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2005 State of the Convenience Distribution Industry
AWMA research indicates majority of convenience distributors feel good about industry and trading partner relationships
By Traci Carneal
This 3rd annual State of the Industry report looks at the attitudes of convenience distributors toward the current business environment – internally and operationally, as well as a broader view of the industry. This report is an effort to keep AWMA members in touch with industry trends, and what their peers are thinking and doing.
Using an online survey tool, AWMA members and nonmembers were able to quickly complete the questionnaire and provide unique insight into the minds of convenience distributors. This year response to the survey increased by 41 percent, making this an even more accurate representation of the industry’s current state of mind.
In 2004 our survey revealed increasing optimism regarding the state of the convenience distribution industry. This year, 65 percent of respondents indicate they feel better or the same about the industry as opposed to a year ago. Thirty-four percent feel "worse" about the state of the industry. However, 51 percent report a increase in sales for 2005 over 2004; 19 percent say sales were about the same; and 9 percent report "much stronger than usual" sales for this year. Since the 2003 State of the Industry survey, reports of higher sales increased from 40 percent of respondents to 51 percent (see chart 1).
More than one half feel "very positive" or "somewhat positive" about the state of the c-store industry in general. Twenty-two percent refer to it as "status quo." The percent of respondents feeling very positive about the c-store industry increased by 3 percent – from 9 percent in 2004 to 12 percent in 2005 (see chart 2).
Operations and staffing
The survey indicates that most distributors are relying more heavily on technology and cutting expenses and overhead in order to make their businesses more successful. In fact, cutting expenses and overhead was the number one vehicle for improving company operations in 2005 (see chart 3).
The number of companies reducing expenses and overhead increased to 68 percent as opposed to 59 percent in 2004. Twenty-four percent of distributors reduced their staff, versus 16 percent last year. At the same time, 14 percent report hiring more staff.
Only 28 percent of respondents streamlined their warehouse logistics as opposed to 42 percent in 2004.
Others took the following actions to improve operations: concentrated on the correct things; enhanced their foodservice offerings; experienced decreased competition; raised prices; implemented delivery fees; increased services to c-stores; and focused on higher margin items.
Forty-one percent say employee issues, such as turnover and productivity, are major concerns for their companies. This figure is down 6 percent from last year. About 20 percent indicate that employee issues are of no concern, up from 14 percent in 2004, and 30 percent have minor concerns but basically "have a great team with few problems." Five percent find low productivity levels to be a huge concern.
Attitudes about new hires haven’t changed much – 32 percent (slightly higher than last year) still believe that the best type of new hire is someone with a sales background, but from any industry, while 46 percent would hire someone without a sales background, but who has the enthusiasm and interest to be a success.
Once the hire is made, a number of factors can affect the success of a sales person. AWMA asked distributors what tools their sales teams find most beneficial in working with customers. Gaining almost equal amounts of support from respondents are computerized product tracking systems, sales meetings, flexibility to negotiate deals, and cell phones, pagers and beepers. Less important are Internet services for product tracking, laptop computers, and paperless processes.
Others noted that customer-oriented service programs are a value-added sales tool that helps their sales teams.
Convenience distributors were posed this question: If you could have just one accessory for your warehouse to streamline operations, what would it be? Here are some of their responses:
1. Internet ordering capabilities
2. Scanning (several responses)
3. RF technology
4. Hands-free headsets for order picking
5. Up-to-date computer system
6. Tax-Right system
7. Voice directed order picking (many responses)
8. Data collector
9. Truck Tracking Software
10. Improved stamping lines
11. Warehouse is efficient; "what we need is more orders"
12. Multiple live loading conveyor system
13. Palm pilot/wireless
14. New flow racks
15. A parent company
16. Pick-to-light
17. Better receiving technology
18. Robots to pick and load trucks
19. Up-to-the-minute inventory tracking system
20. A very efficient warehouse management program
21. Shorter lead times
22. An oil refinery
23. Better checking
24. More automation
25. Additional loading docks
26. Red-Stamp cigarette machine
27. Endless supply of Telxon machines
28. Ability to verify accuracy of items being shipped
29. Electric pallet jack
30. RF scanning inbound
31. Better security
32. Expanded freezer square footage
33. More business than we could handle
34. Paperless picking
35. Up-graded technology systems interfacing w/ retailer
36. Fewer high cube, heavy products
37. Better employee training
38. Program to track productivity
39. Refrigerated trucks
40. Conveyor system
41. Better inventory tracking system
42. A sharp pencil
43. Electric picking carts
44. The right inventory counts all the time
45. 100 percent order verification system
46. Better delivery flexibility
47. RFID at a reasonable cost
48. More space
49. Material handling system for merging orders
50. Robots
51. Knowledge base
52. More secure entrances/exits
53. Automated sortation
54. A computerized picking system
Categories of growth
In terms of growth categories, this is how the convenience distributors see it: foodservice and snack items remain the leaders in growth potential categories among respondents. However, foodservice far outweighs any other category as an area of growth, with 65 percent of distributors identifying it as such, up from 52 percent last year.
Distributors are also seeing growth in snacks (44 percent), beverages (34 percent), and frozen and refrigerated products (32 percent). And, despite all the woes facing the tobacco industry, 28 percent report tobacco as an area of growth for their company (see chart 4).
Other categories of growth that were mentioned include candy, gums and mints, health and beauty care, general merchandise, baked goods, produce and dollar items.
Trading partner relationships
Maintaining good relationships with retail and manufacturing trading partners is important to convenience distributors, and an ongoing topic of discussion at association meetings and in trade publications. Despite all the discussion, it remains a challenge for distributors who feel they are being squeezed out of the supply chain process at times. Only 17 percent report "very strong" relationships with trading partners (down from 22 percent in 2004), 40 percent say their relationships are "pretty good" (down only 1 percent), 30 percent say are "not bad, but not as good as they could be" (up 4 percent), and 10 percent say they are "getting worse all the time" (down 2 percent).
When asked why relationships are so strained, 67 percent indicate that the value of the distributor remains underrated. This figure is down from 75 percent last year. Sixteen percent believe more manufacturers are working directly with the retailers, as opposed to 12 percent in 2004. Eight percent think their sales team needs to make more of an effort to work with trading partners. Others blame the strain on continued competition from big box retailers, manufacturer cutbacks, and a heavier focus on discount retailers.
A few more distributors are relying less on face-to-face interactions with their trading partners and more on technology to streamline communications. The percent of respondents relying on face-to-face interactions dropped from 39 percent in 2004 to 29 percent this year. The number of companies relying a bit more on technology grew to 56 percent, up from 51 percent. Those relying primarily on technology-based communication rose to 14 percent from 9 percent in 2004.
Biggest threats to industry
When asked about the most significant threats to convenience industry profitability, most seemed concerned about the onslaught of discount marketers (43 percent), tobacco taxes and regulation (48 percent), changes in tobacco manufacturer programs (40 percent), grocery outlets becoming more convenience oriented (30 percent), and poor trading partner relationships (19 percent). Others mentioned:
- rising fuel costs
- tobacco rebates
- failure of the traditional independent retailer
- high petroleum prices and credit card fees
- WALMART & its suppliers
- The big box locations selling fuel
- fewer independent retailers
- less money for the c-store shopper to spend
- distributors’ profit expectations are too low
- outdated distribution technology
- lack of creativity in marketing
- theft
What lies ahead
What about the future of the wholesale distribution industry? How do distributors see it?
If you could make one prediction for the wholesale distribution industry, what would it be? (Unfortunately, we couldn’t print every comment, but this is a broad representation.)
1. It's going to get tougher to make a profit than ever before.
2. The big will get bigger, the small will be sold, or put out of business unless we find a niche.
3. Philip Morris will have no more than a dozen "preferred" distributors within five years.
4. There will be fewer of us in 2007.
5. The number of distributors is going to continue to decline.
6. Profit will continue to erode as long as manufacturers continue their oppressive policies.
7. Fewer wholesalers because of vendor programs and low margins.
8. An overall shrinking profit for wholesale and convenience stores.
9. Philip Morris and R.J. Reynolds will determine our fate by how they change their programs, and cash in advance is an insult to all of us.
10. There will be even fewer distributors as margins decrease. Distributors will become more diversified as products like candy and tobacco decline in sales. Beverages are much more profitable with projected territories. When a distributor gets a product moving, we can do the job. With products like candy where the retailer can get it from a hundred different places are sold, these products become a price-only item. No one cares about service…only price.
11. If the c-store is not made a "destination stop," customers will go elsewhere.
12. Inflation on the rise.
13. By expanding the breadth of product carried, the wholesale distributor should be able to supply more items to each store thus increasing the profitability of each stop.
14. The big will get bigger but some niche distributors will prosper due to personal contact with their customers.
15. Turn off the lights when you leave.
16. Continued consolidation.
17. Acceleration on consolidation at both wholesale and retail levels.
18. Low cigarette margins are going to take some more distributors down.
19. Learn to operate profitably without cigarette backend programs.
20. There will be fewer distributors in the next few years, only because of the inability of many to price their product in a manner that allows them to make a profit.
21. I predict that the future for the wholesale distribution industry is bleak until we realize that we must make a profit selling our products, as opposed to relying on manufacturer's programs and rebates to shore up profits. These opportunities to earn additional revenue should bolster profitability, but not serve as the primary source of it.
22. Less profits!
23. Manufacturers will begin running our businesses.
24. Fewer subjobbers to compete with in 2006.
25. Continued instability.
26. Fewer, more sophisticted, broad-line distributors
27. Grow or be bought out.
28. Survival of the fittest.
29. Wholesale distributors will need to make smaller deliveries more often to stores to accommodate the need for fresh products.
30. Smaller companies are in trouble.
31. Continued retraction in terms of the number of wholesalers. Large wholesalers will continue to get larger and acquire smaller houses.
32. Hang on, it's going to be a rough ride!
33. Sales will continue to grow, margins will continue to lessen.
34. If we don't get smarter with profits, then there will be very few wholesalers that make it.
35. In 15 years, cigarettes will no longer be our main item of distribution.
36. Huge shake-out due to Philip Morris & RJR program money/terms reduction.
37. Forty percent less distributors in five years.
38. Mop the blood off the floor!
39. It will be very difficult to maintain profitability as a result of capital upgrade needs and shortened margins. Pressure from vendor and retailers are creating less real dollars to keep up.
40. More legislation and taxes for the industry.
41. Smaller distributors will continue to be pushed out by the cigarette companies.
42. There will be very large distributors and very small, niche, distributors and nothing in between.
43. Manufacturers, wholesalers and retailers will have to strengthen relationships to be profitable.
44. Retailers will be able to receive new lines of products from their distributors that were historically delivered DSD.
45. More government intervention.
46. Bigger companies get better deals than smaller wholesalers. It is really hard to compete pricing wise with these companies. If this continues there will be no need for c-stores to carry these items when there is a big chain on every corner.
47. Fewer distributors and poorer service levels, lack of any product guarantees, and portfolios too large to manage.
48. In trouble if margins do not increase.
49. There will be fewer small to medium size distributors.
50. There will be significant change in the next 10 years and only innovative, agile wholesalers will survive.
51. I think the wholesale industry mimics societal rankings. There are rich and poor people similar to large and small wholesalers. The middle class and medium size wholesaler is disappearing. When economic trends for the people change, the wholesale market structure will follow.
52. The spiral continues. Less margins and more consolidation.
53. Here to stay for a while!
54. Get real good at what you do!
55. More consolidation
56. Continued consolidation, thinner margins, more technological advancements in operations.
57. Consolidation of distributors.
58. Flat growth.
59. Better become more profitable.
60. States will continue to increase the tax on cigarettes and tobacco until the sales decline negatively affects the income stream for the states.
Traci Carneal is editor-in-chief of Distribution Channels. She can be reached at tracic@awmanet.org.
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