A CAUTIONARY TALE

David Merrefield

There's a major business sector in big trouble these days because of the way it generates revenues.

It's an industry that somehow decided to back away from the old-fashioned notion of generating profit by selling services and products, and instead opted to generate cash flow on the basis of wringing funds out of vendors. Probably no one remembers which company first struck upon this strategy. Most likely it was an almost instinctive reaction to a bunch of numbers run by some astute actuary. In any case, the beauty of the concept became obvious to all who saw it: It relieved industry players of the unpleasant obligation to tell its customers there had to be a relationship between the cost of services and product supplied, and the price those customers had to pay. And, after all, who wanted to be the first to give customers the bad news of price increases and see business drain away? So, as time went on, everyone in the industry was selling products at a price below their intrinsic worth, and, in place of merchandising, was heaping on auxiliary services.

Said one industry observer, "The truth is, they didn't really know what it takes to make money on their core business." Said another, "This has not been a healthy industry for most of the decade."

By now, are you suspecting I'm referring to the wholesale grocery industry? If so, you've missed the mark. All this is a description of the automobile rental industry, for which I'm indebted to a news article that was in the Wall Street Journal several days ago. It seems the car-rental business drifted away from making money on the basis of renting, and instead focused on accumulating buying incentives from manufacturers. Then, it started churning cars at a fast rate to keep the buying incentives flowing. To the extent the car-rental industry marketed to consumers, it was done by sticking pontoons on the products. It became difficult to rent a car without buying insurance, refueling options, cellular phones, VCRs in minivans and what have you. It was all done with the hope that such outriggers would keep the business afloat, or at least stable. Now buying incentives are being choked off and a day of reckoning for the rental companies is at hand; they must figure out how to make money from the rental business. This column so far has been about renting cars, but, of course, there is an analogy to supermarket retailing and wholesaling, especially the latter, that's too obvious to overlook. Luckily, our industry several years ago recognized the problems inherent in premising business on buying, instead of selling, and has made aggressive moves to correct the situation. Look at the big two players alone: Supervalu is moving forward with its Advantage program that's intended to move the wholesaler to a "cost-to-serve" pricing structure. Fleming Cos. has long been working on its similar Flexible Marketing Plan. The broad concept behind both plans is that independent customers should pay in accordance with the real cost of services and products supplied. Will it work? Fleming said lately it may back off this re-engineering initiative a little because of a string of disappointing financial reports. Let's hope Fleming hasn't decided that the medicine is good, but the patient could die of it.

It's essential that this industry -- and its manufacturing partners -- swallow the medicine of change now so the shift from buying for dollars to selling for dollars can be accomplished. If it's not done, independents and their wholesalers won't survive into the next century in anything like the form we know them today.