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What Distributors Must Do Now to Improve Profits
Part II of the AWMA study, The Distributor Value Equation, was presented by Kit Dietz, a co-author of the study, who said a new "mindset for profit" needs to be adopted by distributors as they embrace new opportunities that can lead to higher profit.
Dietz warned that accelerated change will occur on the tobacco front with higher taxes and continued societal pressures, meaning that distributor profits in this category will continue to erode.
"At a 2.5% return on assets, your business is not sustainable," he said. "I set out a goal of 12% ROA by the end of 2009. It can happen if we take the actions that are necessary."
Dietz said distributors must tackle problems involving pricing for high cube, heavy weight items, as well as the practice of providing single-pick items for retail customers without increasing prices to cover cost."
"Using a cost-plus formula makes sense where we have similar size cases involved, but not where there is a variance by size and weight," he said. "We need to have dialogue with our trading partners so they understand where we’re at. It’s great if you carry specific items for them, but you need to let them know what it really costs." Overall, pricing must be based on actual cost-to-serve, he said.
He called for new profit standards and measurements to determine a company’s profit position and to allow for corrective actions to be taken. According to the new report, "Achieving improved bottom line results means that distributors must be willing to establish their own set of standards that will lead to profitability, and they must be able to measure those results so they know where they stand. Pricing policies must be implemented that will lead to profit."
Fully transitioning to a cost-to-serve pricing model is a progression that will require shared understanding with trading partners, Dietz said, including customers.
The issue of single-pick, which the new study emphasizes is one way to improve profits quickly, was addressed by Cortney Hunt, Director of Logistics Engineering at McLane Company. The practice, he said, typically exists because retailers want to reduce backroom holding requirements, to determine appeal of a product new to the marketplace, to satisfy consumer expectations for certain items, to meet minimum manufacturer requirements for item mix, to increase the depth of product assortment, and to increase category sales through scope.
"We as distributors have to understand the value to our retailers, and we really do add huge value. We ignore that to our peril," he said.
According to Hunt, McLane has 6,000 "single sell" items, or 13.7% of total SKUs. However, those items provide only 1.4% of sales, involve 16.7% of shipping units and incur 21% of labor costs.
"You need a systematic analysis of all of the costs involved, and until you do, you won’t have a real understanding of the true costs," he cautioned. "We’re getting smarter about it, about items, categories and specific customers. We hope that you will as well."
In answer to a question, Hunt said McLane is considering imposing a minimum order requirement of three items. "The cost for single sell must increase to a level that provides profitability," he said. "No category needs to be subsidized by other categories."
"That was great," said Dick Dunham, Stephenson Wholesale Company, Inc., Durant, Oklahoma. "That was even more information than we got from the first study. It’s the direction in which distributors need to go."
Dunham, who will succeed Bunce as 2008 AWMA Chairman, said distributors need to focus on high cube, high weight products – "an everyday nightmare" – as well as single pick. "Our clientele is a lot of smaller C-stores, and it’s really important to them," he said. "But I think we can go to a minimum requirement, like three items, without being hurt."
Sherwin Herring, Southco Distributing Company, Goldsboro, North Carolina, said his company does not have a minimum purchase requirement, but does impose an up-charge for single-pick items. About 500 SKUs out of 10,000 overall are available single pick. "We are trying to eliminate items," he said.
Herring agreed that price changes need to be considered for heavy cube items. "There has got to be an opportunity there," he said.
Barry Latham, S. Abraham & Sons, Inc., Grand Rapids, Michigan, found the standards discussed by McLane's Hunt of special interest. "I think most of us try to do that, but I’m not sure how good we are at it," he said.
"We are always working on improving margin," commented Paul Noorda, Gem State Distributors, Pocatello, Idaho. "Any time you can take costs out of the system, it goes straight to the bottom line. We’ve been doing single picks in our market for quite some time, but we do have to have margin with that service. We have a broken case up-charge. We much prefer selling cases."
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