Distributing Value

Published in CSP Daily News

Wholesalers must prove their worth to convenience channel

LAS VEGAS -- For a business that survives on typically low 5% margins, distribution must focus on increasing its value proposition to retailers and manufacturers if it hopes to grow its profits. That was the thrust of Thursday's general session presentation by Kit Dietz, owner and president of Dietz Consulting LLC, Huron, Ohio, at the American Wholesale Marketers Association's Real Deal Expo, taking place this week in Las Vegas.

Dietz is currently working on a study that will analyze the value distributors bring to the convenience channel, and in particular, [image-nocss] quantify that role. So far, 14 small to large distributors and 11 manufacturers have committed to participating in the study, and Dietz will also select several retailer customers to validate the findings. The final study will be presented at the 2006 AWMA Summit & Business Exchange, September 11-14 in Las Vegas.

In the second part of his presentation, Dietz touched on the AWMA's multivendor endcap (MVE) concept, which presents distributors with a way to promote warehouse-delivered snacks and help convenience retailers increase margins. We've seen our share in the snack segment cannibalized by DSD-delivered snacks, Dietz observed, and cited the MVE as a tool to win back that share.

Warehouse-delivered snacks (WDS) provide equal or similar sales on a square-foot basis, Dietz contended, and 40% to 50% margin thanks to economies of scale, compared to 28% to 33% for DSD products. The MVE concept is meant to maximize that potential. Each distributor develops its own program and SKU selection for the concept. As of last week, 19,855 snack MVEs have been placed in c-stores by 70 distributors, Dietz noted, with the prime location being in the front of the store.

In a study conducted with seven chains representing 186 stores, WDS sales grew 114% on the MVE. In a second study with GPM Investment LLC's Fas Mart chain, despite the fact that the MVEs were placed in the back of the store, the retailer saw its total snack sales rise 18.5%.

Dietz was quick to note that DSD does have its place, especially in potato and corn chips, where Frito-Lay has established a solid reputation in managing those subcategories. But for crackers, cookies, canister chips, nuts, meat snacks and sweet snacks, WDS represent best-in-class brands and 10% to 15% higher margins.

In the final part of his presentation, Dietz offered his take on the cigarette category in the convenience channel, and what role distributors should play in helping it grow. He noted that since the Master Settlement Agreement (MSA), manufacturers' greatest tool in increasing sales and profits is to gain market share and increase prices over time. Both manufacturers and distributors rely on these price increases, which he estimated represented 20% to 50% of operating profit for wholesale class of trade.

Because the big three cigarette manufacturersPhillip Morris USA, R.J. Reynolds Tobacco and Lorillardrepresent 90.9% of measurable sales volume, Dietz said wholesalers should focus on premium brands to drive category growth and convenience retailers should strive to be price leaders in their markets and push toward never being out of stock on leading brands.