Annual conference delivers strategies to help distributors build profits.

By Bob Gatty

An agenda packed with strategies to help distributors build and maintain profits despite the nation’s troubled economy highlighted the 2011 AWMA Summit held in Atlanta, GA, Sept. 12-15, with concrete recommendations offered by top industry advisors and executives.

The stage was set by Al Bates, president, The Profit Planning Group, who pointed out that the typical convenience distributor’s profit before taxes now stands at about $700,000 per year, or 0.7 percent of sales, down slightly from 0.8 percent in 2011.

He predicted that payroll pressures will increase an average of about 3 percent over the next five years, with inflation, health care reform, and possible changes in Social Security being contributing factors. So, he said, it is essential for the average distributor to achieve annual sales growth of at least 3 percent, compared to the 2 percent recorded in 2010.

That, he cautioned, “will barely keep you in the game.”

In fact, Bates advised distributors to adopt strategies to generate sales increases of at least at least 5 percent—or 2 percent greater than expected boosts in payroll. That, he said, should be organic growth, not growth from mergers or acquisitions.

“You might have to steal it from somebody else out there,” he observed.

Instead of trying to generate increased sales by being the low cost leader, Bates suggested distributors should provide customers with strategies to increase their sales and profit. Helping retailers reduce their expenses, even as they boost their sales, he said, could achieve that and, in turn, generate higher sales and profits for distributors.

“If we can help them drive more margin dollars, that’s a home run,” Bates declared.

Bates advised distributors to set joint goals with customers and periodically review how those goals are being met. There needs to be a strong emphasis on category management, he said, even as distributors work to educate their customers on ways to build profit. “It’s a high risk, high reward way of doing business,” said Bates.

Driving Center Store Profits

Industry consultant Kit Dietz, president, Dietz Consulting, LLC, told distributors there are sizeable new profit opportunities available if they can better manage candy and snacks through improved category management that increases in-stock positions of core products and more efficiently eliminates slow moving items that do not contribute to the bottom line.

He said the top 4 percent of SKUs create 50 percent of sales while 50 percent of SKUs provide only 5 percent of sales. “That is unacceptable,” he declared. “It should be unacceptable to you and to the retailer.”

“Core brands drive profitability,” stressed Dietz, using chocolates as an example. Here, core brands produce more than twice the sales and more than four times the true profit of non-core items, he said, adding that non-core chocolate items provide consumer choice, generate a 46.1 percent gross margin and 14 percent true profit, which depends upon maximizing the use of available space.

“Leverage brand strength,” Dietz said. “Consumers have preferred national brands and regional favorites. Know your shoppers and the brands they prefer. Build the core and be strategic around new item launches.” Duplications, he said, should be strategic—such as making sure packaged meat snacks are on an end cap, as well as near the register, because of the impulsive nature of the product.

Distributor Perspective

Tom Cinnamon, vice president, merchandising, Eby-Brown Co., outlined his company’s approach to category management. Pointing out that 35 percent of items generate 90 percent of sales, Cinnamon said enforcing category management would help create better efficiencies and increase the bottom line.

“The retailer does not need every item for every consumer,” he declared. “So why do we stock over 15,000 items when the average c-store only carries around 300? Because the manufacturers and distributors are not actively working and executing category management with our customers.”

Cinnamon pointed out that convenience operators are now making less profit on fuel and cigarettes than in the past, so for them to survive and compete, inside sales must grow.

“Gradually, over time, category management will help us improve the profitability on many of these categories,” such as salty and sweet snacks, he said.

Thus, distributors need to eliminate non-performing SKUs, which should not be included in retail accrual programs. High cube and low volume items need to be managed. “Why do we need three types of mustard?” Cinnamon asked.

“Eby-Brown really focuses on working with our customers to ensure they are carrying the right mix,” he said.

Data is critical to effective category management, Cinnamon said, and urged distributors to participate in AWMA’s InfoMetrics program. “When you are using multiple data points, it makes it easier to get buy-in from our manufacturer partners to eliminate underperforming items,” he explained.

Retailer Perspective

Jim Hachtel, senior category manager, center store at the BP/ARCO ampm 1,200 store chain of c-stores, stressed that understanding the unique role each category plays is critical. Destination categories pump shopper frequency and foot traffic to the perimeter, he said, creating opportunities for retailers to capitalize on high margin impulse categories in center store.

“Know the customer’s shopping pattern, leverage the layout and adjacencies to efficiently drive basket-building sales in high margin categories such as snacks and candy with both primary and the right secondary product placements,” he advised. Include just the right emergency fill-in items as needed.

“Remember, the cost of space is the biggest contributor to inefficiency in many center store categories,” Hachtel advised. “By the time everything is factored in, destination and center store categories are almost equal in true profit contribution.” The challenge, he added, “is to manage those activity based costs (ABCs) through proper category management and store execution to help increase the true profit of center store and ensure that more money gets taken to the bank.”

Hachtel said snacks contribute significantly to sales and gross profit, but fall short in true profit because of space inefficiencies and unnecessary duplications. “This represents a big opportunity to optimize snacks through a category management approach, and help snacks close the gap between gross profit and true profit,” he explained.

He noted that candy, HBC and general merchandise contribute a lower percent of center store sales and gross profit than snacks, but are stronger true profit performers. Grocery, meanwhile, represents only 4.6 percent of sales, 2.2 percent of distributor sales, but occupies nearly 35 percent of total warehouse space and is unprofitable for both distributors and retailers. His company, he said, stopped giving space to grocery because it contributed less than 0.5 percent to total store sales.

Even with candy at ampm, there are over 725 SKUs scanning in their stores, but only 300 of them provide 95 percent of sales. Many of the remaining 400 unprofitable and inefficient SKUs are selected by individual franchisees, who are allowed to choose 20 percent of SKUs under the company’s category management program.

Hachtel pointed out that customers do not know or care that some snacks are warehouse delivered and others DSD. “What they care about is having the products they want, when they want them, merchandised in a way that makes it easy for them to shop. What this means to us,” he said, “is that we don’t merchandise by warehouse or DSD, but by customer need, and the role of the category.”

Regarding assortment inefficiencies, Hachtel said “evicting” products that do not meet expectations allows the chain to provide customers with the products they want, resulting in higher true profit for franchisees. “Serving our core customer is the driving factor in our category management practices,” he explained. “Providing the products they seek regardless of source and listening to them as they vote with the dollars is essential to success.”

Distribution gaps on top selling core items is the biggest sales growth opportunity, said Hachtel, pointing out these potential payoffs if industry-wide distribution levels could be increased to 90 percent or better: candy—$350 million; salty snacks—$234 million; DSD—$608 million.

“Both DSD and warehouse have a role in our stores,” said Hachtel, noting that warehouse snacks generate greater average gross profit per unit, but that the choices made for those products must be correct. “The opportunity here is by properly managing the categories and optimizing the assortment, warehouse snacks have the chance to even further widen the gross profit gap from DSD.”

To distributors, he said, “You are often the only source of category management for your customers. Make sure you are providing that education to them, and that you are managing your own assortment properly so you can make good, strong recommendations to your customers.”

Benefiting from InfoMetrics Data

“The biggest impediment to category management has been having the data to make it work and a process to put it to work,” said Rob Sincavich, president, Sledd Co., Wheeling, WV, who co-chairs AWMA’s education and research committee. AWMA’s InfoMetrics program, he added, can help distributors identify gaps in distribution by looking at the market and comparing results to their own performance.

InfoMetrics, operated for AWMA by InfoRhythm, Inc., Pittsburgh, PA, now includes data from some 60 distributors covering more than 92 warehouses representing 80,000 stores and detailing shipment results for some 900,000 SKUs. Participating distributors provide up-to-date shipment data to InfoRhythm, which then compiles reports that allow them to better manage assortment and manage categories.

Mike Dion, vice president, sales, at InfoRhythm, outlined the program during the Summit luncheon program, stressing that InfoMetrics is ready to partner with additional distributors to help them increase their business. “This can fulfill your need for solid data,” he said. “We want to partner with you to find insights to grow your business.”

The data is also available to manufacturers, Dion added, as well as to brokers.

Focus on Tobacco

Nik Modi, UBS Investment Research tobacco analyst, discussed the tobacco landscape with an emphasis on the impact of FDA regulation. He predicted that FDA would not ban menthol, saying there is too much money at stake—including tax revenue from a sizeable portion of the business that otherwise would go black market and pay no taxes.

Modi also predicted that smokeless products will continue to increase market share and by 2025 will have a larger percentage of the tobacco business than cigarettes.

“To comply with the FDA is going to be tough,” said Modi, adding that some smaller companies that do not have the capability of meeting all of the regulatory requirements may well be squeezed out of the marketplace, which is likely to consolidate.

The big three companies will continue to increase pricing whenever possible, he added, suggesting this would provide opportunity for alternative lower cost brands.

“There are some really good small companies out there that can grab market share as weaker competitors fall by the wayside,” he said.

Bob Gatty is a contributing editor to Convenience Distribution™ and founder of G-Net Strategic Communications.