DELIVERING VALUE IN NONFOOD

CHRISTINA VEIDERS

LEICESTER, Mass. -- The new thinking at Millbrook Distribution Services here has everything to do with the urgent nonfood problem faced by supermarkets today.

Conventional operators are losing nonfood sales to mass merchandisers, whose daunting logistics have led to increased efficiencies and sharper prices. Supermarkets across the country are desperately searching for ways to cut costs and find extra value in order to survive and prosper in the nonfood arena.

Enter the service merchandiser. This type of provider, whose ranks include Millbrook,

made its mark in a low-technology era through labor-intensive services like replenishing and stocking shelves for retailers. Now the question begs whether retailers even need the expense of such a provider when much of the competition has eschewed the outsourcing of such services.

Robert Sigel, Millbrook's president and chief operating officer, contends that retailers need his company, but not for the same reasons as before. In an interview with SN here, Sigel detailed sweeping changes enacted to align Millbrook with the state of supermarket nonfood retailing today. The bottom line is Millbrook's embracing of new value-added services and its shrinking reliance on its old core function.

"Today, less than a third of Millbrook's volume is distributed on a full-service basis," Sigel said. "Three years ago it represented 70% of the company's volume.

"Supermarkets are losing share to mass merchandisers, and we need to do something about that proactively. It's not just a pitch for space, it's a pitch for logistics. It's the whole system of how you move product from the manufacturer to the consumer with the most efficient logistics piece going, and if it means the retailer can do it less expensively than we can, that is fine." Sigel described Millbrook's transformation process as going from a vertical wholesaler that handles a piece of a retailer's business to a "virtual" wholesaler that works in partnership with its retailers to provide only those services that are cost-effective.

The new Millbrook incorporates changes such as these:

Providing distribution services ranging from cross-docking to less-than-full-case orders to Spaceman planogramming, many of which cut costs and increase flexibility for customers and embrace advanced technologies.

Creating menus of services with separate fees so that retailers only pay for what they use.

Working with many larger supermarket chains to fill distribution voids for slower-moving items while carving out a larger niche in the independent sector by taking over voids left by conventional wholesalers.

Continuing to provide service merchandising on a situational basis to retailers and teaching store employees to service their own departments.

Millbrook services some 19,000 retail outlets, most of which are food chains, from distribution centers here and in Harrison, Ark.; Greenville, N.C., and Ozark, Ala. Half of Millbrook's business is in health and beauty care, 28% is general merchandise, and 21% in specialty food, a fast-growing segment.

Some of the country's largest chains, such as Albertson's Southwest division, San Antonio; Food Lion, Salisbury, N.C.; Publix Super Markets, Lakeland, Fla., and Stop & Shop Supermarkets, Quincy, Mass., are supplied and serviced by Millbrook. "The most progressive major retailers in the supermarket business need people like us," said Sigel.

Millbrook is owned and financially backed by the $12 billion pharmaceutical wholesale giant McKesson Corp., San Francisco. Sigel was named to head the $750 million Millbrook division in January 1994.

The financial stability that McKesson provides is proudly touted in Millbrook's promotional literature, and by Sigel, who says it allows Millbrook to invest in an inventory of 26,000 stockkeeping units of mostly nonfood items, as well as in research and technology.

In the months following his appointment, Sigel has overseen a major restructuring of the company. Two autonomous service merchandising organizations -- McKesson Service Merchandising, Harrison, Ark., and Millbrook -- were combined into a national company under a new name. Every division of the company, which services 42 states, has been reorganized, Sigel said.

"It's a challenge trying to turn around the nation's largest service merchandise organization," he added.

But that challenge has become Millbrook's means of survival in a retail marketplace that has rapidly changed since McKesson acquired the New England service merchandiser in 1986. During the 1980s, major consolidations in all channels of distribution and emerging alternative formats transformed the retail landscape. Supermarket retailers saw their 25% to 30% margins on nonfood sales with full-service merchandising shrink to levels that forced them to rethink the viability and cost of full service.

Sigel said he never believed his company and service merchandising would go the way of the dinosaur, as some in the industry have predicted. "Talking to grocery retailers at the top level, they always said, 'We need what you do, but perhaps you need to think how we can do it differently.' " One such area is cross-docking. The presence of Shaw's Supermarkets trailers on the warehouse lot of Millbrook Distribution Services here signifies the new direction.

In cross-docking at Millbrook, Shaw's grocery boxes are ready to be loaded with pallets of nonfoods before being shipped directly to some of the 87 stores in the Shaw's chain, which is based in East Bridgewater, Mass.

In a special agreement with Shaw's, orders are being shipped without the customary checking in of inventory at the retailer's back door. Instead, orders are randomly spot-inspected by Shaw's, which saves the retailer hundreds of man-hours in labor costs.

Besides Shaw's, Millbrook is initiating other cross-dock programs with Bruno's, Birmingham, Ala.; Delchamps, Mobile, Ala.; and Ukrop's Super Markets, Richmond, Va. Cross-docking is just part of a menu of services Millbrook is offering its retailers in adding value to the replenishment process.

Besides cross-dock options, other services include less-than-full-case orders, product preticketing, direct store delivery, Spaceman planogramming, return privileges, custom promotional and seasonal programs, and training.

"The only way to sell today is to break up the things that you do into incremental pieces and ask retailers if they want to pay for it accordingly," Sigel said.

With new technology available to retailers, major food chains have begun to take a hard look at the cost of doing business. Shaw's recently hired the New York-based accounting firm of Arthur Andersen & Co. to study whether or not Millbrook's services are cost-effective. The study concluded Millbrook is indeed a cost-effective provider of nonfood products, Sigel said.

One area of focus for Millbrook is retail employee training. Millbrook is presently running a test in some HBC departments at Dierbergs Markets, Chesterfield, Mo., on the effectiveness of training Dierbergs' employees in servicing their own HBC departments. Gary May, Millbrook's senior vice president of organization and management development and chief learning officer, is supervising the training sessions, and will evaluate the sales and productivity at those stores with trained personnel.

"Over the years we've developed top-flight materials for teaching merchandising skills at retail for HBC, general merchandise and specialty food. We've developed prototypes and are putting it out in the market and are now pilot-testing it at Dierbergs," May said.

He contends that training will give the retailer a return on its investment. But Millbrook first needs to prove this is so before it rolls out the program to other chains.

"Service merchandising is still an alternative, and we think it's situational. It depends on the retailer's size and relative sophistication. It also depends on the product category," May explained.

For some larger food chains, working with Millbrook might mean ordering those slower moving HBC items and buying through their own warehouse the top several hundred faster turning items.

"We are acknowledging that grocery warehouses can lend themselves to full-case movement with certain sizes of the top couple hundred SKUs on promotions of full cases. On the other hand, we have more break-case capability," Sigel explained.

For small, independent retailers such as convenience stores and 25,000-square-foot grocery stores, Millbrook plans to carve out a market niche through its independent store division.

"There's been a lot of indication that the grocery wholesalers are abandoning the independent market. We see a real niche there for us," said Fred King, senior vice president of sales and field operations at Millbrook.

King said independents still value full service because they don't have the expertise or staff to deal with the nonfood category. Therefore, they are willing to pay for service merchandising expertise.

Despite the Efficient Consumer Response movement, forward buying and diverting are practices that still go on in the market. However, Sigel said Millbrook is no longer a "proactive player" of such practices. "I want our company to focus on value-added distribution. Diverting doesn't add value and it takes our eye off the ball," he said.

Although there is less forward buying going on today, Sigel said that when it happens, "we are having to rethink our whole position on how we were creating value in the past, because the margins have changed dramatically."

Millbrook will concentrate on its credibility in the marketplace. Discussions with retailers will turn from selling to tangible measures, Sigel said.

He sees supermarkets continuing to battle for their nonfood share of the business. "It's not over yet in terms of market share," he said. "Maybe to break the paradigm, supermarkets will have to work on less margins. The nonfoods category is going to have to be more like a grocery category. But to battle that, supermarkets will expand variety of nonfoods and focus on merchandising."