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Taking Action
AWMA distributors are confident in the future because they are TAKING ACTION to make it brighter
by Bob Gatty
Despite being at the bottom of the barrel in terms of average industry profit, many convenience distributors say the picture at their own companies is bright and getting brighter, and they are confident of further improvement. The reason – they are working to make it so.
An online survey of AWMA member company executives completed in October reveals that strategies are being implemented to cope with declining profits from cigarettes, a common concern, and to replace them with stronger returns in other product categories. Moreover, specific steps are being taken to improve profits and reduce warehouse and distribution costs, and to institute policies that will reduce the drain of unprofitable practices and costly customers.
Interviews with several of the respondents also indicate that some of the new tactics and strategies being employed stem from the AWMA Value Equation Study completed over the past two years. While there is still concern that profits are too low, confidence remains that they can be increased and, overall, the state of the convenience distribution industry appears to be strong.
While 49 percent of respondents said their company’s pre-tax profits are higher than the industry average of 0.3 percent reported in the 2007 Hershey Industry Performance Analysis (HIPA) report, the vast majority – 89 percent – said their profits and return on assets (ROA) are not good enough.
There was remarkable confidence that profits and ROA can improve – 72 percent said they thought so.
It is clear from the survey that AWMA member companies are doing more than hoping, however. A remarkable 98 percent said they are targeting specific categories and operational areas to make it happen, in many cases compensating for lower profits on cigarettes, which 68 percent of respondents said is happening at their company.
Many companies are following key recommendations made in the AWMA Value Study in areas such as single-pick, pricing for heavy and high-cube items, better management of SKUs, and utilization of activity-based costing. Focusing more on foodservice and taking advantage of the multi-vendor end units (MVE) developed by AWMA for warehouse-delivered snacks also are providing important pathways to profit for many companies.
“There is a new mindset for profit in the industry,” says industry consultant Kit Dietz, co-author of the AWMA Value Study. “These results tell me that distributors recognize that this industry needs to change and that they need to be a part of that change.”
Pathways to profit
This year’s State of the Industry survey focused on several of the touchstone problems highlighted in the Value Study as contributing to the low profit levels experienced by most convenience distributors. The survey asked AWMA members what, if anything, they are doing about these challenges.
ITEM:Ninety-one percent agreed distributors must change pricing policies to improve their return for carrying heavy and high-cube products such as bottled water. Fifty percent said their company has already instituted such policies and another 28 percent said they were considering doing so.
ITEM: Twenty-eight percent said their company provides single-pick items for customers with no restrictions, but 43 percent said they charge a higher price per item and 11 percent have a minimum order requirement. Another 13 percent said they were considering one or both of those options.
ITEM: Fifty-eight percent train sales personnel so they understand which customers are profitable and which are not, and 33 percent said they are considering changes to do so.
ITEM: All but 17 percent said they use technology to improve operational efficiency, and most of those companies said they are considering implementing some form of technology-based system.
ITEM: A number of companies are working to rationalize their warehouse SKU count, often reducing the number of items carried. However, some companies actually have increased the number of products offered. Still, 76 percent of respondents report reducing warehouse SKUs over the past two years to eliminate slow movers and duplicates and 17 percent more plan to take such action. Future plans clearly call for reducing the number of SKUs.
ITEM: By far the majority, 64 percent, of distributors report having a process in place for evaluating their customers’ contribution to profit and another 20 percent say such steps will be implemented. Fifty-one percent have a process for eliminating customers that do not contribute to profit or cannot become profitable, and another 30 percent intend to establish such a process.
The survey revealed that 38 percent of responding companies are using AWMA’s Warehouse-Delivered Snacks MVE program, which indicates that a large number of companies are missing out on that benefit and a large profit opportunity.
“We’ve been very active in placing these units in retail locations and it has helped a lot in our sales increases,” reports Pat Carrico, president & CEO, Master Distributors, South Bend, IN, a regional distributor in the Midwest.
“We built one for liquor stores that focuses on salty snacks and a candy unit that’s strictly for new items, and the same thing for other tobacco products,” Carrico explains. “We expanded that set dramatically, and we have one for new products. We used to put in a 4-ft. section, and now it’s 12 or 16, and it’s planogrammed. We are getting more turns out of those products, and now we buy everything by the truckload, so we’ve reduced our costs because we are buying better.”
The challenge to act
“If you say profitability is currently unacceptable, then you have to be willing to take action,” Dietz says. “If you aren’t willing, then you’ve got to ask yourself what is holding you back. Distributors must be willing to change their practices. They can no longer run their business according to the lowest common denominator in the industry.”
According to AWMA’s SOI survey results, that is exactly what a large percentage of AWMA member companies are doing. But pulling away from the pack is not an easy task.
“Nothing happens until your competitors acknowledge the lack of profitability,” says Jon Burklund, president and COO, Burklund Distributors, Inc., Fairview Heights, IL. “It’s damned lonesome for the first to walk the plank. With that being said, we are focusing on realistic outcomes of increments, remembering that increments might not be enough.”
Dealing with high-cube items and single-pick, cautiously moving forward with foodservice, and finding new business opportunities are part of Burklund’s strategy today.
“In foodservice, we are still seeing mixed signals in the Midwest,” he says. “There is a wide range of wants and needs, but if you filter out the hot dispensed beverages and carbonated soft drinks, foodservice is indeed growing, but not as highly as advertised,” he says. “Some wholesalers are really ramping up their expertise; I hope it pays off for them. I understand that investments are always needed up front, but test kitchens and professional staff don’t come cheap. Historically, change happens at differing rates throughout our country. We are poised at any time to reinvest heavier in foodservice.”
Regarding single-pick, Burklund says the company’s philosophy has changed. “You simply cannot price them high enough to substantiate a pick of one. Add to that, when we deliver even three of anything 30, 60, 120 miles away, plus provide marketing and merchandising services, everyone – retailers, manufacturers, and yes, our people, need to understand the true costs of what we try to accomplish. The future logistic model has to be molded around picks of sixes. Items need to have a sales level of six each, one-to-two weeks. It’s the same old stuff.”
Burklund says his company has a business plan that creates awareness for high-cube items, and that “most people can understand our need to cover occupancy cost plus additional financial costs for holding imprint items longer than usual turn. It is hard to move from the old ‘cost-plus’ scenarios.”
“Beverages,” he adds, “are a mixed bag.” His company has been able to leverage some rebates “at the expense of providing ship data in many cases.” He points out that most “no-fit trucks” are a result of high cube cups, windshield wash, and Gatorade.”
A new opportunity, Burklund believes, lies in redistributing store supplies. “We have had success working with paper and chemical companies who see that one distributor can supply several chains and many independents,” he says. “Unfortunately, we are currently struggling to partner with a low-cost source of cash register supplies.”
Novel solutions
At Manchester Wholesale Distributors., Inc., Manchester, NH, expanding the company’s novelty business is part of the company’s strategy to strengthen profits.
“These novelty items tend to be in-and-out one time,” says Bob Moore, the company’s chief financial officer. “Profit margins are among the best items for C-stores to sell and promote.”
President & CEO Ray Tetu says Manchester has not been able to change pricing on heavy and high-cube products such as bottled water and Gatorade, although he believes such action is important in the battle to improve profit. He blames local competitive realities.
“We still have one or two competitors that promote price rather than service and quality. But those competitors are becoming fewer and fewer. They can’t win in the long run. They can’t win without service.”
Single-pick items are provided by Manchester, but Tetu says the company has “had some discussions” about imposing restrictions, especially since the AWMA Summit & Business Exchange in September, when Part II of the Value Study was presented and recommended that such action be taken.
“That presentation helped reinforce my thoughts that we should consider that,” Tetu explains. “We need to drive down our costs for single-pick.”
Manchester also ranks customers based on sales and profitability, Moore says, and is in the process of further formalizing that process. “We’ve seen some customers leave (as a result of conversations following that analysis), and it hasn’t hurt us one bit.”
Distributors, he adds, need to work with customers in an effort to help them improve. “But some customers are just too costly and it’s tough to serve some customers that are so needy.”
Tetu says he is optimistic about the future of Manchester Wholesale Distributors, but is only “neutral” as to the future of the overall convenience distribution industry. He was asked why.
“I’m very optimistic about our company because we are shifting gears into other areas, such as foodservice, and to some other areas that we are investigating,” he says. “I don’t know what other companies are doing, so I can’t speak for the rest of the industry. But I know that we are taking action to position us to succeed in the future.”
Paying attention
The survey showed a general trend toward a reduction of SKUs and, generally, distributors who responded expressed the intention of further reducing their inventory load.
“Our policy has been to take whatever the broker and the manufacturer brought through the door,” Master Distributors’ Pat Carrico admits. “We didn’t pay enough attention to product duplication. For example, we were carrying seven or eight lines of meat snacks, so we are reducing them to two lines – Jack Link’s and Slim Jims – based on sales.”
Carrico says his company implemented an additional markup on water and juices after the initial Value Study was published last year, identifying the costs of handling those products as an important issue to address. “We’ve maintained that, but we did get some heat from retailers. A lot of competitors have been slow to raise those prices. But it’s getting better. We’ve been able to stick to our guns on that.”
To address the needs of smaller accounts, the company has four cash-and-carry locations. For other customers, minimum dollar requirements have been imposed for delivery, “although that’s been a moving target because of fuel and excise taxes going up.”
Regarding single-pick, Master Distributors sells smaller retail items in threes or sixes, depending on the product. “The computer automatically converts an order for one to the minimum,” he explains. “We started that within the last year. We had customers that would order single-pick items and we were sending one each week, every week. We think we picked up their sales with this new minimum order requirement.”
SKUs have increased at Master Distributors, Carrico says, but that’s because the company “has gone into prepared foodservice in a very big way, and we’ve expanded frozen and refrigerated dramatically.”
He credits foodservice vendors with developing new and innovative products that have led to significant increases in business. “Our foodservice business continues to double every six months,” he says. “There are some unbelievably creative products brought out for the roller grill, for example. They have really done well for us. And the foodservice business is much more profitable than candy and tobacco.”
However, to manage the process and eliminate slow-movers, his company has a regular evaluation policy and eliminates the bottom 20 percent in sales performance. “Until we did that, we were buying new products every day but we weren’t getting rid of them,” Carrico says.
In Part II of the Value Study, Dietz urged distributors to shoot for a 1.5 percent profit margin and a 12.5 percent ROA by 2009. Only 38 percent of those responding to the SOI survey said they thought that was possible, and Carrico was one of the doubters.
“I don’t think the industry is going to move that quickly,” he explains. “Competitors won’t let me, but I’m hopeful that will change. I think it is going to improve. Competitors are much more conscientious about profit than they’ve ever been. I attribute a lot to AWMA and the effort that’s gone into the study reports and presentations.’
Bob Gatty is a regular contributor to Distribution Channels and founder of GattyEdits, based in Sykesville, MD.
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