Understanding Distributor Dynamics
We see several positive trends of cooperation between stores and their distributors. These are lowering the cost of goods in several categories and increasing the competitiveness of both stores and distributors. We also see several key areas of focus for retailers and for distributors that lead to improved performance for their customers.
In writing, we hope for a more pervasive dialogue and coordination of efforts between retails and their distributors, and that this will lead to stronger, more efficient retail and distributor linkages. We will address the need for integrated systems for procurement, marketing and retailing, using examples in our industry and others.
Following are some key attributes to understand when working with your wholesaler to cut their costs and there-fore cut your costs. It all comes down to creating economies of scale. Distribution's economies of scale are generated by many issues, primarily:
- Volume truck load purchases (one vendor, one truck, in some cases one truck, one item) generate huge savings at the manufacturer and inbound freight level. The pull through is generated at retail. The weekly purchases of 6 (of 8) Bread and Circus stores from Stow Mills equal the total weekly purchases from Northeast Cooperatives of all 41 of its co-op retail members.
- Number of drops per truck: the fewer the better. Mass market grocery distribution averages 1 to 2.5 drops per truck, not 5 to 20 as is normal in the natural foods trade. Large stores such as Nature's Fresh in Portland or Whole Foods, help their supplier achieve this scale. Each delivery to two large Nature's stores is one truck, two drops for their distributor.
- Miles traveled as measured in revenue per mile: The goal is fewer miles traveled but full trucks and with fewer drops generating greater sales. In mass market grocery, the service area is generally limited to a 200 mile radius from the warehouse, not a 300+ radius as averaged in natural foods.
- Travel distance in the warehouse to pick the order. Running all over a 150,000 sq. ft. warehouse and past 16,000 items for any order less than 500 items is not considered terribly cost effective if the warehouse is slot ted with a pick pattern and is designed for materials handling processes to serve large stores. A smaller retail order might average 100 items and $1,600 -- contrasted with orders that average 1,000 items worth $16,000.
- High volume. Volume in an optimally sized warehouse with a tight category management partnership with the stores generates high turns with attendant cash flow. Distribution is a cash flow business, with great attention paid to operational and procurement details due to the small margins.
- Use of distributor specials and preordering of specials to create economies of scale back through the distribution chain to the manufacturer. This could be several stores banding together to create their marketing plan and attendant buys together.
These distributor economy of scale dynamics support the following recommendations for negotiating the best deal in conjunction with your warehouse:
- Larger single buys. Reduce the number of store promotions and focus on larger, more exciting deals. You'll get bigger discounts and save labor in your store and at your warehouse.
- Joint marketing with other retail co-ops. The Cooperative Grocers Association in the Twin Cities is working with one shared marketing person, who coordinates marketing plans and a common marketing image (and greater presence for consumer cooperatives), and deals on promotions that these co-ops all buy into. Davis Food, Sacramento Natural Foods and North Coast Cooperatives are working together in a similar arrangement, but with the buyers meeting once per month to set promotions and pricing strategies. They achieve reduced marketing costs per store, yet bigger bang for their buck. Besides these benefits to the stores and to the stores' members, all concerned say that it is a great learning experience sharing strategies. They become more savvy buyers and marketing people by their cooperation.
- Dedicate more of your purchases to your main supplier. This will lead to the efficiency of larger drops for the distributor. In addition, you will have greater leverage for negotiating deals, earn a larger volume discount, have your buyers spend less time shopping around through catalogs (placing orders with multiple vendors and receiving and processing multiple deliveries), and they have more time to spend retailing. This may sound self serving; but most of the largest retails in the natural foods market and all of the retails in the mass market grocery industry follow this practice. This has long been a tenet of natural foods industry consultant Danny Wells when addressing strategies for small to medium size stores. It's almost more important for the small stores to follow this practice, due to staffing constraints and distributor volume discount structures.
- Have your store more closely reflect what your warehouse carries, and vice versa. Your warehouse needs to hear about the products that your store moves in volume. This is, of course, a two-way street. The more that your store's product mix is in synch with your warehouse, the greater the inventory turns for the warehouse, and the better the pricing, deals, etc.
There are many more ways to create synergies that reduce your distributor's costs and therefore increase your volume discount or rebate. Distributors, like any other organization, also have goals that change due to different marketplace pressures. Keep in touch with those issues.
Unfortunately, there are many retail co-ops that are outside of the cooperative warehouses' service areas. The above points can also be a template for working with warehouses in which you have no ownership. It is clearly very important for us all to continue to work within the cooperative system in order to achieve a greater strength and unity, but when this is not possible, then just go out and cut your best deal. The Davis/Sacramento /North Coast alliance has also structured a relationship with Mountain People's that earns them a better rebate structure.
Northeast Cooperatives is designing systems to help us be more efficient and to meet the future needs of our members. As consolidations and new mass market players change the retailing and wholesaling landscape, there will be a predictable downward pressure on all of our margins and a drive towards greater efficiency and economies of scale.
To achieve these goals, Northeast is involved in the design of our new headquarters warehouse and offices. To be built in four stages over 12 years or less, the facility when completed will be 400,000 sq. ft. Unlike most warehouses, it is being designed with modern materials handling processes in a unique combination accommodating both slow and fast moving items -- the type we handle now and expect to handle in the future. We plan to continue serving both small and large retails, small and large buying clubs; our plans also incorporate flow-through logistics appropriate to our members and customers. This unique approach to facilities design looks to serve our diverse customer base efficiently and effectively.
The independent mass market grocers only exists as a force today because they formed large procurement and distribution cooperatives over 50 years ago. Wakefern Foods ($4.2 billion annual sales), Associated Wholesale Grocers in Kansas ($3.4 billion), Certified in L.A. ($2.0 billion) are huge cooperatively organized procurement and distribution systems of stores; they are among the top ten food wholesalers in the US as measured in sales. The independent grocery retailers own, nurture and protect their lines of supply. Each of these wholesalers is fully vertically integrated in that they have a manufacturing arm that supplies private/controlled label products. IGA achieves a portion of this strategy through a different methodology and marketing approach -- a very interesting template to explore outside cooperative distributors' areas.
There are many examples of the same or related processes of evolution in other sectors. We can look to the supermarket industry to understand much of the evolutionary process that we currently are undergoing. The supermarket became the channel of distribution because it represented a creative adaptation to a rapidly changing economic, social and cultural pattern. This adaptation to change proved not only sustainable but devastating to existing competition. In less than a decade, the supermarket triumphed over the urban-based corner grocers who offered full customer knowledge, home delivery, credit and even employment. Ironically, these practices are now trends that many economic forecasters see as key to the future of food retailing.
Small can be beautiful. Look at the flexible approach exhibited by your local hardware. Most family-owned hardware stores exist today only due to their patronage and ownership of huge procurement cooperatives. Local hardwares epitomize customer service and are competitive due to the system that they own and that continues to be redesigned to meet their needs.
Our future is built on the past and on the arrangements we build in the present. You retailers own us. Work in concert with one another and make us continue to work together, for you.