Convenience distributors are charging forward – despite the poor economy

by Bob Gatty

Key Takeaways
•    ROA continues to improve, but distributors are still unhappy with profits.
•    Distributors are not moping, but are actively seeking ways to generate profits.
•    The majority of respondents are optimistic about their company and the industry’s future.

    Even though the nation’s economic situation has been woeful and is only now beginning to improve, and despite challenges posed by skyrocketing taxes on tobacco, convenience distributors are producing better returns than last year and are showing signs of resiliency that should lead to improving sales and profits going forward.

    An online survey of distributors completed in October for this report showed that 43 percent of companies responding are generating operating profit of about 0.6 percent and another identical number said their profits exceed that figure, the typical pre-tax margin reported by firms who participated in the 2009 AWMA/Hershey HIPA Report.

    Likewise, 47 percent of respondents said their return on assets (ROA) was about 5.3 percent, the level identified in the HIPA report for the typical distributor, while another 42 percent said their ROA was better than that.

    While both of those measurements were improvements over the previous year, 75 percent of companies that responded to the AWMA State of the Industry survey said they are still not happy with their company’s level of profitability and 73 percent said it is possible to improve.

    A telling number in the HIPA report, taken from results in 2008, is typical sales volume of participating companies: $99,998,100, compared to $90,704,000 in 2007 and reflecting a steady increase from the $66,000,466 level of 2004.

No ‘woe is me’ attitude
    Many factors are contributing to the increased success that many distributors are experiencing in the face of the worst recession since the Great Depression, and in the face of massive federal excise tax increases on cigarettes and other tobacco products. Perhaps most important, however, is that distributors are not standing still. They are not saying, “woe is me, aren’t things awful.” Instead, they are moving forward, some with a vengeance, determined to take advantage of opportunities that may exist. Indeed, they are investing in their future.

    For example, AWMA member Holiday Wholesale, Inc., Wisconsin Dells, WI, serves the Midwestern states of Illinois, Iowa, Michigan, Minnesota and Wisconsin, all devastated by the recession and unemployment.

    “Wisconsin has lost 140,000 jobs over the past year, and I don’t really see us turning the corner for another year, but instead of pulling in we’re trying to go forward,” says Ed Wojnicz, the company’s sales manager. “There are a lot of good independent people out there, and that’s our target for growth. When I look at our competition and where we stand year-to-date, we’re nearly even, and that’s what gives us hope that once the dust settles we’ll have made some inroads.”

Tobacco’s impact
    While 77 percent of AWMA’s SOI survey respondents said their cigarette sales have declined over the past year, 25 percent reported that sales actually increased – no doubt the result of taking some margin on the tax hike. However, 18 percent reported declining profits from cigarette sales.

    “With the last FET increase, we have been able to achieve a little more margin,” says Wojnicz, who says recent Internet tobacco sales busts are encouraging. However, he adds, competition from Native American tribes is difficult.

    “The tribes have an advantage over anyone else,” he says. “The tribes are in the number-one position, selling more and more products.”

    However, in the state of Washington, AWMA member Harbor Wholesale is able to capitalize on Native American casino and convenience store operators who sell large volumes of cigarettes and other tobacco products – supplied by Harbor Wholesale,” according to Controller James Chess.

    That’s because the state allows the tribal operators to keep the state tax revenue that they charge, helping to level the playing field with the competition. The company has also benefited from increased margin on the higher federal tax rate and a diverse customer mix to increase volume.

    According to HIPA, cigarettes still account for 70.9 percent of sales for the typical distributor and 65.9 percent for distributors considered to be in the “high profit” category. Obviously, any external action – by government or otherwise – that affects cigarette sales has a significant impact on convenience distributors’ operations and their ability to generate a profit.

    The FET increase and hikes in state taxes have also spawned increased sales of roll-your-own (RYO) and little cigar products, distributors say, helping to take up the slack for reduced cigarette sales.

    Josh Altman, vice president of sales and marketing at AWMA member Mountain-Service Distributors, Fallsburg, NY, whose company also must deal with unfair tobacco product competition from Native American tribes that sell to customers far beyond their borders, reports booming sales in moist and RYO products.

    In fact, his company has developed a new RYO shared center for c-stores dedicated to those products to give c-store operators a way to make up for lower cigarette sales and profits. “The consumer is willing to make his own cigarettes if the price differential is enough,” Altman says.

Seeking alternate solutions
    Nevertheless, companies are not standing still waiting for the situation to worsen as the Food and Drug Administration begins to exercise its new muscle and imposes new regulations on tobacco sales. Instead, 95 percent of survey respondents said they are looking for other ways to generate higher profits, with 89 percent of them saying foodservice, and another 47 percent pointing to beverages, as major focal points. Following close behind were candy and snacks at 43 percent.

    At AWMA member Doyle’s Wholesale, Hayden Lake, ID, foodservice has become an increasingly important component of the company’s offerings to the customers it services in Idaho, Oregon and Washington state.

    In fact, the company hired restaurant owner Mike Hardin to be its foodservice director and is moving full steam ahead to providing customers with new foodservice opportunities.

    “I own a restaurant and came from a resort, so the company created a position for me to train our sales force,” reports Hardin. Now, under Hardin’s direction, Doyle’s Wholesale helps to train customers on key foodservice issues, including food safety, to help remove obstacles that prevent them from capitalizing on foodservice sales.

    “The company made an investment in specialty fast food,” he explains. “We hired someone to handle equipment, so now we have something to go to the retailer with. Then we got into a partnership with a coffee company that’s been unbelievably successful.”

    That, he adds, has helped his company sell additional foodservice programs to customers who initially contract for the coffee program and then expand, once they realize the level of service and support that is provided. Doyle’s Wholesale works with Omni Food Concepts to distribute Sub Express and Bellarico’s Pizza products to more than 100 accounts. In addition, the company developed a new “Asian to Go” concept in partnership with Minh Corporation, offering from three to 15 entrees to customers.

Management solutions
    Generating sales from alternative sources is only one part of the typical distributor company’s effort to improve its bottom line. Another critical component is finding ways to better manage their businesses – and not just by cutting, cutting, cutting.

    Some 70 percent of responding companies reported having a system in place to assess the contribution of individual customers to profits, and 9 percent said they were developing such a system. In that context, 20 percent said they are utilizing the new AWMA Customer Profitability System that recently was developed for that purpose.

    “We do a review each year using UniPro University (from Progressive Group Alliance),” says Wojnicz of Holiday Wholesale. “We’re in our fourth year. We get reports by customers, sales, profits and more. Our people are now starting to take a look at our customers, and that education has helped us in that regard.”

    Officials at Doyle’s Wholesale, meanwhile, developed a system to track profits quarterly and year-to-year with individual spread sheets for each customer. “Then we have individual meetings with customers to go over their profits, discuss what is going on with them, and evaluate their performance. It helps them find trends, grow the category, and become more profitable,” Hardin says.

    At Harbor Wholesale, a “red, green, yellow” customer rating system to track customer profitability has been implemented. “It allows us to make service decisions and helps us determine which customers we need to manage up to a higher level. It even helps with routing decisions. You are a lot more willing to bend over backwards for somebody who is going full-line with you,” says Chess.

    Mountain-Service Distributors is in the early stages of implementing the new AWMA Customer Profitability System, and Altman says he hopes the tool will help his company make smart decisions regarding its customers. “Right now, it’s all in our heads. But this tool will help us make sure we’re doing the right thing.”

    Meanwhile, 54 percent of respondents said they have an established system to help improve results from individual companies that lag behind in their contribution to profits, and 12 percent they are developing such a system. Moreover, many companies “fire” customers when necessary, as 73 percent said they have developed a process to eliminate unprofitable customers and 9 percent said they plan to do so.

    Taking advantage of technological advances for warehouse management systems, category management and fleet management are all important components of distributors’ efforts to improve productivity and reduce costs. In fact, at Harbor Wholesale, a new system to scan cases coming off its delivery trucks as part of its warehouse management system is being implemented.

    Many companies are also seeking to rationalize their inventory, some by reducing the number of items carried, and others by replacing slow movers and SKU duplicates with a history of success.

    “We want to carry the right SKUs,” says Chess at Harbor Wholesale. “We want to carry the SKUs we need to carry and get rid of those that are getting dusty.”

    The AWMA Warehouse-Delivered Snacks MVE program is used by 55 percent of respondents in an effort to generate increased sales and profits from snack products and compete successfully against DSD.

Preparing for the future
    AWMA survey companies are generally optimistic, with 68 percent saying they are either very or somewhat optimistic about their company’s future and 63 percent giving similar views about the industry as a whole.

    To help chart future success, 45 percent of companies said they are considering acquisitions and adding capacity to their current operations. Sixty-nine percent are increasing category services, such as foodservice, and 35 percent are looking for opportunities to expand outside the convenience channel.

    In fact, at Harbor Wholesale, the company just purchased a new warehouse in Roseburg, OR, which Chess says will dramatically improve its distribution efficiency in that region. The company also has obtained financing for a new $12.5 million warehouse and headquarters facility in Tumwater, which will be designed to the company’s specifications for maximum efficiency.

    Ironically, the poor economy has proved beneficial in this endeavor, as the cost is about $3 million less than estimated three years ago, and interest rates are also lower.

    “Yes, we have been fighting through a recession,” Chess acknowledged. “But we are actually thriving.”

    Companies are recognizing, too, that they offer a great deal of value to their customers and 73 percent have changed their pricing practices and approach to selling to reflect that value – all part of a strategy that should help distributors cope with whatever challenges lurk around the corner.

Bob Gatty is a contributing editor and writer to Convenience Distribution magazine and founder of G-Net Strategic Communications based in Sykesville, MD.