• Inventory management
• Category management
• New item introductions and management
• Merchandising assistance
• Accrual tracking
• Store sets, resets and tagging
• Promotional planning and coordination with manufacturer
• Technology assistance
• Real-time access to information
• Marketing expertise
• Speed to market assistance for new products
• Extra deliveries
• Handling returns

But those services all come at a cost, and while manufacturers and retailers often understand and recognize the benefits of many of these value-added services, that is not always the case as distributors nationwide, large companies and small, contend that many of their efforts often go unrecognized and are simply assumed. Worse, many retailer customers who do recognize and say they appreciate the distributor’s efforts generally are unwilling to provide the compensation that is needed and justified. Often, history has told them that distributor requests for increased prices or fees will not be enforced, particularly if competitors enter the picture and offer lower prices.

Commented an executive of a large distribution company, "We provide retailers with easy access to the right products and programs, have better systems to deliver information than our competition, yet when it comes right down to it, they are so focused on the cost of goods, that our value-added services are only a tie breaker."

In other words, all of those services are great, but if somebody with fewer add-ons comes along offering product a few pennies cheaper, they may well get the business – no matter the efficiencies and added profit those "frills" would have provided. If they come in at the same price, then perhaps some of those additional services will tip the scales in that distributor’s favor.

It is no small feat what is performed by convenience store distributors as they receive, warehouse, deliver and merchandise thousands of products every day to convenience store chains large and small, and independent operators alike. Said one regional distributor, "We keep our customers’ stores filled with the product they need at a competitive price. The fundamentals of what we do involve incredible exercises on behalf of our customers. It is a big deal."

It is a "big deal" and the sense of being taken for granted causes resentment that runs deep among some distributors, and no doubt interferes with the positive partnership relationships that are so important to manufacturers, distributors and retailers alike.

"Some manufacturers take us for granted and for fools," a distribution company CEO said during an interview. "If we can get their product introduced for them, that’s all we’re good for. And when we reorder, it is going to be at their most profitable price."

Said another, "The manufacturer community has been slow to realize the value that the really sharp distributor brings to the marketplace."

And, a third company complained that all too often, after they have helped retailer customers find the right merchandising mix and shelf sets to maximize profit for their previously underperforming but now profitable stores, they take their business elsewhere.

"We’re still held pretty close to the lowest bidder. People forget there are other companies who can do it, but not as well," he said. "It’s ‘What have you done for me lately?’ that is important. So now, they say, ‘I’m going to use your configuration and buy it from somebody else cheaper.’ It’s tough to look that guy in the eye and say ‘I can’t walk away from my price.’ It’s always a big risk with a sizable customer."

The Profit Problem
The most serious problem facing distributors comes down to dollars and cents -- to profit. The 2006 Hershey Industry Performance Analysis (HIPA) report reiterates a long-standing problem for much of the industry: extremely poor profit and ROA. The typical AWMA distributor produces a pre-tax profit margin of just 0.5% and an ROA of 4.0%.

Another respected industry study by The Profit Planning Group shows that the financial results of convenience store distributors rank 75th in a list of 75 industries examined. Thus, it is not surprising that in this work, the ability to turn a reasonable profit—and all that this represents—was ranked as the most important challenge by virtually every company that participated.

Distributors attribute this bleak profit picture to many factors, including:

• Excessive—and increasing-- taxation of tobacco products
• Declining volume in the cigarette category, changes in the major cigarette manufacturer programs, advance payment requirement and terms reductions that have negatively affecting cash flow and gross margins
• Rising operational costs, including health and property insurance, energy, investment in technology and equipment with no offsetting margin gains
• Over-proliferation of SKUs in the warehouse
• Growth of high weight/cube categories/products not covering basic costs to pick, pack and ship
• Unreasonable competitive challenges caused by distributors willing to provide added services at little or no cost
• Perceived discrimination against the c-store distributor class of trade by some manufacturers; i.e., retail customers can purchase some items from club stores at a price lower than what the distributor must pay

Low Profit Contributors
Competition within the channel appears to be responsible for part of the problem. There always seems to be someone willing to offer a service at a lower cost, whether it makes good business sense or not, even to the point of giving away value-added services – such as extra deliveries. That’s a key factor, but it’s been compounded by recent developments involving the all-important cigarette category, which has been the lifeblood of most c-store distributors for many years.

Some distributors complain that there is a tendency on the part of all too many companies to perform to the lowest common denominator -- to cut prices to the bone for retailer customers whose primary focus is on price rather than overall value. As a result, many distributors have come to the conclusion that more business is not always the answer. The answer really is the right business—working with customers who appreciate the value of the services they provide.

Competitive pressures have made it difficult for distributors to consistently apply cost-to-serve standards for all product categories, leading to under-pricing and low margins. Many distributors are finding that they need to delve more deeply into their own companies’ balance sheets and to truly understand the actual cost incurred in providing specific products and services to their customers.

Thus, distributors realize that they must break the trend of downward financial results and raise their own profit expectations to a reasonable level.

Clearly, the distribution business has evolved and distributors either are changing, or must change, with the times. Despite competitive pressures, it is essential for distributors to understand their margins and the cost-to-serve their customers. One distributor put it like this: "If we can get the industry to understand what’s at stake, we can increase our margins. We’ve got to look at the cost side of the business – the cost-to-serve."

The Cigarette Factor
Much of the current problem facing distributors stems from developments in the cigarette category, which accounts for 71.3% of the average distributor’s sales while requiring only 9.7% of SKUs.

As cigarette manufacturers sought to satisfy shareholder expectations in a declining category, growing market share, brand equity and increasing prices over time was a successful formula from the early 1980’s through 2002. Cigarette price increases were fairly predictable and like commodities traders, distributors speculated on the timing of those anticipated price hikes by building inventories and achieving significant non-operating profits when prices went up.

But times have changed. The cigarette industry is now a mature declining business, and over the past eight years a number of developments that have negatively affected distributors have occurred. While overall cigarette volume declined, c-store distributors did not feel the pinch because cigarette sales volume in convenience stores dramatically increased. However, about 18 months ago, that trend changed and has begun to slightly decline – even as state excise taxes have increased and cigarette companies have imposed advance payment requirements and implemented share-based programs that are a challenge for some distributors to meet.

What did this really mean to distributors? The average loss of margin for distributors based on terms and program changes was about 43 cents per carton. For the first time in this industry, distributors were forced to raise prices to offset losses, and still were unable retain their margin because of competitive pressures.

Today, distributors are investing more money in their cigarette inventory, and they are paying faster. But they have not changed their payment policies with their customers because of competitive concerns. Thus, they are collecting accounts receivables at a much slower pace than they are being paid, directly contributing to the declining ROA trend that began in 2003.

Declining numbers, increasing costs and conflicting payment terms are not a formula for success, especially given the miniscule margins that are being realized in other product categories.

Possible Solutions
Is further consolidation the answer? Would companies be stronger if there were fewer, but larger competitors in the marketplace?

Many distributors as well as manufacturers expect that some consolidation is inevitable and say it would be a positive development. In fact, it may well be true that distributors either need to consider being the aggressor in the consolidation hunt, or they need to position themselves to be purchased.

Distributor Actions
Meanwhile, distributors are not sitting by idly waiting for a white knight to rescue them. Many are taking concrete and aggressive action to improve their businesses and their outlooks for the future, and more such action is needed. Here are some examples of steps taken by distributors to improve profits and ROA:

• Increasing the use of technology for warehouse management, inventory control and category management
• Reducing the number of SKUs carried in the warehouse to eliminate slow movers and duplicates
• Seeking new profit centers, such as foodservice, to compensate for reduced profits from other declining categories
• Imposing surcharges or minimum fees for handling low profit, high cube items
• Training sales personnel to focus on net margin provided by each customer
• Enforcing minimum purchasing requirements on customers and providing incentives to encourage exclusivity
• Carefully assessing "value" provided by customers, and eliminating those that do not contribute to profit or cannot be profitable over time
• Increasing focus on logistics efficiency
• Taking advantage of multi-vendor snack units provided by AWMA
• Seeking increased compensation for more frequent deliveries
• Imposing restocking fees
• Seeking acquisitions where they make sense and are feasible
• Planning and implementing strategies for organic growth
• Seeking new opportunities outside the convenience channel that can increase utilization of plant and equipment

However, these actions by themselves are generally unilateral. For distributors to continue to offer the breadth of services that they currently provide, there are a number of issues that must be addressed on a channel-wide basis by their trading partners at each end of the spectrum.

Manufacturer Practice Changes Needed
What supplier procedures or policies would distributors like to see changed if they could have their way? What modifications would help them achieve a more reasonable profit and ROA?

• Cigarette issues. Distributors are not pleased with many of the requirements and policies imposed by the major cigarette brand manufacturers, such as advance payment requirements, a no return policy and share-based programs.
• SKU Proliferation. Reign in proliferating product lines. Manufacturers agree this is a problem, but major brand executives say their firms are aggressively assessing their product mix and are reducing SKUs significantly. Nevertheless, SKU rationalization on the part of manufacturers would help distributors improve efficiency and reduce their costs.
• New Products. While new products are recognized as the "lifeblood" of the industry, distributors want suppliers to establish clear exit strategies for non-performers as they are replaced by new offerings.
• Class-of-trade discrimination. Do not underestimate the value of the broad product mix offered by distributors and provide equitable pricing, rather than placing distributors at a competitive disadvantage vs. club stores.
• Use of information. Recognize the value of and utilize purchasing data provided by distributors that can enable manufacturers to increase sales for the benefit of all trading partners.
• Promotions. Improve follow-through and coordination to make certain that promoted product is available when and where it is needed.

Bottom line, distributors believe that manufacturers should help, not hinder, the very trading partners that are critical to their success in a channel that would otherwise be very difficult for them to reach. Policies and terms should be established with that understanding clearly in mind.

Retailer Recognition of Value
It is also essential for retailers to have a clear understanding of the value of the services provided by their distributor. Retailer customers need to recognize that technology-based services, category management assistance, planogram creation and implementation, extra deliveries all come at a cost.

Certainly, by beating down prices during negotiations retailers may achieve short-term savings. But it is unrealistic to expect that distributors can continue to provide such service over the long term without receiving fair compensation. If a distributor shows that he will move mountains to accommodate the retailer’s needs, then that must be recognized, particularly when negotiations take place and terms are established.

By recognizing this value and the contribution that full-service distributors make to their bottom lines, retailers can help assure that such services not only continue but also will be improved. However, if that does not occur and distributors are forced to eliminate such services to control costs, then others will follow suit and the entire channel will suffer.

Thus, when retailers enter into a relationship with a distributor they should take advantage of the value-added services that are offered, including those involving technology, and should recognize the contribution that these services make to their ultimate success.

Retailers should recognize the value of the distributor’s ability to meet their overall product needs and not give in to the temptation to cherry pick specific items at the club store because they can save a few pennies. That is not the way to encourage a positive long-term relationship that can pay much bigger dividends in the future.

Retailers should recognize the value of the distributor’s relationship with their major suppliers – companies from which they may not be able to command individual attention, but with whom their distributor can work to resolve problems in their behalf.

Trading Partner Communication
There is much room for improvement with regard to communication, coordination and execution involving new product introductions, particularly. Manufacturers should accept responsibility for developing exit strategies for poor performers and communicate those strategies to distributors.

Currently, some distributors and manufacturers proactively create opportunities for trading partner communication and collaboration. Those are positive developments and can benefit all involved.

Overall, suppliers, distributors and retailers alike need to work as closely together as possible, and the distributor plays a critical role to keep these lines of communication open and working.

Conclusion
Convenience store distributors are faced with tight margins that typically allow little freedom for investment and building for the future. However, many of these companies have aggressive and dynamic leadership and are determined to find ways of thriving and continuing to grow and serve their customers. In fact, they are so bullish on the future that they are seeking ways to expand, whether organically or through acquisition. Bottom line, they are committed to long-term success.

Distributors realize there are problems to overcome, but many believe relationships with suppliers and customers alike are improving, and can be further improved.

As companies become better educated about the costs associated with specific product types, categories, customers and services, distributors hope that competition will be rational and based on the value of services provided. They also hope that manufacturers and retailers alike will appreciate the value they bring to their companies and recognize that for them to continue they must be able to turn a fair profit.

As distributors continue to provide increasingly sophisticated value-added services to help improve the efficiency, performance and profit of their customers, they believe sales will increase, translating to higher returns for every trading partner in the supply chain.

Manufacturers say they understand the distributor’s profit and ROA predicament and are anxious to help, within the constraints of their own business paradigms. Ultimately, they know that the c-store distributor is an invaluable partner in their effort to penetrate the convenience store channel that is thriving and growing in importance to consumers every day.

For as one major supplier commented, "There is a tremendous amount of efficiency in a complex channel. Distributors enable us to get our products on the shelf when we need them there. We couldn’t do it without them."

During the course of this study, one convenience store operator made this comment about his distributor. "We have an excellent relationship with them. We’ve asked them to do a lot of things for us, and they always come through."

That basic statement is the foundation upon which success for the future must be built, not upon the never-ending downward spiral of price competition.

There should be no underestimation of the value of sound business relationships in this channel. With manufacturers, distributors and retailers working together as a team, difficult issues can be overcome and success can be achieved.

Kit Dietz is president of Dietz Consulting LLC, Huron, OH, and Bob Gatty is president of G-Net Communications Consulting, Poolesville, MD.