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    Published on: February 18, 2003

    …will return tomorrow.
    KC's View:

    Published on: February 18, 2003

    Results of “The BIG IDEA Beat” Contest from Glen Terbeek and MorningNewsBeat.com

      Because of yesterday’s email snafu, we’re going to take the unusual step of rerunning Monday’s piece recounting the discussion of Wal-Mart’s acceptability as a wholesaler to independent grocers, which was part of the weekly “BIG IDEA” Beat contest that we’ve been running. This discussion isn’t just about Wal-Mart’s wholesaler intentions; it also is about the ways in which other wholesalers serve their independent customers, and about the needs of the independent grocer sector. So enjoy…


    Premise:

    Wal-Mart’s supply chain has been envied by the supermarket industry as being both efficient and effective; many in the industry say it is the key to their success. It was the motive for the ten-year ECR movement, in which the industry tried to emulate it. It includes a significant technology investment including Retail Link that shares complete sales and inventory visibility at store level with their suppliers. It operates on the policy of “net, net” costing to the store.

    And now, as reported on MNB, it is rumored that Wal-Mart may offer wholesaling services to independent supermarket operators, leveraging this supply chain.

    Challenge:

    Tell us if you think independent supermarket retailers should use Wal-Mart’s wholesaling services. What are the pros and cons of doing so? What would be the impact on the shopper, the manufacturer, and the retailer of such a decision? Consider this question from the shoppers’ and manufacturers’ view as well as the retailers'. And finally, if Wal-Mart decides to go into the business of supplying independent grocers, what should the current wholesaler class do in response?

    Responses:

    We received many good entries to Challenge #4. I have included excerpts from several that support the conclusion best summarized by Jim Swoboda’s entry at the end of this article. All entries below will receive a copy of Agentry Agenda: Selling Food in a Frictionless Marketplace.


    Richard Lowe writes: What is Wal-Mart doing to our….ability to create and get new and different products into distribution …creation and growth of new small companies supplying creative products, etc, etc.?

    This question is not only true about Wal-Mart; it is true of the industry in general. How many good new items don’t make it into any system because the manufacturer does not have the financial or distribution clout to get it into the store? The problem is that marketing funds are intertwined with logistics, creating inefficiencies in both logistics and marketing productivity. In addition to the trade dollars “corruption”, redundant logistics systems carrying the same national brands does not make economic sense, and limits variety as well.


    J. Boonton adds to the theme: Being an independent retailer and hearing that Wal-Mart is going to start selling wholesale....my first impression is I hit the lottery, and then I start to think just a little. While Wal-Mart no doubt would have the best prices, I believe there will be too many things missing that go into making a successful retailer.

    I am a firm believer that if you don't buy it right you can't sell it right, and we have heard many times especially lately that price does matter; but an independent also needs other services and resources to be successful. I believe that the wholesalers should just do what independent retailers should do and that is taking care of your customer.

    Finally, I am not sure that independents being serviced by Wal-Mart will have any effect on their customers. How is the customer to know that you are serviced by Wal-Mart?

    This entry again talks about the need to separate logistics from marketing to be effective in the future. Wal-Mart does a great job of doing this by “net, net” costing to the store so that they can measure true performance at store level (remember, each store does not perform equally) and share it with their suppliers.

    This entry is right in that it is what happens in the store that makes the difference. Wouldn’t it be nice that any store could get any item the manufacturer wants to market at a “net, net” cost through an independent logistics system so that the store and the supplier can jointly market the item according to the market objects of the store?

    After all, the manufacturer has complete responsibility for an item’s market performance until it reaches the store; at that point, it becomes a joint responsibility. Yet, we have an industry business process that is built around the responsibility transferring when the physical product enters a warehouse. Remember, the finished cost of an item is often 20% or less of the retail price; I would argue that the marketing value is much higher.



    Gene Coleman chimes in: I have never believed in supporting my competition. If I, the private supermarket retailer were to buy my groceries from Wal-Mart, I would be buying from them at their price. I know Wal-Mart made their suppliers “Go Home and sharpen their pencils" and come back with their absolute lowest price, which in fact left no room for the profit they needed. Sure, they had the prestige of having Wal-Mart as their #1 customer, but they had to pass on the "savings" to their smaller customers in the form of higher prices, thus making the little guy even less able to compete with Wal-Mart. So, what makes the small retailer think they're getting the very lowest "wholesale price"? Certainly not from Wal-Mart.

    This argument again demonstrates the barriers and inequities in the current system, regardless if Wal-Mart is involved or not. Wholesalers have always had the conflict between big customers vs. small customers as far as who creates the buying power and who gets the benefit.

    Doesn’t this again argue for the separation of logistics from the ownership of product? If the retailer doesn’t change the product until it reaches the store, shouldn’t each store have the same cost (assuming the same handling) at that point? After all, promotional monies could be paid on true store performance, i.e. based on POS data.



    Ken Robb suggests: The relationship between retailer and wholesaler should involve more than who can provide the lowest cost of goods and highest service levels. This is particularly important for the independent retailer with one to twenty stores, for whom self-distribution is not a realistic option, and whose operations can be the beneficiary of the wholesaler's expertise in store format development, site selection, advertising, and marketing, which the most progressive wholesalers and distributors are providing... To propose that Wal-Mart would attempt to or would even want to replicate this role model is unimaginable.

    This entry supports the truism that in saturated markets, demand activities skills are needed to differentiate and thus sustain a retailer’s success. Can a wholesaler or any retailer have the skills to provide effective demand services to their stores, and still operate a “buying” biased logistics system?


    Albert Furst asks: How can the largest food retailer in the country supply small independent chains that they either are or will soon compete against? With the success WM is having in the food business and the generally higher margins in retail, why would WM want to sacrifice the retail end of the transaction anyway?

    Again, a great argument for the separation of logistics services from marketing; or the “Frictionless” connection of retailers to the products they want to market. The Wal-Mart wholesaler proposition may be an extreme example, but don’t many wholesalers also have retail stores?


    Jim Swoboda (formally co-chair of ECR) sums the debate up very well: Wal-Mart's possible move into the wholesaling arena is such a logical move. The pros of such a move focus primarily on most retailer's stated mission, the old cliché, "the right product at the right cost at the right time"...clearly Wal-Mart can deliver on two of these fronts immediately, the right cost and the right time.

    In a business where the bottom line is measured in single (low single) digits, it is hard to imagine a retailer not wanting to drive their costs down.

    Imagine if today a retailer is getting 2, maybe 3 deliveries per week and because of Wal-Marts current stores and soon to be neighborhood markets, they would be in the area daily. DAILY deliveries to an independent? Their inventories would go down, freshness would go up, in stock conditions would be better. Again, major gains.

    Can Wal-Mart deliver the right product...? In this area, selection has not been a strength of Wal-Mart, although they are getting better in their Supercenters. Time would likely cure this shortcoming.

    What are the downsides? Not many.

    Promotional dollar tracking could become a nightmare for those who build their budgets on shipments since all shipments would be going to Wal-Mart. However, this might force a long needed move to measure and pay promotional dollars bases on consumption. Would that not be a novel idea?

    Additionally, if a manufacturer’s volume began to move through the control on a single distributor, would that cause a significant shift in power that might not be acceptable? One could argue that the retailer would still have the control and that the distributor is just a mechanism by which the product is moved from manufacturer dock to retail dock.

    If this model were to evolve into reality, it is important to begin to think about the fixed costs that would come out of the supply chain by the reduction in duplicative buildings, pools of inventory, back office functions, etc. that would no longer be needed to move goods to retail. The possibilities are amazing to think about.

    Of course, the most difficult challenge of all may simply be that the "gray" matter that would make such decision would simply not embrace the thought of doing business with the competition. Unfortunately, as has been all to often the case in the industry, such thoughts can keep potential great opportunities from happening. Have a large, national distributor controlling the activities in the supply chain could result in the industry realizing things that have only been the topic of conversations for many years. The trick will be for all to realize that logistics do not provide the differentiation that is needed to compete. Lowering costs simply would put more tricks into the bag that would allow creativity and consumer satisfaction to become the true way retail is differentiated.

    Jim is right on except for one point: it shouldn’t be Wal-Mart that provides the logistics; it should be an independent logistics provider open to every one.


    And independent retailer Marv Imus provides another perspective: Should Independent Retailers use Wal-Mart as a wholesaler ? Of COURSE ! I worked on the ECR issue for years trying to get in-line as a supply channel that is efficient, effective, and profitable. One of the issues was on the flow of fast moving products and slow moving products through the supply chain. Fast movers can be maximized very profitably, and efficiently, with little inventory cost. This is the place Wal-Mart excels. They examine what are the top movers in a category and they process the information and flow of those products to minimize cost. Most slow moving products are very costly, inefficient, and have much higher inventory cost. Wal-Mart does NOT handle these products. So, if I am to create a more cost efficient retail outlet, I MUST use the most cost effective supplier.

    What we worked on in ECR with our wholesaler was to make ourselves work as a single unit. Good idea but hard to implement. In recent years, wholesalers have gone into retail in an attempt to get to that single unit look by controlling the retail aspect (believing that the Independent retailer was not “on the team” enough). As we have seen recently, most wholesalers have abandoned this attempt. So as a retailer, I MUST buy from the lowest cost provider I can. BUT I cannot find a single wholesaler that can provide the products at the cost a Wal-Mart could. Of course, Wal-Mart will NOT be able to provide the line extensions that I feel our consumers look for in our store. So, I have to use many different suppliers instead of one. By buying from the lowest cost provider on fast movers, Wal-Mart, and then the specialty/organic/even local products from a variety of other suppliers, I can round out my offering based upon my market.

    Does that mean Wal-Mart knows what I am selling ? Sure . Does it matter ? Not if it’s the blend of products that Wal-Mart doesn’t carry that makes our business.

    If they open a market in our town because of the volume we do, their impact will be minimal if our cost on the products that we carry are within the 10% range of their retails. We cannot do that in today’s environment with our current suppliers.

    What are the negative effects ? Wal-Mart will not work with, or if they do, will surcharge an inefficient operation. So if we buy from Wal-Mart our in-store technology must be at a level that we can provide the information flow required to reduce the cost of buying. Most Independents have not invested anywhere near that level. Also what do we do about private label ? We cannot carry Sam’s Choice (though I doubt Wal-Mart would even let a non-Wal-Mart operation carry such a product) and would not because I do not want our consumer to feel that we are no different than a Wal-Mart ! Private label is a brand of identity for a retailer, not just a “cheaper” offering to the national brands.

    Also we will have to find other types of support that we currently have with a wholesaler. Financial, logistical, and operational support are key support elements a wholesaler provides the Independent retailer. We would have to do it ourselves or pay a third party source, costly either way in our current way of doing business.


    Summary & Conclusions:

    The entries above point out the following key questions that need to be answered by retailers, by Wal-Mart, and by the industry at large:

    • Isn’t store differentiation to match local markets needs the key business process in the saturated future -- even for Wal-Mart?


    • Isn’t the logical point for the transfer of product ownership at the store door at a “standard market” price plus true logistics costs, since that is when marketing responsibility transfers?


    • Doesn’t it make sense to pay for promotional performance at POS?


    • Because of the above points, doesn’t it make sense for networks of independent logistics providers to connect retailers with the items they want in the future? Doesn’t the current redundant buying biased logistics system limit item availability and merchandising flexibility and reduce logistics productivity?


    • Can the industry adjust before it is too late?


    The open, frank discussion of these kinds of issues is key to creating the kind of “frictionless marketplace” that we believe is necessary for many in the industry to survive long-term. It has been our goal over the past month to stimulate this discussion through the “BIG IDEA” Beat Contest, and we’ll return in future weeks and months to reconsider them and provoke new ideas and debate.

    These are, as always, “Big Ideas For Thought Leaders.” We appreciate your ongoing contributions, and hope you’ll continue to do so every morning here on MorningNewsBeat.com.
    KC's View:

    Published on: February 18, 2003

    Apologies to those of you who got the MNB Wake Up Call late yesterday. For reasons we don’t completely fathom, the snowstorm here in the northeast wreaked havoc with our email server, causing the morning missive to go out several hours after it was supposed to. (The good news was that here in the US it was a national holiday, so in all likelihood a lot of you didn’t even notice. The bad news was that we got up early to do MNB, proud of the fact that we were the only service of its kind being posted on a blizzard-racked President’s Day, and it was for naught. Ah well…)

    If you’re looking for yesterday’s news, you can find it in the MNB archives by clicking on the “Archives” button at the top of this page. Or, you can go to:

    http://www.morningnewsbeat.com/archives/2003/02/17.html
    KC's View:

    Published on: February 18, 2003


    • Wal-Mart Stores reported that last week’s sales lived up to expectations, and attributed the performance to Valentine’s Day presents and people who bought duct tape because of concerns about possible terrorist attacks.

      Wal-Mart said it expects its February US sales to increase between two and four percent.

    KC's View:

    Published on: February 18, 2003

    Reuters reports this morning that Anheuser-Busch has lost its legal battle in the UK to prevent a Czech state-owned brewery Budejovicky Budvar from using the trademark "Bud."

    Britain is Anheuser-Busch's second largest market. There does not appear to be an appeals mechanism.
    KC's View:

    Published on: February 18, 2003

    The New York Times reports this morning that consumers are beginning it utilize store credit cards more, as retailers aggressively promote them.

    For example, according to the NYT, Bloomingdale's gives shoppers who charge five pairs of shoes on store cards an additional 25 percent, or $25, off a sixth pair; Pier 1 Imports cardholders who spend at least $1,000 a year get free local deliveries; Neiman Marcus users with 100,000 points can upgrade their Hertz car rentals; Target card customers can donate one percent of what they spend to whichever any nonprofit public or private school they choose.
    KC's View:
    It seems to us that the key difference these days is that retailers have abandoned the old strategy of giving benefits on first purchases, and instead are rewarding consistent and profitable customers.

    That’s a lesson that more retailers ought to learn. With all due respect, that’s what stuck out for us in an announcement yesterday from Meijer Stores that it will launch a private label credit card program in conjunction with GE Consumer Finance.

    The new Meijer card is being launched in Detroit and will soon be available in all of its 156 retail supercenters, offering cardholders programs and benefits that include a 10-percent off promotion on their first purchase, a dedicated line of credit and no annual fees.

    First purchases are nice. But it’s the 100th purchase, the 1,000th purchase, that really are worth rewarding.

    Published on: February 18, 2003

    Fleming Companies announced that it has completed the sale of 17 Food4Less locations to Save Mart Supermarkets, for approximately $82 million.

    The company is supplying these Save Mart locations through Fleming's Divisions in Sacramento and Fresno, California.

    As previously announced, Save Mart Supermarkets has agreed to purchase another 11 Fleming-owned Food4Less locations in California, a deal that should be finalized this quarter.
    KC's View:

    Published on: February 18, 2003

    The UK’s Food Standards Agency has published its third annual UK Consumer Attitudes to Food survey, revealing that 68 percent of people are concerned about food safety, down from 71 percent in 2000.

    Just 45 percent of people are concerned about BSE, and 36 percent are worried about genetically modified organisms, down from 61 percent and 43 percent two years ago, respectively.

    One out of four consumers say that food labels have too little information, while one out of five says that food labels are “fairly difficult” to understand.
    KC's View:

    Published on: February 18, 2003

    You have to admire a company that ventures into the lion’s den with little more than a chair and a whip…or, in this case, a large latte.

    California-based Peet's Coffee & Tea has announced that it will open its first store in the Seattle market – home turf to the estimable Starbucks. The c company says it may open more units there, depending on how the first one does.

    Of course, there are other coffee chains in Seattle: Tully's Coffee Co. and Seattle's Best Coffee, as well as independents such as Espresso Vivace Roasteria and Zoka Coffee Roaster & Tea Co.

    Ironically, the founders of Starbucks learned their coffee roasting techniques from Alfred Peet, who founded Peet’s.
    KC's View:
    Does Seattle need another coffee chain? We’ll see.

    But we have to admit to a certain tingle of excitement when this kind of confrontation takes place. It would be like a company not named Wal-Mart deciding to open a supercenter in Bentonville, Arkansas…, which we probably wouldn’t recommend, but we’d certainly enjoy the spectacle.

    It’d be sort of like a scene from “Gladiator.”

    Published on: February 18, 2003

    General Mills announced it is raising cold cereal prices by about two percent, following on the heels of similar moves by Kraft Foods and Kellogg Co.

    The price increases are said to be necessary to offset rising commodity costs such as wheat.
    KC's View:
    The way the Content Kids eat cereal in our house, this news means we may have to ask the boss for a raise.

    Especially now that the Content Kids have decided that Kellogg’s new Smorz cereal is the finest product of its kind currently on the market…

    Published on: February 18, 2003

    The UK Office of Fair Trading (OFT) has launched a review of the nation’s industry practices, a move that comes a year after a Supermarkets Code of Practice was put into effect there to regulate the relationship between retailers and suppliers.

    It also comes a day after there were media reports that Safeway Plc was “squeezing” its suppliers in violation of the code. The OFT said that it was coincidental that the review was taking place as an acquisition frenzy for Safeway has been taking place, though it admitted that they couldn’t be completely divorced from each other.
    KC's View:
    Not to be skeptical of the British authorities (are there two words that go more naturally together than “British authorities?), but we don’t really believe in coincidences. Especially not when there are billions of dollars at stake.

    Published on: February 18, 2003

    Wal-Mart’s 258-store Asda Group in the UK will announce today that it plans to spend the equivalent of $560 million (US) to expand its operations there, opening 10 new stores as well as expanding and adding mezzanines to others. The expansion will result in the creation of about 3,900 jobs, according to the company.

    The announcement comes just weeks after Wal-Mart said that it would bid on Safeway Plc, believing that it might be able to land at least part of that now-available chain.

    Asda is the third-largest food retailer in the UK, with Safeway in the fourth position. Tesco is number one, followed by J. Sainsbury…though it is expected that Asda will leapfrog Sainsbury this year.

    Much of the expansion is expected to be in the company’s non-foods operation.
    KC's View:
    Must be nice having all that money just burning a hole in Wal-Mart’s pocket…

    It’s also an interesting announcement for Wal-Mart/Asda to make at a time when it is hoping the UK Office of Fair Trading (OFT) will approve its bid for Safeway. You’d think Wal-Mart would have waited until it got a sense of which way the OFT was leaning.

    On the other hand, maybe Wal-Mart only bid for Safeway to raise the price for the competition. Or maybe it believes that it has enough political clout to land at least a sizeable piece of Safeway no matter what.

    Or maybe there’s something else going on, some other strategic imperative that we’re not aware of.

    Published on: February 18, 2003

    Well, not exactly no tax. It’s just that Wal-Mart, for the moment, is picking up the tax.

    Wal-Mart announced that its pharmacies in Massachusetts no longer will pass along to shoppers a $1.30 tax per prescription on non-Medicaid, non-Medicare prescriptions that was levied by the Massachusetts legislature on Jan. 1, 2003.

    "While we strongly disagree with this tax, we have made a business decision in the best interest of our customers not to pass this tax along," said Frank Segrave, Wal-Mart's vice president of pharmacy. "Ultimately this tax has the potential to impact the access and the practice of pharmacy in the Commonwealth of Massachusetts. We will continue to work toward a more fair and broad-based solution to this issue," he said.

    Wal-Mart customers who had prescriptions filled between Jan. 1 and Feb. 10 and were assessed the tax will be issued a refund.
    KC's View:
    Let’s face it. Wal-Mart could pay everybody’s taxes, and still have plenty of money left over for incidentals. (Like small countries.)

    Published on: February 18, 2003

    PlanetRetail.net reports this morning that Loblaws “may have its sights on the Canadian operations of US Safeway” amid rumors that Canada Safeway is for sale.

    The theory goes that Safeway is looking to reduce debt, especially now that it may have to sell Dominick’s in Chicago at a price far lower than what it paid for the company just a few years ago. Selling Canada Safeway would allow it to focus on core US operations, while a Loblaws acquisition of the company would permit it to expand in the western part of the country.

    However, it also is thought that both Sobey’s and Metro would bid for Canada Safeway…perhaps setting off an acquisition frenzy similar to that occurring in the UK when Safeway Plc went on the market.
    KC's View:

    Published on: February 18, 2003

    The American Cancer Society is launching a new campaign to get people to lose weight, saying that the cancer risk in being fat is as bad as the risk in tobacco.

    First step: The Great American Weigh In, scheduled for March 5. It is modeled on the three-decade old Great American Smokeout.

    The society says that a third of cancer deaths are related to diet and inactivity, and that some 186,000 lives a year could be saved if people lost weight and became more physically active. Colon and breast cancer are the two types of the disease most directly connected to being overweight and physically sedentary.

    In a related development, a new 30-second television commercial sponsored by the Physicians Committee for Responsible Medicine reaches the airwaves this week, telling viewers that a high-protein, meat-intense diet can promote osteoporosis, kidney disease, and possibly colon cancer. "You have more to lose than just weight," a voiceover says, according to a report in this morning’s edition of The New York Times.
    KC's View:
    Where all this starts to having an impact on retailers and manufacturers -- besides the fact that a certain percentage of them probably need to lose weight and start jogging -- is that there may be a move toward creating legal issues around fatty foods.

    It is pointed out by some medical authorities that in much the same way that smoking is regulated in terms of how old people need to be to buy tobacco and where they can smoke, it may be possible to have a similar impact on the obesity-cancer connection by taxing foods deemed to be contributing to the cancer death rate.