 |
Warehouse-Delivered Snacks: Channeling Greater Snack Profitability
" If we don’t hang together, we shall all hang separately"
—Ben Franklin
Could it be that he was looking more than two centuries ahead to the development of multi-vendor endcaps for warehouse-delivered snacks?
by Carole Anne Nelson
It’s no secret that convenience retailers are feeling the pinch as gasoline and tobacco margins continue to shrink. The latest State of the Industry report from the National Association of Convenience Stores showed the average total store profitability down to $29,000 per store from $36,000 in the previous report. Worse still, the profitability of salty snacks—a cornerstone of c-store sales—was down double digits from $1.2 billion in 2000 to $911 million in 2001. Even allowing for some changes in how the report figures were determined, the numbers are not encouraging, especially when the snack category was the only one to reflect that kind of drop.
Numbers like this have left the door wide open for wholesale distributors to approach retailers with a better, more profitable way to merchandise snacks. And distributors, with an unprecedented level of support from manufacturers, are ready to drive a delivery truck right through that door.
The vehicle for this aggressive assault on snack shelf space is the Warehouse-Delivered Snack Committee under the aegis of AWMA’s leadership. The fuel is the cooperative C/SCAPE study conducted by Willard Bishop Consulting at the behest of AWMA and the National Association of Convenience Stores. Using activity based costing (ABC), the study identified true profitability and prompted many companies to do their own more specific analysis. The resulting numbers demonstrated overwhelmingly that retailers were paying a high price for the "free" labor of direct store delivery.
With solid data in hand, these wholesalers, manufacturers, and others in the warehouse-delivered snacks channel have geared up to educate retailers and provide programs that will expand the use of warehouse- delivered snacks to the mutual benefit of all concerned—from snack maker to snack buyer.
Pennies Make Sense
The retail profitability of snacks seems complex at first glance due to its many facets, and harried retailers all too often opt for the easy answer of direct-delivery products. A closer look, however, shows that those facets resolve themselves into individually simple issues: margins, turns, shelf space, category management, and merchandising.
Showing a higher "penny profit" and higher margin are two good ways to get a retailer’s attention, according to Marty Monserez, convenience channel leader at Procter & Gamble. That prepriced 99-cent, direct-delivery bag of chips typically has a margin that produces 24 to 30 cents per transaction. A can of Pringles priced at 89 cents by the retailer will typically produce 41 to 48 cents in profit based on its higher (46 to 54 percent) margin. And higher margins are true for virtually all warehouse-delivered snacks.
It doesn’t take a CPA to see that these higher-margin snacks will yield more money that goes to the bank. Even where direct deliverers try to cloud the issue with annual performance paybacks, retailers are likely to find, on close examination, that these payments reflect only a small proportion of the lost penny profit. And, as members on the committee observe, programs for performance and merchandising money are, or soon will be, part of the overall programs being developed for warehouse-delivered snacks.
Increased turns is another way wholesale distributors can help retailers improve profitability by offering a variety of products and brands, many of which consumers recognize and buy because they are nationally advertised. Both General Mills and Procter & Gamble reported substantial growth for their snack products during the time frame when overall snack sales profitability dropped, which suggests that these products were selling through at a better rate.
Their more compact packaging may also be a contributing factor since they permit more product per square foot, reducing the possibility of out-of- stocks. As George Eversman, business development manager at Dot Foods, points out succinctly, "Bags have a lot of air taking up room."
Better use of shelf space is another place where warehouse-delivered snacks can improve retailer profitability. Because they are used to having proportionately much less space, wholesalers have become very adept at using shelf space to the best advantage. "We get the most that we can out of our section," says Tommy Thomas, director of sales for The H.T. Hackney Company. "We don’t just fill it up with whatever’s left on our truck. We track and use data to stock more appropriately for our retailers. We have to do a better job with less space, and that means putting the proper products in the proper spaces."
Hackney points to a joint effort with Procter & Gamble to remerchandise stores with new shelving. They shifted Pringles from their normal bottom-shelf position to two-ft. or four-ft. vertical displays. Monserez reports that Pringles’ sales doubled in those stores, while the category increased about 30 percent.
Effective use of shelf space is really just one element under the broader umbrella of category management— a service where wholesalers have demonstrated their expertise for many years now. Since whole-salers track sales trends and product sell-through for numerous brands and products, they can provide retailers with the right mix of products to promote sales and better serve consumers by offering them a broader range of choices.
Simply put, according to Thomas, some direct-store-delivery space is over-allocated based on sales, profits, and turns. Retailers who think direct-store delivery means "free labor" may let them annex more and more space. Unfortunately, extended space allocation often results in under-filled shelves, reducing sales opportunities. Several committee members expressed the opinion that retailers might well find no loss of direct-delivery sales if they shift some of their shelf space to warehouse-delivered snacks.
Greg Kaminski, corporate category manager for candy and snacks and the committee member representing Core-Mark (now Fleming Convenience, Div. of Fleming Foods), says direct-store delivery today averages an 80 percent share of the snack space in c-stores. Grocery stores, which have traditionally operated with better category management principles, now have a 60-40 ratio. "Realistically," says Kaminski, "I’d be happy to get c-stores up to a 70-30 split."
Bill Bishop, who heads up the company that undertook the C/SCAPE study, stresses that it’s not a question of eliminating direct-delivery items, but rather creating a better balance. Retailers need to look at how they’re using their space, particularly secondary locations. "Right now a store may have three snack endcaps dedicated to direct-store-delivery products," says Bishop. "A retailer has to ask, ‘How many do I really need?’ Maybe replacing one with an endcap of warehouse-delivered snacks will improve both sales and profitability."
Tooling up for Greater Profits
Having data to demonstrate that retailers can improve their profitability by expanding warehouse-delivered snacks is only the first step, say committee members. Step two is a double- pronged effort—first, to educate retailers and other wholesalers and, second, to develop merchandising tools and programs. Both aspects are crucial to success.
At last October’s NACS convention, the committee presented a practical session emphasizing the category growth, control, and profit that can be achieved with warehouse-delivered snacks. Wholesalers and manufacturers are working together to develop other materials for internal and external use to get sales reps enthused and carry that message directly to customers.
Dave Onorato, national director of convenience sales for Hershey’s Foods, attributes their support to the wake-up call provided by the findings of the C/SCAPE study. "We were excited," he says, "and had an immediate meeting of all the disciplines involved. Knowing how responsive confection is to merchandising, Hershey’s is helping distributor sales forces bring the message to retailers."
One important element of the message is the nature of warehouse-delivered snacks, which tend to be single-serve items for immediate consumption. "A single bar is consumed within an hour," Onorato notes, "so the consumer is ready to repurchase soon." Other product lines, such as larger bags of chips, may take two to three days to consume.
The committee also has explored the physical materials that will be needed to complement the educational and sales efforts. Over the past year committee members Core-Mark/ Fleming, Hackney, and Dot Foods have worked concurrently to develop planograms and multivendor endcaps for their customers. All three are launching their new endcaps at the beginning of 2003 with hopes of having some successful case studies to present at next fall’s NACS meeting.
"We’ll be stocking our endcap with brands that carry their own weight," says Kaminski. "These are nationally advertised, top-selling products from manufacturers like Procter & Gamble, General Mills, Hershey, and Kraft Foods—products that have consumer awareness but need better positioning in the store." This effort, like others, are backed up with the company’s SmartStock™ program, which has been in place for the last five years. Under this program they’ve hired hundreds of merchandisers to work in retail stores, giving service equivalent to direct store delivery. Over the first three years, snack sales doubled.
Hackney, likewise, has people on the street to help ensure that retailers keep their categories up to date and managed properly. They had great reviews from customers about their new endcap and already had placement commitments for the first 500 units ordered in December and signed bookings for several hundred more. Characterizing them as "best of the best" displays, Thomas acknowledges excellent support from manufacturers, saying they’ve been fortunate to work with a lot of the lead people at Procter & Gamble, General Mills, Kellogg’s/Keebler, Kraft Foods, Master Foods, ConAgra, Snack Brands, and Jack Links to develop the salty and sweet snacks display. "We see an opportunity for us to let the retailer understand that this multi-vendor endcap brings eight great snack companies together," he says. "Per square foot this may become the most profitable space in the store, based on sales and turns."
Dot Foods, as a redistributor, is creating its own rack to take to its wholesale customers. "We don’t get involved in this type of marketing very often," Eversman says, "but this seemed like a great opportunity for us to pull some of our key c-store suppliers together for the benefit of our distributor customers who may not spend a lot of time on multi-vendor endcaps." Dot Foods is billing their endcap as an "any time of day" rack with meat, salty and bakery snacks represented from General Mills, Procter & Gamble, Mrs. Freshley’s and Sara Lee. They plan to have a prototype on view in the special warehouse- delivered snacks pavilion at AWMA’s show in February. In conjunction with participating manufacturers, Dot will provide funds to wholesalers to help execute the program at the retail level, effectively "buying back" space from direct store delivery.
Manufacturer support for merchandising efforts has been strong across the board. "What’s good for the industry is good for all of us," says Jon Althoff, former director, convenience solutions team, at General Mills and a member of the committee from the beginning. (He was recently promoted to director of food service sales and replaced by Rich Rodriguez.) "It’s not that we’re not still competitive, but we see a common need to work with wholesalers." He expects more materials to be available at the AWMA show, with additional presentations ready for the next NACS convention.
Kraft Foods is providing retail coverage using its "Sell Thru Services" to provide retail support within convenience stores including building displays, cutting in new items, and maintaining planogram integrity. Hershey’s Foods has been working with distributors for promotions and merchandising in c-store chains. "‘Distribution everywhere’ used to be our motto," says Tom Joyce, director of industry affairs. "Now it’s, ‘Everything everywhere.’ As a leader in the confection industry, we feel we have to step forward with support for this kind of effort."
What’s the Word?
For wholesalers, the word on warehouse- delivered snacks is "incremental." Adding more snack sales to existing customers is a clear bonus. The only "cost" is the sales person’s time in educating customers to the advantages of increasing their allocation of space for warehouse-delivered snacks. With the potential for increased sales, it could more properly be termed "investment."
The word for retailers is "control." Far too many have relinquished control of their snack section to direct-store delivery because it’s easy, one less thing to worry about. But with some manufacturers of warehouse-delivered snacks seeing double-digit increases while NACS reports declining snack sales, maybe it’s time for retailers to worry.
"We have to help the retailer ‘think differently’ about the merchandising of snack products," says Althoff. "Retailers have to take back profitability, and better category management is how they can do it." He thinks smaller retailers in particular will benefit from the better service associated with warehouse-delivered snacks.
The word in general, however, is "beware." Wholesalers and retailers alike need to take stock as direct delivery manufacturers attempt to encroach on the types of snacks traditionally supplied by wholesale distributors: nuts, seeds, pre-packaged cakes and cookies, meat snacks, and alternative snacks such as power bars. The issues of profit margins and activity based costing will become increasingly important if direct delivery makes inroads here. Retailers could find profitability dropping even when sales don’t, and this is where wholesalers have to make their case on those key points.
Retailers will need to better leverage the best-selling snack products irrespective of delivery method, says Monserez. With a bow to his competition at Kraft, he says, "Planters is the gold standard in nuts. It doesn’t make sense for a retailer to broadly merchandise lesser-known brands at a lower margin just for the convenience of having someone else put it on the shelf."
Of course, someone has to show the retailer exactly how the bottom line can be affected by taking direct-store delivery add-ons. Ultimately, says Monserez, the retailer has to take responsibility and decide what strategy will yield the best profitability, then make sure that merchandising, pricing and in-line shelving reflect that strategic choice. For retailers who are content to continue with business as it’s been and pass on checking out the data for activity based costing, he observes, "Failing to make a strategic choice allows others to make it for you."
What Lies Ahead?
Bishop points out that, while manufacturer support is vital, it is wholesalers who will play the linchpin role in both getting out the message and working with retailers in merchandising their snacks. The Warehouse-Delivered Snack Committee will be fully engaged in the year ahead developing materials and strategies to educate wholesalers and retailers alike about the benefits of warehouse-delivered snacks. They will also be developing case studies as retailers implement the multi-vendor endcaps and other secondary location displays. By the next NACS meeting, Bishop anticipates being able to make a presentation of success stories that will get the attention of retailers.
The C/SCAPE numbers show an opportunity. Now wholesale distributors must act to capitalize on it.
Carole Anne Nelson is a freelance writer based in Hyattsville, MD.
Reprinted from Distribution Channels. © 2003 by the American Wholesale Marketers Association.
For more information on warehouse delivered snacks and the Joint Industry Warehouse-Delivered Snack Committee, contact Bob Pignato at 800-482-2962, ext. 642 or robertp@awmanet.org.
|
