Supervalu to Implement Cost-Based Price Plan

MARK HAMSTRA

MINNEAPOLIS — Retailers in the Eastern U.S. who are customers of Supervalu are bracing for sweeping changes in the way they pay for, plan and schedule their deliveries as the wholesaler, based here, rolls out a new pricing scheme.

Supervalu said it will introduce a system it calls market advantage pricing, or MAP, to retail customers in its Eastern Division later this month. The system is similar to the “activity-based selling,” or ABS, model the company uses in its other divisions.

In the new system, vendor allowances are passed along to retailers rather than being used by Supervalu to defray the cost of delivery. As a result, delivery costs for customers will increase, but product costs for retailers will drop because of the deduction of the vendor rebates.

“In the old method, distributors and retailers operated independently of each other, but you can't compete in the marketplace with conflicting objectives,” said Jeff Noddle, chairman and chief executive officer, Supervalu, in an interview with SN. “This method aligns manufacturers, distributors and stores in a more transparent system.”

Jim McCaffrey, president, McCaffrey Management, Langhorne, Pa., a five-store operator supplied from Supervalu's Harrisburg, Pa., warehouse, agreed that the new system is more transparent, but said the increase in distribution costs will require adjustments in the way it schedules its deliveries.

“I have always said that the current relationship that independents have with their wholesaler starts with a lie, and that lie is that they get to deliver groceries to us at 2% [markup], when in fact their warehouse costs and everything else are so much higher,” he told SN. “This will kind of put everything out on the table — it is a more transparent program.

“Obviously, we are a little afraid of it, in the sense that we need to become more efficient and manage our costs, because it is going to be crucial to the fee that you are being charged.”

The delivery charges will be based on Supervalu's costs for warehousing and delivery, averaged out for all products and adjusted periodically, according to retailers who were told about the new system. It differs from ABS in that warehousing costs are not ascribed to each product individually but spread across the whole inventory, the retailers said.

“We're looking at all of our deliveries and schedules to see how we should tighten them up, and at our product lines to see how to tighten them up,” McCaffrey said.

He said some stores currently receive deliveries of meat and other perishables five times a week, and he's considering scheduling fewer deliveries to reduce costs. He's also planning to look at truckloads to see how to maximize each delivery.

One concern McCaffrey has is whether the slow-volume specialty products that his chain carries will become a burden on his cost structure.

“If you get involved in a program like this, all of a sudden some of those slow-moving items could end up costing a lot of money,” he said.

Operators told SN they believe the MAP system is not used by their regional rivals and could end up giving Supervalu customers a competitive advantage in the long run, however.

Scott Karns, CEO of Karns Foods, Mechanicsburg, Pa., said he's optimistic that the efficiencies from the new program will allow him to drive sales growth at his eight-store chain.

“Hopefully, it will make me as a Supervalu customer in the Eastern region more competitive, and it should help my sales,” he said.

“We are looking at it as open disclosure, where the manufacturer gets to see where the money is getting spent on the retail end,” he added. “There's always been this tug of war out there about who gets the money — the retailer to promote advertising and buy-downs, or the wholesaler to pay for slotting.”

To prepare for the changes, the company is looking at switching to ordering bulk products by the pallet “as opposed to getting five or 10 cases every order,” Karns said. “There are efficiencies to ordering pallet loads.”

Noddle said he thinks customers will adjust.

“By the time the program starts, retailers will understand how this works, although change is always hard and new ways have to be learned,” he said. “But we've asked customers on the ABS program if they'd like to go back to the old way, and they tell us, ‘Absolutely not.’”

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said ABS and MAP encourage retailers to order more full truckloads rather than seeking fill-in deliveries on partially loaded trucks.

“It brings some retailer discipline, which helps Supervalu from an order-selecting and loading standpoint in the warehouse and helps with trucking, because the trucks that go out tend to be at full capacity, rather than shipping air,” he said. “Overall, it provides some good economic incentives for retailers that have superior operating systems and standards. Those retailers will see their costs go down.”