AWMA Groundbreaking Research Defines ‘Value’ Distributors Provide to Suppliers & Retail Customers

New research commissioned by AWMA will be presented Tuesday outlining the many valuable services distributors provide to manufacturers and convenience store retailers as well as the need for improved compensation for those services.

The study will be presented by the research team of Kit Dietz, president, Dietz Consulting LLC, Huron, OH, and Bob Gatty, president, G-Net Communications Consulting, Poolesville, MD, who were commissioned by AWMA to quantify this value and analyze the factors that contribute to poor profit performance.

The study is based on a series of in-depth interviews with manufacturers, distributors and retailers, combined with additional research from HIPA and other sources. A printed report is now being prepared and will be distributed to AWMA members. The Executive Summary will be published in the October issue of Distribution Channels.

Noting that the "table stakes" for AWMA distributor members is their ability to purchase, stock and distribute a broad variety of products every day at a competitive price, the research points out that distributors do much more, providing:
  • Inventory management
  • Category management
  • New-item introductions and management
  • Merchandising assistance
  • Accural tracking
  • Store sets, resets and tagging
  • Promotional planning and coordination with manufacturer
  • Technology assistance
  • Real-time access to information
  • Marketing expertise
  • Speed-to-market assistance for new products
  • Extra deliveries
  • A credit shield for manufacturers and credit services for retailers
  • Handling of returns.

"But those services all come at a cost," the report observes, "and while manufacturers and retailers often understand and recognize the benefits of these value-added services, distributors contend that many of their efforts go unrecognized and are simply assumed. Worse, many retail customers who do say they appreciate the distributor’s efforts generally are unwilling to provide the compensation for them that is needed and justified."

The study points to the 2006 HIPA report, which shows that the typical AWMA distributor produces a pre-tax profit margin of just 0.5% and a return on investment (ROA) of only 4.0%. That ranks c-store distributors as 75th in a list of 75 industries examined.

Low Profit Contributors
Distributors in the study attributed these low profits to many factors, including:

  • Excessive-and increasing-taxation of tobacco products
  • Declining volume in the cigarette category, changes in the major cigarette manufacturing programs, advance payment requirements and terms reductions that negatively affect cash flow and gross margins
  • Rising operational costs, including health and property insurance, energy, and investment in technology and equipment without offsetting margin gains
  • Over-proliferation of SKUs in the warehouse
  • Growth of high-weight/cube categories and products that do not cover basic costs to pick, pack and ship
  • Unreasonable competitive challenges caused by distributors willing to provide added services at little or no cost
  • Perceived discrimination against the c-store distributor class of trade by some manufacturers; i.e., retail customers can purchase some items from club stores at a price lower than what the distributor must pay.

The study outlines many remedial steps distributors are taking, such as increasing the use of technology, reducing the number of warehouse SKUs and seeking new profit centers, but said many issues need to be addressed "on a channel-wide basis by their trading partners."

Recommended Remedies
It urged manufacturers to understand the value that distributors provide by giving them efficient access in a complex channel that is difficult to reach, and to provide assistance with:

  • Cigarette issues, by reconsidering some of those difficult policies and requirements
  • SKU proliferation, by reigning in product lines.
  • New products, by establishing clear exit strategies for non-performers
  • Class-of-trade distribution, by not placing distributors at a disadvantage against club stores
  • Purchasing data and information provided by distributors, by using it to increase sales for the benefit of all
  • Promotions, by making sure promoted product is available when and where it is needed

The report urged retailers to "recognize that technology-based services, category management assistance, planogram creation and implementation, and extra deliveries all come at a cost."

It said it is "unrealistic to expect that distributors can continue to provide such service over the long term without fair compensation."

It warned that unless retailers recognize the contribution that full-service distributors make to their bottom lines, distributors will be forced to eliminate some services, and others in the channel will then do likewise.

The study urged retailers not to "cherry pick" items they can purchase a few pennies cheaper at club stores, saying "That is not the way to encourage a positive long-term relationship that can pay much bigger dividends in the future."

"There should be no underestimation of the value of sound business relationships in this channel," the study said. "With manufacturers, distributors and retailers working together as a team, difficult issues can be overcome and success can be achieved."