BUILDING CONNECTIONS

MARK HAMSTRA / ELLIOT ZWIEBACH

The biggest news of the past year for some sales agencies may not have been the breakup of Albertsons, but instead the ongoing centralization of procurement by Kroger, according to some third-party firms that service the chains.

The recently completed sale of Albertsons, Boise, Idaho, to Minneapolis-based Supervalu and a group led by New York-based Cerberus can be seen as a sort of de-consolidation, they said, unlike the supermarket consolidation and centralization of procurement that drove the sales agencies into a merger frenzy of their own in the late 1990s.

"We have a very large team in Minneapolis built around Supervalu, and we have a very large team in Boise built around Albertsons, and what we're hearing from them is that the changes will be slow," said Gary Chartrand, chairman and chief executive officer, Acosta Sales and Marketing, Jacksonville, Fla. "The changes at first will be really in the back room - the non-resale items like shopping carts, bags and that kind of stuff."

Supervalu's decentralized style plays into the strengths of the sales agencies, he said, because it is a complex organization to serve from the manufacturers' standpoint, with separate sales calls required at the headquarters and regional levels.

Albertsons, on the other hand, had been centralized in its purchasing, but

if it adopts a more decentralized model, it could create more opportunities for third-party firms to provide service.

"We think what's happening here with both Supervalu and Albertsons is going to be pretty complex for some period of time," Chartrand said. "That impacts us pretty positively, because we have the scale to be able to deal with it vs. a direct manufacturer on their own."

Cerberus has a two-year agreement with Supervalu to provide merchandising services, he said, so that piece of the sale, encompassing 650 stores in several markets across the country, should not have a negative impact on the third-party community either. In addition, Chartrand said the stand-alone Osco and Sav-On drug stores that were acquired by CVS also will continue to be serviced by their respective brokers.

In a memo to its vendors obtained by SN, Supervalu said it does not anticipate many changes in its relationships with its supplier community (See "Supervalu Foresees 'Business as Usual,' Page 20).

"We expect that it will be business as usual and we look forward to working with you," the memo said.

A Supervalu spokeswoman told SN it was too soon to speculate about potential changes at Albertsons' former headquarters in Boise and how that might impact brokers, although she did say the company would "maintain an important presence in Boise."

Centralization at Kroger

Despite the negligible near-term impact of the Albertsons sale, third-party sales agencies are continuing to feel the effects of consolidation on both the retail and manufacturer sides.

Kroger's recent announcement that it would consolidate buying for its Fred Meyer and Ralphs chains on the West Coast into its corporate headquarters in Cincinnati has been a blow to some sales agencies, who stand to lose a lucrative piece of their business as manufacturers' representatives in those banners.

"Kroger is having a bigger impact than the Albertsons sale," said Ben Fischer, president, sales agency, at Plano, Texas-based Crossmark. "Today we call on Fred Meyer for most of our clients, but when they roll that into Kroger corporate, we'll lose a little headquarters business. For a lot of our big clients, we don't make the headquarters call, they do."

He agreed that the Albertsons sale would have little impact on the brokerage community, at least in the short term.

"Albertsons has some innate understanding of their business that Supervalu doesn't have today, and they are probably going to leave that to the folks who have run Albertsons from a merchandising standpoint," he said. "Long term, they may want to take advantage of their size and the synergies that creates for them in terms of procurement. Ultimately, they may pull the buying into Minneapolis, but they will leave the merchandising in terms of how they market a little more decentralized."

Even as the large supermarket chains have centralized their buying organizations, the brokers still end up doing a lot of the follow-up work at the regional and store levels, they said.

Chartrand pointed out that as the largest traditional supermarket chain in the country, generating more than $60 billion in annual sales, Kroger remains a complex organization with 16 divisions that all require some brokerage work.

"We have infrastructure around each Kroger division, and we have enough scale and infrastructure to keep people in place in each of those divisions while a direct company would have a hard time doing that," he said, noting that Kroger's consolidation and centralization historically has been a net positive for Acosta.

Less High-Quality Work

One of the challenges brokers face, however, is that the headquarters sales calls are an important part of their business, while the store-level continuity work can be bid out and performed at very thin margins, according to sources in the industry.

"As retailers consolidate, and manufacturers consolidate, you've got less potentially high-quality work available," said one former broker who now works as a consultant and asked not to be identified.

The store-level services, he said, "have become less than profitable. The manufacturers have brought the higher-quality work in-house."

But brokers say that although many of the largest CPG companies use a direct sales approach, plenty of small and midsized manufacturers still have need of the sales agencies, especially when it comes to the category management services they can provide.

"There's no question the brokers have done a tremendous job building category management tools," the consultant said. "They have replicated what any of the direct companies have, and they can provide that to the mid- to small-sized manufacturers."

Category management, in fact, could be a big opportunity for the brokerage community to serve both manufacturers and supermarket operators, said Paul Weitzel, vice president of consulting firm Willard Bishop, Barrington, Ill.

"There are companies that have outsourced IT, and companies that have outsourced accounts payable, and we've heard there are some companies that have said they could potentially outsource some of their category management work," he said. "There are a couple of retailers we've talked to who potentially might do that, and I think brokers would be a natural to provide category management. They are in the stores, they have done this work before - it's just a matter of elevating their capabilities to provide high-end category analytics."

Brokers also indicated they are adding services at the store level to enable more customized offerings, which helps counterbalance the centralization of procurement.

"The opposing force to [centralization] is that micromarketing is occurring in the industry, and everybody is realizing that you really have to be a store of the neighborhood to reach the community," Fischer said. "Kroger can't make a store in Cincinnati, and pick it up and put it down in Los Angeles and have it be successful.

"We can assist retailers in creating their planograms, and in targeting by store," he added. "We have store-level sales data, to see what sells in some neighborhoods and not in others. We can see the differences between stores that are right near each other. If one store is used more like a convenience store, another might just have heavy sales on Saturday and Sunday. They both might have the same planogram, but the velocity of SKUs is very different."

Chip O'Hare, president, Johnson O'Hare, Billerica, Mass., and chairman of the Independent Food Brokers Association, said smaller, regional brokers are ideally suited to provide such a complex level of services, including category management, at the local level.

"You just don't deliver deal sheets any more," he said. "You've got to come in with at least a top-line analysis, and sometimes our salesmen are walking in with a totally in-depth analysis with decision trees.

"Now that there are software packages you can use, you don't need to be a big, national broker to be able to afford it."

Weitzel of Willard Bishop said he believes brokers will transition into a business model where they offer a menu of services at a range of prices that support various levels of complexity.

"Brokers used to spend the majority of their time cutting new items into the shelf, and working on promotions displays," he said. "With all the category management work in the 1990s, that shifted to headquarters, so now they are working on planograms, and providing category management support.

"In the future, I think what you are going to find are new, value-added services emerging, and more menu-type pricing where you will choose the services that you want. I think you will see more dedicated services, with more brokers acting like a dedicated sales organization, where folks will want to buy a labor pool for a dedicated amount of time, to do service merchandising work."

Vendor Consolidation

Manufacturer consolidation also has a potentially greater impact on sales agencies, some observers said, although Chartrand said the brand divestitures that have occurred in recent years make up for the mergers that have taken some of the business away from the sales agencies.

"Historically over time, manufacturer consolidation has sort of washed itself out," Chartrand said. "We had clients who have been buyers and clients that have been sellers.

"Five years ago, Clorox bought Glad trash bags, and they were with a competitive agency. They got consolidated into us, and it was a windfall," he said. "Three years ago, Heinz divested a number of brands to Del Monte, which is agency-represented, but by our competition, so business went away. NestlT bought Purina, and that was a net gain when that happened, so over time it seems to wash itself out."

He noted that the two largest food companies, Unilever and NestlT, both outsource a significant amount of services to third-party firms. NestlT is Acosta's largest client and Unilever is a client of Advantage Sales & Marketing, Irvine, Calif., which is the other of "the big three" in the brokerage space, along with Acosta and Crossmark.

In addition, as large CPG firms unload their peripheral brands, it creates opportunities for the brokers to pick up business.

The increased interest among private-equity firms in acquisitions also could make merger activity lucrative for brokers, according to one observer.

John Maxwell, Americas Retail & Consumer Industry leader, PricewaterhouseCoopers, said financial buyers might be less inclined to want to build up a sales force at an acquired brand, especially if their intentions are to flip it.

"I would think that would lead to more outsourcing," he said. "It could be they may not even have a sales force, so it would make sense to go with a broker. I can see that driving some additional outsourcing."

PricewaterhouseCoopers recently published the results of a survey of consumer goods companies that found a trend toward more outsourcing - nearly 70% of respondents said they expect to do more outsourcing this year than last year. Although the survey didn't specifically address outsourcing the sales and merchandising functions, the principles are fundamentally the same whether the companies are outsourcing manufacturing, technology or the sales function, Maxwell said.

CPG companies see the real value in their brands in creating innovative new products, and therefore dedicate the bulk of their resources in that area. A manufacturer with limited resources might be more likely to outsource some of its functions, including the sales and service piece.

"I think what's happening is that a lot of the CPG companies are realizing that the essence of value is really around the brand," Maxwell said. "There's a balancing act of bringing innovation, like P&G's Swiffer, that is really where the value is created, as opposed to manufacturing or back-office accounting."

The increasing penetration of private label may play against the sales agencies in their efforts to secure more sales business with the manufacturers, he suggested, as CPG companies look to preserve more space on the shelf and may be hesitant to relinquish control of the relationship with the retailer.

Consolidation also continues to some degree among the brokers themselves, as the large national sales agencies pick up some specialty brokers in niche businesses like natural products or perishables, as Acosta has done.

O'Hare of Johnson O'Hare said he thinks the big three will eventually become the "big two" as the national brokerages eventually merge.

"Consolidation was not the answer," he said. "The smaller, regional brokers are growing like weeds."

Supervalu Foresees 'Business as Usual' Following Acquisition

MINNEAPOLIS - For suppliers who deal with Albertsons, it will be business as usual, at least through the end of this month, according to a letter to vendors sent jointly by Supervalu here and Albertsons LLC, Boise, Idaho, the Cerberus-owned portion of the chain.

In a letter signed by Duncan MacNaughton, executive vice president, merchandising and marketing for Supervalu, and by David Dean, group vice president of procurement for Albertsons LLC, the two companies said they have established a service agreement where Supervalu will manage bill payments and perform accounting services for the Cerberus-owned entities; in addition, those entities will utilize existing Albertsons systems, which are now owned by Supervalu, the letter says.

"All Albertsons purchase orders issued prior to June 30, 2006, by operations acquired by [Supervalu] and Albertsons LLC will be honored," it adds.

In the case of CVS Corp., Woonsocket, R.I., which acquired the freestanding Osco and Sav-on drug stores from Albertsons, the letter says it will manage payables relating to goods and services to the drug stores and the La Habra, Calif., distribution center.

In a series of frequently asked questions attached to the letter, the companies said vendors should continue to call on the merchandising teams within the divisions, as they have been doing, and to continue to do business with those divisions and the distribution centers.

The letter says both companies have committed to comply with the current terms and conditions of existing agreements, and strategic sourcing reviews will continue under current time frames.

Regarding payment arrangements, the letter instructs vendors to submit invoices to Supervalu or Albertsons LLC, as appropriate.

As for open purchase orders that cross over between the two companies, the letter says all existing purchase orders will be honored, though the two companies "may elect to segregate and re-issue outstanding purchase orders by entity in order to facilitate timely payment processing," the letter points out, noting that any such procedure will not reduce the obligation of any entities for the original purchase order.

If vendors have any questions for either the Supervalu-owned portion of Albertsons or for Albertsons LLC, the letter directs them to contact supplier services at (208) 348-2804.

Under terms of the sale of Albertsons, Supervalu formed a wholly owned subsidiary, New Albertsons, to acquire Shaw's, Star Market, Acme, Jewel, Bristol Farms, Albertsons Southern California and Albertsons Intermountain West, and the Osco and Sav-on pharmacies in those stores; CVS Corp. acquired all freestanding Osco and Sav-on drug stores; and Cerberus acquired Albertsons' Dallas/Fort Worth, Northern California, Florida, Rocky Mountain and Southwest divisions.

ELLIOT ZWIEBACH

Storecast Tapped For P&G Services

CINCINNATI - Procter & Gamble here said it has selected Storecast Merchandising Corp., Malverne, Pa., as its preferred provider for retail merchandising services nationwide.

"We've had a longstanding and frankly worthwhile relationship with Procter & Gamble," said Vince Willis, chief executive officer, Storecast. "This is the most strategic relationship we've had with a CPG company, where we are really thinking about working together to create a model that has maximum efficiency and maximum effectiveness from a customer point of view."

The merchandising function previously had been provided by multiple vendors, a spokeswoman for P&G told SN last week.

Storecast, which provides in-store strategic and merchandising services for retailers and CPG companies, acquired Archway Merchandising Services in January, which broadened the company's scope. The acquisition gave it more than 10,000 employee merchandisers covering more than 40,000 retail locations in the mass merchant, food and drug, dollar store and specialty channels.

Willis said he thinks his company also will have some opportunities to benefit from the breakup of Albertsons, the Boise, Idaho-based retailer that was split up and acquired this month by Supervalu, Minneapolis, and a group of private investors.

"The changes are an opportunity for us to go out and have some meaningful dialogue with the leading retailers and with the leading manufacturers about different models that get beyond the traditional binary choice of how to go to market," he said. "We love it. We can't have enough of these conversations."

He said Storecast has had a longstanding relationship with Albertsons, although it does not have as deep a relationship with Supervalu. In the short term, he said he expects the opportunity to pick up additional reset and remodel work because of the transaction.

MARK HAMSTRA