Center store takes on renewed promise, exclusive study reports.
The viselike pressure of competition and mounting costs has forced an introspective David Meiners to take a deep breath and look cautiously within, hoping he likes what he sees.
In the past year an “unholy alliance” between a large convenience-store competitor and a leading regional grocery chain has lured locals—including those who once frequented Meiners’ stores—with cents off per gallon in exchange for their loyalty. The program has siphoned gallon sales at Meiners’ six c-stores, leaving him bent but certainly unbroken.
“Our inside sales are up, but atthe pump every one of our stores is down, so fi gure that out,” says Meiners, owner of Meiners Cos. LLC, which does business in greater Kansas City. “Some stores have had doubledigit losses in fuel, and some [other local operators] have lost 17% to 20% of their volume.” Losing at the forecourt, Meiners has taken to “pumping” up an area often ignored by periphery-focused convenience retailers: the center store.
Aided by key vendor and distributor partners, the small chain has turned an aggressive eye toward the candy and snack categories: managing in-stocks of best-sellers, expanding to multiple placements and promoting “two-for” pricing. Chainwide, year-to-date sales dollars and item movement on both categories have risen, but Meiners and his colleagues aren’t done reaping the fruits of the center store just yet.
A recent industry study shared exclusively with CSP suggests Meiners is on the right track.
In a slow-to-recover economy, against the backdrop of stagnant consumer spending and escalating fuel prices, retailers whose stores carry the best-selling center-store items and maintain high in-stock levels stand the best chance of staying in the black. The next steps, then, are to pare down slower-moving items undeservedly taking up time, resources and shelf space—eroding profit dollars as a result—and deny the temptation to tack on unproven new items that add variety but not value.
“A lot of the wrong items are getting into stores,” says Kit Dietz, principal of Huron, Ohio-based Dietz Consulting. “The problem is multifaceted. We have too many non-value-adding new items, and the failure rate of these new items is very high. There needs to be a good reason to bring in a new item other than just because it’s a new item.”
Recently, Dietz collaborated with fellow industry consultancy Willard Bishop on an ambitious research project— the C-Store Retail SuperStudy— designed to identify center-store profit opportunities by analyzing the operations of retail chains throughout the country and the wholesale distributors that service them.
The study results were, in a word, startling. Among the findings: Across all c-store categories, the top 19% of SKUs contributes 80% of sales, and the bottom 50% of SKUs contributes just 5% of sales. Put simply, there’s too much dead weight on store shelves. “We have these big distribution gaps on core SKUs,” Dietz says.
“We’ve been talking about these issues for a long time now, and finally I think we’re at a point where we have better data resources, better wholesalers and even better retailers than we did 10 or 11 years ago. But it’s not like we turn the switch and three months later we’re all great. This is going to take years [to correct].
“The priority is to make sure we have distribution on the best-selling items and make sure the core brands are represented in every category,” Dietz continues. “No. 2, let’s make sure we optimize the current assortment and allocate space accordingly. No. 3, we need to rethink the layout, positioning and size of categories in the store, and seize the opportunity where we can get the most, first and fastest route to profitability.” What he’s talking about is called efficient assortment, the logical evolution of category management being embraced by every retailer from Target Corp. to Rite Aid and Offi ce Depot. And, according to some, it’s where all convenience retailers need to be headed—starting with the center-store categories.
Digging up Roots
Efficient assortment begins with, above all, a perspective shift. Retailers who have relied on traditional metrics—sales, gross-margin dollars and other primary movement measures—must dig deeper, Dietz suggests, to gather the information needed to “tell the full story.”
Traditional metrics remain important in understanding item- and category-level performance, but retailers must also factor in manufacturer incentives and activity-based costs (ABCs)—meaning the toll of space, resources and associated labor, among other things, assigned to a particular item from the time it is received by the retailer to the time it exits via consumer transaction.
Dietz, formerly president of J.F. Walker Co., L&L/Jiroch Distributing Co., and United Wholesale Distributors, for more than a decade has been investigating the specifi cs of assortment gaps as a way to unearth profi t opportunities. The C/SCAPE study he provided leadership and vision for in 2000—and first enlisted the expertise of Willard Bishop—got the industry thinking intently about the notion that understanding an item’s ABCs could ultimately make a retailer more profi table (see box, p. 89). Although the industry has been chipping away at gaps in the system since category management began taking root in the convenience channel nearly a decade ago, deeply ingrained “problems” have transformed this inefficiency into a systematic crisis, hampering channel-wide profi tability as a result. Like any other problem, sources suggest, everyone involved— retailer, supplier and distributor— owns a piece of it.
Retailers: Too many retailers have ceded control of key categories to direct-store-delivery suppliers or wholesaler partners because of lucrative shelf payments and other fi nancial incentives, convenience or simply the inability to make tough decisions. As a result, stores have gone without many of the SKUs they truly need and their customers truly want.
Suppliers: The urgency to promote SKUs pouring from the new-products pipeline has kept the bull’s-eye off the best-selling items that account for the majority of the channel’s profi tability— essentially encouraging sales reps to get the “wrong items” on store shelves. Though certainly not true of every category—candy and packaged beverages are exceptions—this constant stream of new products has diluted the channel’s focus on proven performers.
Distributors: The sin of distributors, in a way, comes from having been too accommodating—stocking too many slow-selling specialty items requested special by individual retail customers instead of helping retailers identify the best-selling items that will have a better chance of driving profit. Also, until recently, distributors have been unable or unwilling to guide retailers with superior categorymanagement tools beyond their own shipment data. “This supply chain is as costly and complex as any I’ve seen in my career, and it won’t get fixed if we don’t work together to fix it,” says Marty Monserez, convenience channel leader for Cincinnati-based Procter & Gamble, which owns some of the best-selling brands in the center store.
“The answer lies in efficient assortment, and in some cases that might mean stocking only the best-seller [in a certain category],” he continues. “Even if you offered two or three SKUs in some center-store categories, the incremental sales cannot support the incremental space. In most cases, the enhanced assortment benefits the brand, but it doesn’t benefit the retailer or the distributor—and rarely benefits the consumer.”
The battlefield hasn’t changed much in the past decade, aside from the emergence of sophisticated categorymanagement and analysis tools. It often comes down to a tug-of-war between wanting to put the best mix of items in front of the customer and being tempted by lucrative shelf payments and other vendor-based incentives. In the basest terms, do retailers embrace “true” category management based on scan data, or “sell” their in-store real estate to the highest bidder?
Sources suggest finding a balance, meaning supply- chain partners will likely need to make sacrifices somewhere. By analyzing ABCs, which factor in vendor payments, retailers can then examine a more telling portrait to help determine how a particular decision affects true profitability.
Destination categories such as cigarettes, other tobacco and packaged beverages may be the core of most c-stores, but the center store may be the “lowest-hanging fruit” in terms of creating opportunities to drive profit, according to Dietz.
In addition to high-impulse items such as candy and snacks, center-store categories include emergency or “fillin” items that most likely don’t call for much variety. Yet many retailers’ fill-in category sets—nonedible grocery, for example—contain too much assortment, which inevitably makes those sets unprofitable; most stores don’t need two paper-towel SKUs or three dishwashing-detergent SKUs, for example. To be sure, streamlining SKUs is increasingly critical as retailers look to optimize their smaller footprint against larger and more sophisticated competitors.
“In fountain drinks, it’s critical to offer variety,” says Monserez, a 35-year veteran of P&G. “But you don’t need four brands of feminine protection.
“The industry has talked about the foodservice potential extensively over the years, but a bigger opportunity could be stocking the top 100 SKUs and getting them into 80% of the stores, replacing slow-selling SKUs, as needed; it would increase [industry] sales by millions of dollars.”
Share the Load
As Dietz suggests, even though identifying the problem appears relatively simple, fixing it is another matter. For that, a stronger retailer spine coupled with vendor/wholesaler collaboration is essential.
In the chocolate segment of the confection category, SuperStudy findings suggest core SKUs sell 2.1 times more than noncore SKUs ($5.57 per week per unit vs. $2.59 per week per unit); they also have a 2.2-times higher adjusted gross profit ($4.57 vs. $1.19) and a 4.5-times higher true profit ($1.63 vs. 36 cents).
That said, c-store retailers collectively stand to gain an estimated $350 million by improving distribution of the top 50 SKUs beyond its current mark of 86.2% of stores, according to Dietz. Equally impressive gains are to be had by improving distribution of core brands in the salty-snacks segment—in both warehousedelivered and DSD brands. In confection, however, category management drives 100% of decisions across all segments; snacks do not perform quite as well, primarily because all segments of the category tend to be managed by vendors rather than by pure, retailer-driven category management. “It might be one chain or one customer, but it’s hard [for a distributor] to discontinue SKUs without upsetting the retailer,” says Dietz. “Pretty soon you start building up a lot of inefficiency, so we [as an industry] need to be more discerning about the mix we offer the customer.”
Precedents for collaboration do exist. The Warehouse Delivered Snack Committee, a 10-year-old group composed of manufacturers and distributors, has helped the channel immensely by recommending multivendor endcap displays stocked with the category’s leading warehouse-delivered snack brands. As many as 30,000 convenience stores now merchandise this multivendor strategy as a result of the committee’s recommendation, according to Monserez.
“It’s unique to have 15 manufacturers and wholesalers in a room with the same objective: driving top-line sales and overall category growth,” says John Dalton, national sales director for the convenience channel for Minneapolis-based General Mills, and also a committee member. “And it shows that everyone can win if we have the right assortment.”
Retailers must scrutinize manufacturers’ rebate programs and make decisions based on true category management, and pushing back when necessary. Meanwhile, manufacturers should structure retailer rebate programs responsibly by focusing on top-selling SKUs rather than unproven me-too items, according to Dalton, whose company’s snack brands include Chex Mix and Nature Valley.
There’s something else manufacturers need to do better: purge their weaker products. “If a rebate program focuses on just another flavor of whatever, it’s not going to help anyone,” Dalton says. “Manufacturers also have to be aggressive on exiting SKUs that are not pulling their weight. … We [discontinued] 13 SKUs in the past year; they were not profitable for us, and they were tying up valuable space for the distributor and the retailer.”
‘A Lot of Runway’
Retailer intuition, everevolving scan data and heightened collaboration between supplier partners has pushed category management well past infancy and into the next evolution—the era of efficient assortment. The difference now is that retailers have access to both more data and more refined data, often localized by ZIP code or market. Traditionally, suppliers have had a lock on the industry’s best data, but the wholesaler community—ideally, a key partner of the c-store retailer—has begun to catch up. “Retailers have led the way, using the tools they have access to as a way to make good category decisions,” says Ron Coppel, senior vice president of business development for Eby-Brown, a regional wholesaler based in Naperville, Ill. “Manufacturers have supported them in that effort, but I don’t think distributors have done as much as they could do.”
Leading distributors such as McLane, Eby-Brown, Core-Mark and H.T. Hackney have long been helpful in sharing with retailer customers their proprietary shipment data to determine store sets—but that’s no longer enough, according to Coppel. For its part, Eby-Brown recently began offering data-rich guidance for suggested plan-o-grams, based on a combination of shipment data, syndicated data and insights from manufacturers serving as category captains, as well as secondary manufacturer partners in each category to “validate” recommendations.
In addition, Eby-Brown’s new “SmartProcess” system for chain accounts analyzes a retailer customer’s scan data and, through proprietary tools and algorithms, creates a series of reports designed to help retailers sell more units in specific categories— specifically, by selling more of the items consumers demand. Retailer customers then have an opportunity to visit the “SmartStore” at Eby-Brown’s headquarters to view these suggestions in a real-life store setting before they are implemented at store level, according to Coppel.
“The premise here is so doggone simple,” he says. “If our customer sells more stuff, what happens? We sell them more stuff, the manufacturer sells more stuff to them, and the customer wins by getting the products they want. … It’s the right thing to do.”
Continued innovation, cooperation and this commitment to doing “the right thing” should continue to reap dividends for all members of the supply chain. As Dietz and others have suggested, it just might take more time to get there.
“If we’re in a nine-inning baseball game, we’re still in the third inning,” says Dalton of General Mills. “We’re still early in this game … and I see another five-year run of growth and opportunity before we [as an industry] get to where we need to be. There’s still a lot of runway left.”
About the SuperStudy
The C-Store Retail SuperStudy conducted by Willard Bishop in collaboration with Dietz Consulting analyzed activity-based costs (ABCs) as a way to “tell the full story” of category- and item-level performance. The study included three geographically dispersed convenience chains based, respectively, in the Southeast, along the West Coast and in the Central/South region, as well as the distributors that service their stores.
The SuperStudy analyzed 28 categories based on NACS category definitions. Three types of data were used in the analysis: item-level performance data, cubic space data and ABC data. For performance data, each participant provided 52 weeks of data, ending in 2010.
Considering the rising costs of doing business and threats to traditional traffic drivers such as fuel and tobacco, boosting center-store profitability has become more important than ever. Here’s how to do it:
Retailers must review center-store categories aggressively and make sure the core, best-selling SKUs are represented over “fringe” SKUs.
Looking at categories holistically, regardless of supplier, will ultimately lead to more efficient sets structured according to consumers’ buying preferences.
Distributors, meanwhile, can tighten up the supply chain by being more discerning about the products they stock, while assisting retailers with data-driven guidance on items that will help drive overall profitability.
New products undoubtedly ratchet up sales in many categories, but in others they can actually hamper category growth. Manufacturers need to structure rebate plans accordingly, to ensure their representatives are incenting retailers to carry and stay in-stock on top-performing items.