Using Brokers Successfully
Buyers that I meet at trade shows and conferences most often describe brokers to me in less than glowing terms. Some buyers complain that brokers "steal their time" or "don't have a clue" when they come to the co-op to sell their products.
From these comments, it's clear that the co-op in question has not learned to work effectively with brokers. Brokers are a vital part of keeping the store where I work, Weaver Street Market, successful in a very competitive natural foods marketplace. Many brokers tell us that Weaver Street is their favorite stop. Such comments tell me that Weaver Street's buyers have learned to manage effectively the co-op/broker relationship.
A product manufacturer pays the broker a fixed percentage of the product's sales in the region the broker represents. The broker's major job requirement is to increase sales in that region. The broker needs to maintain good relationships with the retailers in order to do her job well.
Located in Carrboro, North Carolina, Weaver Street Market competes with two Whole Foods stores and several upscale mainstream grocers. Additionally, the area is home to a large gourmet and mail order retailer. In spite of all this competition, our co-op has enjoyed three years of double digit growth and ever increasing gross profit margins. This year, both the grocery and nutrition departments are growing at over 15 percent over last year.
What has this got to do with brokers? Recently, we analyzed our purchases from our primary and secondary natural foods suppliers (alas, neither is a cooperative). We were astounded to find that over 60% of purchases from our primary supplier were "on deal," and a whopping 78% from our secondary supplier. These numbers are indicative of the positive relationships we have built with our brokers. We have a keen awareness of discounts the manufacturers and distributors are offering on the products that we want to buy. Brokers are the most important link in the information gathering process of successful purchasing.
How do you make successful buying happen? The first step in a positive broker/store relationship is defining clear expectations. Always let the broker know exactly what you expect. Ask the broker what she needs from you. Usually, the answer is fairly similar on each side. "Don't waste my time. Honor your commitments to me. Treat me fairly. Don't hide valuable information. BE HONEST WITH ME!" Retailers should be explicit in their demands of any broker.
Here is a list of basic broker requirements that has served me well during my years as a buyer:
- Always make an appointment in advance. Don't expect me to squeeze you in.
- Be prepared for your meeting. Know what is happening with your manufacturers for the next quarter. This includes deals (at every distributor in the trade area), new product introductions, supply problems, etc.
- Bring product samples if you expect me to buy. I know what my customers want.
- Expect to work for me. I need you to walk the store and offer suggestions and help. When I am resetting a section, come prepared to get dirty and stay until the job is done.
- Offer critical information. If you feel a product is overpriced, or poorly merchandised, or if I am missing key products, tell me.
- Be my advocate with manufacturers and distributors.
In order to maintain the most productive relationship, you as the retailer should be willing to meet the broker's needs too. Our buyers know that they need to treat brokers as internal customers who can address their needs. Here are basic rules that our brokers know they can expect us to follow:
- Always honor commitments to meet the broker at his appointment time.
- If you commit to buy something, always do so. If you can't, call the broker and tell him why you cannot.
- Listen to what the broker has to say. It is his job to sell you products. Give him a chance to do so.
- Write purchase orders with brokers. Their manufacturers and office need to see the results of the broker's work.
Now that the ground rules are set, it's time to get to work. Use the broker's manufacturer list to set goals for your meetings. Brokers can often offer ongoing discounts on some of their lines. Find out which lines you already have give you an "OGD." Decide whether you need others. Use examples to explain how the manufacturer would benefit by offering you better pricing all of the time. Try an always-reduced price option and a high/low option.
If you have a newsletter, decide which lines to promote there. Tell the broker how many cases of the product you would be willing to sell at a reduced price for an attractive discount and co-op ad money. Prepare a list to inform the broker of which products are not selling at this time. Ask her to help you to analyze why and offer suggestions to move these products. Ask the broker to arrange a demo to spark interest in the line.
This preparation will help you when the broker arrives. First, allow the broker to go over new products and deals. Take notes about the particulars of the deals and their length. Order the ones that meet the store's needs. Say no to the others. Go over the store needs list you have prepared. Discuss which needs are priorities that need to be attended to immediately and which are for followup. Set a time for the broker to call you with answers to your requests. Place initial orders for upcoming promotions.
After the buying and selling, walk the store with the broker. Ask for ideas and suggestions regarding shelf sets, endcaps, and other merchandising ideas. "Have you seen another store with particularly good merchandising?" is a question I often ask. Ask for help setting displays if you wish. Ask the broker to do price comparisons when she is at other stores -- they're already doing this for the manufacturer anyway. Don't forget to set the time for your next meeting.
Dollars and cents
Now, let's talk dollars and cents about the benefits of developing the store/broker relationship. Learning the specifics of how manufacturer deals are structured gives the co-op information to purchase most effectively now and in the future. For example:
Cereal manufacturer Z is offering a great promotion on shredded wheat. First, find out what percentage discount is being offered to the distributor. This is called an off invoice discount. Ask the broker to tell you what additional discount the distributor is offering. Thirdly, find out if the manufacturer is allowing the broker to offer an additional discount for large purchases. These discounts are usually passed on as manufacturer charge backs or "MCB." MCBs are given to the co-op by the distributor, who then bills the manufacturer for the discount at the distributor's catalog price. Knowing all three pieces of information gives you important tools for better buying.
"Z" Shredded Wheat: Regular
Manufacturer invoice price $1.25
Total landed cost to distrib. $1.50
Distributor margin (25%) $0.50
Catalog price $2.00
Co-op cost with 13% volume discount $1.74 (13.79% GPM to distrib.)
In our example, Shredded Wheat at wholesale is $2.00 per unit; the off invoice discount is 10%; and the distributor is matching is for a total discount of 20% or $1.60 per unit. The manufacturer is authorizing an additional discount of 5% for a 10-case order and 10% for a 25-case order. So, you can expect to pay $1.40 (30% off of $2.00) on a 25-case order, right? Maybe not! You can expect a minimum of 30%. Here's how:
Ask the distributor to offer additional discounts on volume purchases. The broker cannot guarantee, but can send in the request to your distributor. Most often, distributors are willing to offer additional discounts on large purchases with manufacturer charge, because the MCB gives them additional gross margin too.
"Z" Shredded Wheat: Deal
Manufacturer invoice price $1.25
Total landed cost to distrib. $1.38 (8% less)
Distributor margin $0.22
Catalog price $2.00]
Co-op cost with 20%
volume disc. $1.60 (13.75% GPM to distributor)
25 case discount $(0.20)
$1.40 (30% off)
In the Shredded Wheat deal example, the distributor bills the manufacturer the full 20-cent reduction for the additional discount. This means that the distributor pays $1.18 per unit and sells it for $1.40, realizing a gross profit margin of 15.71%, almost 2% higher than the expected GPM. Consequently, the co-op should be able to negotiate to get additional discount from the distributor (up to 5%) on deals with a manufacturer charge back. Although you will not always be successful doing this, additional discounts on key promotions allow you to offer the most competitive prices to your owners and customers on the items they want to buy.
The next important thing to find out about the "Z" Shredded Wheat deal is the duration. One month? Three months? Is it a year-round promotion? Many manufactureers offer these promotions on top selling items every day. If they do, find out whether they can arrange an ongoing deal for your co-op. This gives you a high movement product at the best price to your customers.
Often, the distributor or manufacturer will eliminate or reduce the minimum order requirement in echange for attractive retail pricing. Remember that the big guys in the natural foods industry have more purchasing pwoer, but they have higher overhead too. You can compete effectively if you focus on key products your customers want and work well with brokers to get the best pricing.
You can apply the above test case to a range of situations. Negotiating monthly specials can help expand your ongoing deals. Knowing the breakdown of any deal will help you to negotiate the best pricing from the distributor and manufacturer. Consistently purchasing through the broker gives them an added incentive to work hard to meet the co-op's needs.
Merchandising and shelf sets
Another major area where the broker can help the co-op is merchandising and shelf sets. A good broker looks at the set of a section and compares it to the sales numbers on her movement reports.
Most of the brokers that visit Weaver Street Market walk the store and take notes of particular areas of concern to them before they meet with the buyer. They can alert you to poor merchandising, or pricing, or product with short shelf life remaining. Often they have seen a good shelf set design to suggest to us. They replace damaged product with fresh stock from their sample inventory. This preliminary work frees up time together for finding collaborative ways to sell more products -- both the co-op buyer's and the broker's main goal.
In closing: the key to using brokers most effectively in your co-op is establishing a plan that works for the co-op, the broker, the manufacturer and the distributor. Deciding what that relationship looks like is up to each co-op. By establishing clear expectations for all to work with, paying close attention to discount and pricing options, utilizing the broker's information about competition, and collaboratively working to best present products to customers, the broker and co-op buyer serve the interests of all parties well.
Ultimately, the broker and co-op buyer have confidence that the relationship is a win-win one. This also benefits your owners and other customers, and it can offer a compelling co-op advantage in pricing and presentation as well as the more traditional areas of customer service and community relations.