WHOLESALE CHANGES 1998

DAVID MERREFIELD

COLORADO SPRINGS, Colo. -- The trickle-down theory is alive and well and working in grocery wholesaling: Consumers are changing, retailers are reacting and -- as a result -- wholesaling is likely to look substantially different in upcoming years.

That's the burden of a major study about the future of wholesaling that received its initial airing at last week's Food Distributors International Midyear Executive Conference here. "Those companies that recognize the warning signs and develop a strategy for the future have the best chance of survival, and of success," said John Block, president of the Falls Church, Va.-based FDI, prior to the report's presentation to a large conference audience. The study, co-sponsored by the National Grocers Association, Reston, Va., was executed by A.T. Kearney, Chicago, under the guidance of a joint industry steering committee. Findings were detailed at the conference session by David Donnan, vice president for consumer products practice at A.T. Kearney, and James Singer, principal at A.T. Kearney.

The presentation was followed by a panel discussion. Comprising the panel were Carole F. Bitter, president and chief executive officer of Friedmann's Supermarket, Butler, Pa.; William May, executive vice president and chief operating officer for Nash Finch Co., Minneapolis; and Warren Nock, vice president of consumer development, wholesalers and distributors at Procter & Gamble, Cincinnati.

The report, titled "Strategies 2005: A Vision for the Wholesale-Supplied System," points out that consumers are deploying their grocery-shopping dollars more and more toward non-supermarket channels, although the news is not uniformly bleak. The wholesale-supplied system remains the leading source of grocery supply, a $178 billion market.

That means wholesalers have a 37% share of relevant retail sales, a share that's higher than direct-store-delivered products (28%) or of self-distributing chains (35%).

Casting a look a little further into the future doesn't produce such favorable results, though. Wholesalers supply 70% of smaller stores, but this is a declining segment. Wholesalers have a much smaller share of high-growth channels: Supermarket chains with more than 100 stores (17%) or emerging alternate formats (13%).

This alignment of the wholesale industry comes at a time of great consolidation. No more than 12 years ago, there were 366 full-line grocery distributors, compared with the 97 that remained as of last year.

Kearney's Donnan told the audience that in addition to dealing with a changing market, conventional wholesalers must grapple with a level of complexity that exceeds that faced by self-distributing chains.

"When we compare the average wholesaler to the average self-distributing chain, there are interesting comparisons. Distribution-center volume is smaller with wholesalers [as compared with self-distributing chains], about $400 million vs. $650 million. Wholesalers have about 50% more stockkeeping units, with wholesalers at 21,000 vs. 14,000. And, as for stops per delivery route, wholesalers have more per route (2.5 against 1.8) and wholesalers deliver goods worth fewer dollars per store, $539 against $786.

"All of these things add up to provide a more complex operation and make it more difficult for wholesalers to operate at the lowest cost."

Into this price-challenged mix, Singer pointed out, comes the changing consumer and a bevy of increasing competitive challenges for distributors: "There is a complex web of key issues facing the wholesale-supply system. Consumers are looking for convenient, high-quality solutions to their needs and food service is well positioned to exploit consumer needs for convenience and meal solutions.

"And, we will soon see the beginnings of consumer-direct in the grocery industry. In our estimation, consumer-direct will take a 4% share of the retail grocery dollar in 2005."

Kearney's Singer told the audience that while alternative styles of food retailing are likely to continue to erode supermarkets' share of business, it is also true that the share of business done particularly by small food retailers will continue to fade. The attrition will come because some will fail, but also because some will succeed and become self-distributing or will be acquired by larger entities -- the very success of some small businesses will remove them from the ledger of independent retailing.

But, notwithstanding the attrition, he said, "It's our belief that smaller retailers will continue to comprise the core customer base of grocery wholesalers in 2005, so the success of this channel should be the common goal of wholesalers and smaller retailers alike.

"Probably the central point of our report is that wholesalers and retailers must work together jointly to survive and to succeed and to prosper."

There are several key areas where these efforts could pay huge dividends: Wholesalers could help retailers differentiate themselves vs. their larger competitors, possibly by uniting under a single banner. Retailers and wholesalers should work to reduce complexity and increase efficiency. And they can find ways to offer competitive pricing vs. chains on certain high-profile, high-replenishment items.

"There are also significant opportunities for wholesalers and retailers to jointly develop training programs and career paths for top employees."

And, as was pointed out throughout the report and its presentation, information technology must be put to work to ensure that a seamless web of information exists among the trading partners, resulting in a seamless distribution network. And, as was repeatedly pointed out, this is a situation that will require building trust among partners, a mantra that has been sounded throughout the industry for years.

In addition to building new relationships and working models between retailers and wholesalers, the facts of change suggest that the wholesaling business is likely to become quite divergent in the future, Singer said.

"We see two primary directions wholesalers can take. For wholesalers of sufficient scale, we see them emerging as larger wholesalers -- larger than today's wholesalers, they will use information technology that is integrated with retailers. These large companies will be multiregional or national in scale.

"The other direction is toward the specialty or focused wholesaler. They will specialize in distribution, products or markets. They will fill a niche better than anyone else will.

"There also may be the emergence of a couple of firms founding a national alliance, or, more likely, regionals forming an alliance for national coverage, even though they are separate companies. These alliances may be with specialty wholesalers, so a wider variety of product can be supplied." (A story about a wholesaler alliance between Fleming Cos. and Associated Grocers of Seattle appears on Page 1.)

As to the point about alliances, in the panel discussion that followed the presentation of the report, Nash Finch's May underscored their importance: "Alliances are critical. The independent retailer certainly can't afford to go up against some of the competition without having a strong equity partner. I think you'll see shared risk and shared strategies and you'll see a lot of success."

As for the importance of reducing wholesaler complexity, P&G's Nock, also on the panel, stressed the importance of all trading partners working to reduce costs: "All of us [wholesaler, retailer and manufacturer] are the problem. I submit to you that until we have an industry that rewards selling merchandise vs. buying merchandise, we're going to have a problem."

Speaking to the same topic, Friedman's Bitter said that "cost of product is critical. I can't be expected, and my peers can't be expected, to pay for inefficiencies or for wholesalers not making the tough decision to close distribution centers -- to do their consolidation -- and to hire the very best people and to work toward labor-cost control if that's an issue."

Retail Lineup

Retail-channel share has shifted significantly as focused retailers have penetrated the marketplace and grocery operators have consolidated.

Grocery Sales by Channel 1992 to 2005

(1997 dollars)

Source: Strategies 2005: Vision for the Wholesale-supplied system