a long way to go."

Among manufacturers of nonfoods, he explained, companies are ahead in some areas and behind in some others. Procter & Gamble and Johnson & Johnson would appear to among those who are well along.

"But on the wholesaler and chain side, not as many nonfood executives are involved in ECR as grocery and top management."

The ECR process, in Tilton's opinion, "will extend well into the next century. That's an optimistic time frame."

THE DATA EXPLOSION

Another related opportunity Tilton identifies is the more sophisticated use of scan data. "I don't think the industry is using scan data the way it should and can be used," he said, again with the caveat that this, too, varies widely by company.

Said Foster-Grant's Robison, "GMDC members are finally getting a little more high tech. For several years our mass division has been on EDI, which provides us with a lot of information by SKU. Now food stores are providing very good data, which helps us refine our mix.

He also noted a marked trend away from warehousing items, which changes the role of wholesalers in distribution of some nonfood products. "In the past, wholesalers had warehoused product in their distribution centers. Now we are writing orders at store level and getting them filled specifically by individual needs.

"The wholesaler still acts as bill-through point, but we drop-ship directly to the stores. Our service people maintain, take inventory, and merchandise."

Said Swain of the trend away from warehousing: "There has been a move to more drop-ships and cross-docking of merchandise. It is a trend which is just in its infancy. GMDC probably will work on that eventually."

MARGIN EROSION

Roberts of Gillette noted that "margins in our category have grown tighter in the last few years, with competitive pressure from the mass marketers and alternative formats. The food channel was losing share in the HBC business in particular and has had to respond partly in price."

But he emphasized that supermarkets also are looking to make up the gap in other ways. "Maybe that is through more in-store support from people like ourselves [manufacturers], category management support, reset activities, issues of retail presence."

Said Swain, "Every retailer has to say, 'Who are we competing with?' It is not just the supermarket down the street, but with anybody that carries what we carry. So we have to look at what realistic margins really are."

With margin pressure comes a dilemma regarding physical merchandising: Unwilling to shoulder the cost of training and maintaining a detail force, both manufacturers and distributors are seeking to shift this burden onto someone else's shoulders.

"Retailers can't use GM/HBC to augment profits for the food business anymore," said Galitzen. "If you want to be in this business, you have to be in this business. Now you also have the supercenters, which, like the mass merchandisers, work with a far better average profit structure. Also their transactional rate makes them a tough competitor."

There are still a few sweet margins available in nonfood, however, said Robison, "ECR is on everyone's mind. But margin erosion, from our standpoint, is not such a big issue."

SERVICE-ONLY WILD CARD

One of the principal features of the evolution in nonfood is what Tilton referred to as a "convergence of roles," which has resulted in a blurring of the lines between various industry segments.

Nowhere is this more apparent than in the issues surrounding in-store merchandising and reset services. Said Tilton, "It is not unusual in a time of change or consolidation. My opinion is that it will continue for a few years, but that there will be a shakeout and a few methodologies will persist and become most accepted."

Added P&G's Skadberg, "GMDC began with a basic structure of health care, beauty care and general merchandise firms. Its membership has expanded; at one point it was virtually all wholesale grocery general merchandise and HBC businesses. In the last few years it has embraced direct buying chains. Now also some service merchandisers have come aboard, a recent phenomenon."

Loringer described the shift by manufacturers, including Colgate-Palmolive, to the use of third-party service-only merchandisers, as "an economic thing primarily. We need to come to grips with the merchandising part."

Tilton said he sees a lot of advantages to service-only firms, which can market their services to wholesalers, retailers and manufactures. "Traditional rack jobbers that used to take possession of product -- a lot of them are going in part to service-only."

NONTRADITIONAL CHANNELS

There also may be unanticipated or underanticipated opportunities within the competitive marketplace, Tilton suggested. "I mean other channels of distribution. Who knows what new areas? New television networks, telemarketing -- what effect will they have?" he said. "As an industry, any leading company or association needs to be on top of the developing trends."

Said Skadberg, "All trading partners are starting to understand the complexities of reaching the consumers of the future. Certainly one place where they can be reached is in the store. The question is, how do we deal with the consumers once we have them in the store? Maybe a farther-reaching question is, 'How do we keep them in the store?' "

FUTURE FOCUS

"One other area of opportunity for GMDC, shared with other associations, is helping members understand the landscape of retailing in the future," Skadberg said. "What will it look like 15 years from now?"

"GMDC can also play an effective role in helping to encourage other associations in our industry to work more effectively together. It might suggest a real review of what we are doing today, with an eye for more cooperation and joint activities.

"Here is where GMDC's multiple constituencies can bring a special strength in achieving the alignment of all trading partners."

Loringer of Colgate-Palmolive added, "As we go forward, the key to success goes from the buy part of the equation to the sell part. This is where GMDC will have an impact on distributors: in taking ownership of the sell part to the consumer. If they accomplish nothing else in the next five years, it should be that."