EUROPEANS COLLABORATING TO CUT COSTS

MARK TOSH

MADRID, Spain -- European suppliers and retailers are engaged in widespread collaborative efforts to reduce costs and improve profitability, according to a study issued here last week.

The overall potential benefit of such supplier-retailer collaboration was estimated at 2.3% to 3.4% of retail sales, the study found. These benefits -- which would accrue either through lower supply-chain costs or increased sales and gross margins -- would be apportioned off, with about 60% going to retailers and 40% to suppliers.

"This is clearly -- compared with the present level of profitability -- a great deal of money for any individual company in the grocery business," the study said of the potential benefits. "Those who move first will obviously have a great advantage over their competitors."

The study, titled "Supplier-Retailer Collaboration in Supply Chain Management," was issued at the Executive Congress of CIES, The Food Business Forum. About 800 executives attended the three-day conference.

The study included 11 separate case studies documenting collaborative efforts between European-based retailers and suppliers and the results of those efforts. Market leaders such as Tesco of the United Kingdom, Albert Heijn of the Netherlands and Promodes of France were among the retailers named in the case studies.

The Coca-Cola Retailing Research Group-Europe sponsored

the study, which also included interviews with more than 200 industry companies from all the major countries of Europe. The objective of the project was to determine whether suppliers and retailers would be better off if they collaborate and, if they are, how much they would gain through collaboration.

"Supplier-retailer collaboration is not just a theory," said Sergio Vitali, a partner with GEA Consulenti Associata, Milan, Italy. GEA conducted the study for the Coke research group. "Collaboration delivers tangible benefits and develops closer relationships. It works," he said.

In one of the cases cited in the study, the French retailer Promodes and supplier BSN increased turnover in the biscuit category by 11.5% and profit margin by 5% through a collaborative merchandising effort. (Raising profit margin by 5% is "considered very good, since one-third of all French sales are at a loss," according to the study.)

The collaboration between Promodes and BSN consisted of analyzing sales data from a sample of seven stores, surveying consumers and reallocating shelf space.

Vitali said companies that get involved with collaboration projects at an early stage are "those who will gain most in competitive advantage." (For the purposes of the study, collaboration was described as going beyond traditional cooperation to the point where both the retailer and supplier "exchange analytical sales and cost data in order to share the benefits.")

Through field research and case studies the study uncovered two existing types of supplier-retailer collaboration that either reduce costs or improve profitability by increasing sales and gross margins. These types are:

Operational, which reduces costs by making product and paper flow more efficient. Operational collaboration can result in savings of 1.5% to 2.5% of retail sales, according to the study. It involves efficient product replenishment and efficient administration.

Marketing, which is a more sensitive collaboration area "due to the need to share highly confidential data," the study said. The benefits from marketing collaboration were estimated at 0.8% to 0.9% of sales at retail prices.

In the area of operations collaboration, suppliers and retailers work together to optimize product flow without exchanging analytical sales data, the study said.

The key to achieving an efficient flow of goods is through the establishment of regional distribution centers, Gerd Krampe, one of the presenters of the study and a board member of German retailer Asko, told the CIES general session. Regional centers operate more efficiently and add less to the retail price than direct-store delivery systems. "DSD appears to add 2% to the retail cost," Krampe said. The Coke-sponsored study also compared supplier-retailer collaboration projects with the Efficient Consumer Response initiative in the United States and found some similarities. ECR, however, has the potential to create much more benefit for U.S. companies -- an estimated benefit of 10.8% of sales at retail prices -- because of the inefficiencies existing in the U.S. market, the study said.

The benefits in Europe (estimated at 2.3% to 3.4% of retail sales) are less because "the starting conditions are already quite efficient in European companies and the benefits -- above those regarding marketing -- are not available to everyone," the study said.

The similarities between ECR and supplier-retailer collaboration include a common driving force, which is the competitive pressure to reduce costs along the supply chain, and similar implementation processes.

The study said the 2.3% to 3.4% range of potential savings from supplier-retailer collaboration is wide because it reflects levels of efficiency measured in different countries.

"The United Kingdom and France are already advanced in the reduction of costs and so are more concerned with projects that deliver an increase in gross margins," Vitali of GEA told a general session audience. "On the other hand, companies in countries such as Germany, Italy and Spain seem to be primarily concerned with reducing costs at this stage of development in their markets."