REVERSING SUPERMARKET ADDICTION TO TRADE DOLLARS

David Orgel

An addict is typically someone dependent on a drug, in denial and terrified of a harrowing withdrawal.

There's an addiction in the supermarket industry, and it is dependence on supplier trade dollars.

Many would agree that the trade allowance practice has pitfalls, but how bad is the problem? That topic was forcefully addressed a few weeks ago by Christian Haub, A&P's chairman, president and chief executive officer, who bluntly outlined how trade allowances have steadily eroded the industry's viability.

''The supermarket industry grew addicted to a drug that many powerful suppliers were content to provide in exchange for guaranteed shelf presence and the acceptance of countless new items, with or without appeal to the consumer, all of which they needed to maintain production capacity in their capital-intensive manufacturing plants," Haub said in a New York speech to the CIES Management Development Program Annual Congress.

For years, according to Haub, many supermarket retailers missed opportunities to seriously re-engineer their businesses and instead relied on a variety of quick fixes.

"When those measures failed to drive results as intended, the only tool we had to fall back on was the hammer we use to pound vendors with for more and more allowances, those so-called free dollars usually applied to the bottom line."

All of this provided a window for Wal-Mart Stores and other non-supermarkets to underprice supermarkets and grab market share, Haub said. But he warned that the game is over as "vendors are broadening their distribution to other retailers, and are not quite as dependent on supermarkets as outlets for their products."

Haub described how A&P is transforming its culture by adopting net costing, giving "a clear signal to our people and suppliers that we no longer want to measure their results based on the case allowances they bring in, but on the case sales and gross profits they generate by selling through our stores."

A&P will refuse to purchase products that won't perform, and will focus only on profitable sales, he said.

Haub is one of a few retailers who are candidly discussing withdrawal from the long-established practice of vendor allowances.

All of which raise the question of what form vendor support will take in the future. A Nov. 17 article in this publication quoted Margaret Bigley, director of marketing for Pathmark Stores, on the importance of collaboration with suppliers for pursuits such as marketing and loyalty programs.

Bigley said that the kinds of resources she seeks from manufacturers include assistance in data analysis and software and data warehouse development, among other things.

"So it's not always coming with a bag of money," she said of the relationships. "It's just helping us identify the opportunities."

That's an important point. What retailers need now is support from suppliers that helps position them for a viable future rather than a dependency that will lead nowhere.