ALLOWANCES: HERE TO STAY?

Some retailers, wholesalers and analysts polled by SN said the industry might be better off with a "dead-net" pricing system in which all vendor rebates are subtracted from the price up front, which is how Wal-Mart, Bentonville, Ark., conducts business. Others said the current system, in which suppliers provide incentives for retailers to sell more product and help pay for promotions has some benefits for both parties, if handled properly.

ks the supermarket industry would be better off with a universally adopted dead-net pricing system, manufacturers will always use allowances as a means to move product from their plants to retailers' warehouses.

"For example, when a brand manager who's worried about not making his sales quota decides to offer a promotion to blow the product out at the end of a quarter," he said. "So you're dealing with a whole infrastructure at the CPG companies that rewards brand managers and retail merchandisers for the volumes they can push through the channel or deals they can capture. And when the going gets tough, it's easy to reach for a 'drug' like promotions."

Retailers argue, however, that vendor allowances mask the true cost of doing business because the price retailers actually pay for a product is never known until after the product is sold.

Rich Parkinson, president and chief executive officer, Associated Food Stores, Salt Lake City, said he agrees that the more conservative approach mandated by the SEC was called for. He also said the industry could be more competitive with Wal-Mart, Bentonville, Ark., if retailers' costs were more transparent.

"They distort the intent of what we're trying to do, which is give consumers the best products at the best prices," he told SN. "But it would require a massive overhaul of the existing system to make that happen. What that would do, however, is to make us more competitive with Wal-Mart because Wal-Mart applies the allowances directly to the cost of goods, while we use them for other things instead of driving the cost of goods, and that distorts the way we go to market."

Retailers also said vendor allowances give rise to miscommunications among vendors, brokers and retailers.

"Manufacturers need to ensure that, whether a chain buys directly from the manufacturer or through brokers, that the brokers have the same information the direct sellers have," said Jack Brown, chairman, president and CEO, Stater Bros. Markets, Colton, Calif. "There have been a couple of instances where a broker said he could only tell us what he knew, whereas the manufacturer told us there were more deals available. We need all the information that's out there."

Still, he said he doesn't think the industry would be better off without vendor allowances.

"What's questionable about the process is the degree to which some companies are able to accumulate hundreds of millions of dollars in vendor allowances," he said.

Retailers also create their own problems when they take advantage of allowances to overstock on products that don't sell.

"The problem comes when a retailer becomes buy-driven rather than sell-driven, and he stocks stores based on what's available from the vendor rather than what consumers want -- and worse, not properly accounting for that product," said Chuck Cerankosky, analyst, McDonald Investments, Cleveland. "A good retailer only books the item when it sells. But if a company tries to fill its warehouse just to get vendor allowances, then that's bad business before it's bad accounting. And if a business is badly managed, no accounting rules are going to stop that."

Some observers point out that vendor allowances can serve to make the overall market more competitive by giving small retailers an opportunity to obtain better pricing.

"It's certainly my opinion that doing away with vendor allowances in some across-the-board fashion would have some anticompetitive effects," said Christopher McAvoy, a partner in the antitrust group at law firm Howrey Simon Arnold & White, Washington. "People say they would like to go to a dead-net system. But will everybody pay the same price? Vendor allowances do bring an element of promotion that in many cases is beneficial to smaller customers."

He said small suppliers could also benefit from paying the allowances because they enable the companies to get distribution for products that they otherwise might not be able to get to market.

"Doing away with them might have the perverse result of entrenching the leading companies," he said.

Marty Karasick, director of internal audits, Wilken & Guttenplan, East Brunswick, N.J., said vendor allowances will always exist in one form or another because they provide benefits to the suppliers.

"There will always be new programs," he said. "They might call them by a different name, but basically it comes down to offering a monetary incentive to get consumers to do different things."