INDUSTRY SNAPSHOT 2004-02-16 (1)

MARK HAMSTRA

An online survey conducted by SN illustrated the varied concerns among different segments of the food-distribution chain.

If retailers and wholesalers could change one thing about the industry, they said, they would somehow reduce the competitive advantage enjoyed by Wal-Mart Stores, Bentonville, Ark. While some companies on the supply side also expressed concern over Wal-Mart's threat, most instead said they would like to see the elimination of trade allowances.

The survey, conducted last month on www.supermarketnews.com, asked retailers, wholesalers, sales agencies and vendors how much their sales and profits grew in 2003, what factors contributed to that growth, what challenges they see for sales and profit growth in 2004 and finally, what they would change about the industry if they could.

Although the survey was not scientific and the data should not be extrapolated to serve as a measure of the industry as a whole, the responses do provide a snapshot of how attitudes differ among the various segments of the industry.

Overall, the majority of respondents of all stripes reported that their sales and profits improved in 2003, although retailers said they had the weakest performance of any of the segments.

About a third of the retailers who responded to the survey (35%) reported that their sales grew by 5% or more in 2003, and the same proportion also said their net incomes grew by 5% or more. One-fifth of the retailer respondents said their sales declined in 2003, and the same percentage also reported that their net incomes declined.

Wholesalers reported slightly better results, with 53.85% saying their sales growth exceeded 5% in 2003, although fewer wholesalers were able to match that pace of growth on their bottom lines. A little less than half, or 46.15%, of wholesaler respondents said their net incomes also improved by 5% or more.

Sales agencies reported a performance that was similar to wholesalers, although profit growth outpaced sales growth slightly for these companies. Nearly half, or 46.67%, of sales agencies reported profit growth of 5% or more, while a little more than half, or 53.33%, reported net income growth of that magnitude.

Among manufacturers/distributors, sales growth outpaced profit gains. Two-thirds of these companies, or 66.67% of respondents, said sales grew by more than 5%, while exactly half said their net incomes grew by 5% in 2003.

Wal-Mart, Wal-Mart and More Wal-Mart

Despite the relatively strong performance reported by survey respondents, many retailers expressed concern about competition from the fast-growing supercenter operator, Wal-Mart. Many of those concerns were expressed indirectly, as when retailers cited the need for a more level playing field in terms of wages with non-union operators or in terms of product pricing.

Labor issues were a frequently cited obstacle to profit growth for retailers, some of whom expressed concern about how cuts in labor would affect customer service, while others lamented the rising costs of providing benefits for employees.

"The biggest challenge is trying to keep our expenses as low as possible," said one respondent. "It seems that every year insurance rates rise, utilities rise, taxes rise, etc. It's hard not to pass this on to the consumer."

One respondent was concerned about "high employee turnover" in the supermarket industry, noting that supermarkets should be seeking to attract career-minded individuals.

Several respondents made reference to driving sales growth in 2003 through price cuts or more competitive advertising, while others cited such factors as expansions through remodels or new store construction or acquisition, missteps or closings by competitors, and strong execution. Some cited the addition of new departments and fuel centers, and several indicated they had taken a more customer-centric approach to merchandising and service.

Increasing employee productivity was often cited as a reason for profit growth in 2003.

One retailer attributed profit gains at their company to "cost-cutting initiatives, labor control and a steep decline in workers' compensation." That same respondent also was concerned about cutting too much labor, however, noting, "More help would move more customers through."

Yet another respondent said their company had "downsized labor without sacrificing service."

One respondent wrote about how their company was able to capitalize on circumstances to gain new customers.

"We offered better customer service than the competitors and steadily improved our price image," said one respondent. "We were there for our customers during Hurricane Isabel with many stores running without power. Going the extra mile not only increased sales, but it increased our customer base going forward."

Labor costs, shrink, increasing competition and sustaining the sales gains achieved in 2003 were all challenges that retail respondents said they faced in 2004. Some retailers talked about the challenges of increasing their traffic count without opening new stores.

One retail respondent said the biggest challenge to growing sales and net income in 2004 was that "customer tastes are in flux, moving toward more interest in health." Another cited "competitive and regulatory challenges."

Yet another respondent reported that negative publicity about certain food products can pose challenges, "but properly addressed can lead to avenues for growth."

One retailer cited as a challenge "the need to balance food safety with profitability."

Another said the industry needs to be "more oriented toward generating profits through innovative merchandising marketing rather than continuing the status quo of profit improvement through efficiency. At some point all the fat is cut away, and any continued cutting starts to impair the ability of an organization to adequately serve the consumer."

Several retailers suggested that in-store services help them compete against Wal-Mart and other supercenter operators.

"In the past, we offered so many services, and now we are going backwards and taking away some of those services, upsetting customers," wrote one retailer in response to the question about what they would change about the industry.

Wholesalers Pick Up Where Fleming Failed

Among wholesalers who responded to the survey, several made reference to the exit from supermarket wholesaling by Fleming Cos., Dallas, as a factor in their growth in 2003. One respondent cited growth in the natural and organic products business as the primary factor in their company's sales growth last year, and another reported growth from the strike fallout in Southern California.

Some said the addition of new accounts came with caveats, however, such as the costs incurred in resetting the stores of new customers and the additional travel required to service them.

Expense controls were widely cited as a factor in driving net income growth among wholesalers, and controlling labor expenses was seen as one of the biggest challenges to growing profits in the year ahead.

Wal-Mart also was frequently cited as posing a challenge to sales and profit growth in the coming year.

Asked what they would change about the industry if they could, one wholesaler responded that they would "back up 20 years and realize the marketing effectiveness of supercenters, niche marketing and the subsequent market segmentation attributable to evolving lifestyles."

Others said they hoped for better cooperation among partners in the food-distribution pipeline.

Sales Agencies See Difficult Relationships

Although sales agencies had the largest proportion of survey respondents who reported growing their net incomes by more than 5%, many cited difficulties in their relationships with retailers. One mentioned retailers' increasing reliance on private-label products as a primary challenge to growing their business in 2004.

Several mentioned slotting fees as the thing they would most like to change about the industry.

One offered an idea for an "Executive Cultural Exchange Program" in which retail executives "must live for two weeks with a family who mirrors the average end-consumer demographics in each regional market impacted by the executives' decisions."

Sales agencies grew their sales primarily through new business, new product offerings and general economic growth. Some respondents said they were able to grow sales by expanding the services offered to existing clients, or by servicing more stores as their clients grew.

Net income growth was attributed to cost-cutting initiatives, some of which were achieved through technology and labor reductions.

Quite a few respondents from the sales agency/vendor side of the industry wrote about the need for retailers to differentiate themselves.

"With the advent of Wal-Mart, chains should be looking at how they can differentiate themselves through customer service and product differentiation instead of cutting labor to the point that customers expect poor service and conditions," one sales agency respondent wrote.

Concern about consolidation -- in all segments of the industry -- also was fairly common among sales agents and vendors. One sales agency respondent was particularly concerned about the consolidation among retailers.

"These consolidated companies are creating synergies that look good on the bottom line for a few years, but it is not a good long-term practice. Every market is different, and customers expect a lot more from them," they wrote.

Manufacturers Show No Love for Slotting Fees

Among manufacturers and distributors, trade allowances -- not only slotting fees, but also other payments to retailers and wholesalers -- were frequently cited as the one thing they would like to change about the industry.

"Slotting is a huge hurdle for smaller manufacturers and vendors," wrote one respondent.

One vendor suggested giving away more free product to retailers in lieu of cash for slotting fees, since the vendor realizes the cost of the product at a lower level than the value to the retailer.

Others blamed the practice for driving up prices for consumers.

One manufacturer respondent said the one thing they would change about the industry is that "all retailers would have a unique point of difference vs. their peers."

Another criticized retailers for focusing on short-term goals to "keep the stockholders happy" while ignoring the long-term view. "If you are looking down at your feet, you can't see what lies ahead," the respondent said.

One respondent said retailers should focus more energy on encouraging dining at home.

Another suggested that retailers should "focus on the consumer and selling the product rather than internal profit centers." Another said retailers should be "more consumer-focused, and less Wal-Mart-focused."

Several respondents on the vendor side also expressed concern about Wal-Mart, however. One wrote that if they could change one thing about the industry it would be "that some of the smaller retailers were stronger, to compete against the Wal-Marts of the world."

What would you change about the industry if you could?

(A sampling of responses from an SN online survey)

Retailers

"Change the culture to achieve a higher level of acceptance of change."

''Even the playing field on buying power."

"Control the growth of Wal-Mart."

"Break up the Wal-Mart monopoly."

"Control the continuing rise of health care costs."

"Stop the consolidation of wholesale operations."

"Create an equal playing field for all players in terms of labor costs."

"Reduce the cost related to accepting debit and credit cards."

"Level the playing field in terms of deals and merchandising for small independents."

"Too much regulation."

"The large non-union players should be paying the same wages as the unionized players."

"Unionize Wal-Mart."

Wholesalers

"Put the emphasis back on value-added selling and creative merchandising."

"This industry is always changing; changing one thing would be like a drop in the pond."

"Eliminate paper coupons."

"Eliminate slotting fees for manufacturers."

"Rein in the power of the supercenters."

"Slow the pace of consolidation."

"More cooperative attitudes to achieve profit gains for all sides."

"The lack of trust each participant has with their trading partners."

"More emphasis on item management vs. relationship-driven buying."

Sales agencies

"Bring the use of in-house food brokers to an end."

"Stop consolidation."

"More chains need to hold onto and emphasize their core values, such as customer service and in-stock levels."

"Change manufacturers' thinking about using national brokers."

"Slotting fees."

"Go back to buying locally. A huge mistake companies make is that they do not value key employees in the divisions who understand the local markets."

"Retailers should establish what their strengths are, and do those things best. Don't try to be a mass merchandiser."

"Too many promotions are not getting the merchandising support they need."

Manufacturers/distributors

"Do away with slotting allowances."

"Management should re-focus on the customer instead of Wall Street."

"Make retailers more efficient. The concept of Efficient Consumer Response never caught on, yet it is exactly what Wal-Mart is doing."

"There are too many stores."

"More out-of-the-box thinking."

"Faster speed to decision."

"The 'fines' that warehouses demand for any item. Make money the old-fashioned way by selling and not through the back door with slotting fees, etc."

"Retailers need to outsource more of their logistics."

"Retailers are so worried about margins today that they can't see the future."

"Lower the cost of slotting fees."

"Treat manufacturers as true partners, and keep the focus on lifetime costs instead of first costs."

How much did your company grow in 2003 in terms of net income?

% of respondents

Less than 0%:

Retailers: 20%

Wholesalers: 7.69%

Sales Agencies: 6.67%

Manufacturers/Distributors: 9.72%

0% to 2.4%:

Retailers: 37.50%

Wholesalers: 30.77%

Sales Agencies: 23.33%

Manufacturers/Distributors: 26.39%

2.5% to 5%:

Retailers: 7.50%

Wholesalers: 15.38%

Sales Agencies: 16.67%

Manufacturers/Distributors: 13.89%

More than 5%:

Retailers: 35.00%

Wholesalers: 46.15%

Sales Agencies: 53.33%

Manufacturers/Distributors: 50%

How much did your company grow in 2003 in terms of total sales?

% of respondents

Less than 0%:

Retailers: 20%

Wholesalers: 7.69%

Sales Agencies: 13.33%

Manufacturers/Distributors: 6.94%

0% to 2.4%:

Retailers: 27.50%

Wholesalers: 23.08%

Sales Agencies: 16.67%

Manufacturers/Distributors: 12.50%

3.5% to 5%:

Retailers: 17.50%

Wholesalers: 15.38%

Sales Agencies: 23.33%

Manufacturers/Distributors: 13.89%

More than 5%:

Retailers: 35%

Wholesalers: 53.85%

Sales Agencies: 46.67%

Manufacturers/Distributors: 67%

SN online Web survey January 2004. Total respondents: 155 (40 retailers, 13 wholesalers, 30 sales agencies and 72 manufacturers/distributors).