Is Vertical Integration The Future?

One distribution system design question is popping up in more and more markets in the U.S. and globally:

For over twenty years, companies like Pepsi have marketed their brands and managed growth in their global product portfolio by consolidating their independent channels (bottlers) and influencing them at arms length through minority stakes (usually in the 30% to 40% range).

So Pepsi reversed course. It’s completing its forays into forward integration, by buying virtually all of its two top bottlers, which together command 80% of  capacity in Pepsi’s carbonated soft-drink (CSD) business.  Pepsi has offered at least three reasons for its decision in the WSJournal and NY Times:

•  Gain “greater flexibility” to direct capacity at fast-changing consumer tastes
• Build advantage in the fastest-growing portion of the nonalcoholic beverage market – waters, juices, energy drinks, Gatorade – all of which are now distributed more and more through non-CSD bottler routes-to-market
•  Reduce the number of margin-takers in the product pipeline to anticipate a long down-market in which overall system profits are smaller

Pepsi puts a spotlight on the two biggest demands on marketing channels today: adaptability and speed. Both seem to suffer in traditional distribution structures. As a result, we're seeing a decided uptick in companies concluding that collaboration and partnering with third-party distribution players is simply too difficult, too slow, and too costly. 

That may be. But Pepsi paid a heft premium of over $1 billion for its distribution partners. That will be very hard to earn back. And the company now has added considerably to its balance sheet, putting increased pressure on asset productivity. It's distribution 101 time: you can cut out the middleman, but not the activities (and costs).

do product makers need to own their distribution channels to make them high performing?

Safer Foods Take Closer Cooperation

Responding to a rising tide of safety problems, the U.S. Food and Drug Administration has just announced that it plans to start coordinating with peer agencies in other countries, where some of these problems have originated. A spokesman says, “For us to do a better job at home, we have to do a better job with our counterpart agencies around the world.

The Associated Press reports that the FDA now has offices in Asia, Europe and Latin America, that the agency is “moving beyond border inspections” and back up the supply chain overseas.

It’s a sign of the times. Organizations must take more responsibility for assuring their own constituents about just what their disparate (and often distant) partners are doing. Increasingly, we are what we guarantee.

In a complex value chain, guarantees take cooperation. Just as the FDA is starting to realize it can’t do its job alone, so also must the manufacturers and retialers involved in the overall food industry. They must get more collaborative in how they share information, determine who is best qualified to perform specific safety-enhancing activities, and negotiating how much each activity is worth in the overall scheme of providing value to the end customer. Cooperation to this degree and of this importance takes more effort, new skills, and new-found diplomacy at the top levels of management teams across companies.

Let’s not be naive. There have been similar but cautionary situations where a company invested heavily in social benefits and received no recognition from customers for leading the charge. In the 1990s, Frito-Lay was first to reformulate its products for reduced cholesterol content. But even today when we think of high-fat foods, what comes first to mind? For many, its Doritos, Tostitos, Cheetos, and Fritos.

It won’t be any easier for brands to achieve competitive advantage by doing “the right thing” in safety. But branded manufacturers owe it not only to consumers but to themselves to try. Whether they want it to or not, the safety bar is rising. It’s an opportunity as well as a burden. And smarter cooperation within their value chains is one way for brands to prevail over retail private labels.

What does a Mother Want?

Let’s mash up two insightful news pieces and see what we get.

--  Story 1: Branded food processors are fighting off store private labels, usually by dropping prices or giving more food for the same price.

-- Story 2: Women are more risk-averse than men, research shows.

Not exactly news flashes but both pieces, from veteran journalists  Stuart Elliott of the New York Times and Jason Zweig of the Journal, pull out fresh insights.

Now apply the lesson of one article  to the other. Women are most families’ food chooser. Mom makes out the grocery list, even if sometimes she hands off picking to her spouse.  Does Mom care about lowest-price? Sure. But, we now know, not as much perhaps as she cares about food safety. Preserving her family’s health is vital if sometimes costly, whereas food isn’t always the most expensive item in a family's budget to begin with.  So most women may reason, ‘Minimize all food safety risks to my family first. Don’t skimp.’

Branded manufacturers should ratchet up their promotion of 'higher quality and lower risk'. Branded manufacturers have spent decades building reliable, closely monitored supply chains (at necessarily higher cost than private label ones typically) that enhance their quality and guard their image. The best of these quality-control systems reach all the way back up the chain to checking on raw ingredients. Meat packers like Tyson’s and Perdue can practically give you the blood tests and biography of the cow or chicken whose products you’re eyeing in the supermarket cooler. 

Retailers, on the other hand, are new to this back-end product supply management dimension. In my experience even those with established private labels are not doing as much as they need to on supply management. Few of them really want to bear those costs anyways. And frankly, supply concerns shouldn’t be their business.  Retailers have more than enough to do managing  their customers’ in-store and post-purchase experiences. Sourcing and merchandising something as basic and packaged as a safe box of lotion-enhanced facial tissues is not a challenge to be sneezed at.

Independent, national brand managers’ goals should be to help the public  understand the safety benefits of their end-to-end value chains. And of course, they should work hard to maintain and improve those systems' integrity. Operations of upstream partners must be open to inspection – and monitoring must in fact be performed. They need to raise the bar on retailer private label systems - they really can’t afford to dig into the distribution system like that.

Brands that try to compete on price are like generals who fight this war with strategies from the last one. In war, the result is Pickett’s Charge or the Maginot Line. In business, it’s self-commoditization. Why go there?

Deep channel expertise (supported, not overshadowed, by advertising!) is the ultimate reason for existence of a branded producer.

Burger King Reinvents Around Customer Experience

In a sign that efficiency and commoditization are waning as business strategy du jour, Burger King has announced a sweeping overhaul of its go-to-market model. On the surface, the company has sikmply announced a new retail franchise format called the Whopper Bar.

But a deaper look suggests that the company is also responding to consumers' craving - and insistance - on new, exciting experience retailing. A recent WSJ article provides a tantalizing preview of what's to come at BK:

...The Whopper Bars' look will be distinct from a typical Burger King. Workers will place toppings on the burgers in front of the customers "to put a little more theater into it," Mr. Klein said, representing a shift for a company that has always hidden food preparation from patrons. Early design plans call for the bars to have chrome, wood, exposed brick and plasma-screen televisions with images of fire playing on them to evoke Burger King's flame-broiled motto...

...the menu (could) include as many as 10 types of Whoppers, such as the Western Whopper, the Texas Double Whopper and the Angry Whopper, a version topped with spicy onions. One menu sketch has a section called "Pimp Your Whopper," where patrons can chose from additional toppings like jalapeno peppers, bacon and barbecue sauce...

Tough economy or no, it is clear we will see more and more channel champions and stewards crafting fresh go-to-market strategies for driving growth. Branded product makers would be wise to get on the train quickly. Pre-emptive strategy and business model leadership and influence roles are hard to supplant.

Step 1: Wal-Mart to Restructure Wholesaling in India

India's local preservation oriented retailing laws currently prevent international behemoth Wal-Mart from opening its own branded stores or even partnering with other retailers to sell its own brand private label products in the country. But in a shrewd move to build a solid foundation for the inevitable change in those laws, Wal-Mart has begun doing what they do best - restructuring the critical back-end retail supply system.

With growth in the US market grinding to a close, the company is successfully exporting its model to new overseas growth markets. Success in Mexico has been stellar. But what's particularly heartening about their India strategy is its ties to the company's strongest core competence: wringing inefficiencies and middlemen out of lengthy, cumbersome, poorly organized supply chains. They then pass the savings from those strategic advantages on to consumers.

In a quiet first step to dominate retailing in India, Wal-Mart has created a carefully structured joint venture with local retail company Bharti Enterprises to start the pincer move that will establish Wal-Mart's future market dominance in India.

Meanwhile, Wal-Mart competitor Metro Cash & Carry continues to focus on "one stop shopping" and traditional "assortment" strategies. The company says it offers commercial customers in numerous countries of the world an assortment competence in food and nonfood products at wholesale prices. The assortment and service portfolio are geared to meeting the special needs of professionals, mainly from the restaurant and retailing sectors.

Nothing wrong with paying attention to assortment of course. But if I were Metro, I'd be picking up the pace and accelerating strategic moves in valuable southern hemisphere growth markets. Wal-Mart's entry will be anything but slow - consider Mexico where the company now accounts for the majority of all retailing.

Grocery Direct Re-Targeted by Amazon

E-commerce giant Amazon has announced that it is piloting a fresh grocery delivery program, and a post by Planet Retail goes on to say that the new offering will be called Branded AmazonFresh, and the pilot program is available at fresh.amazon.com. The move is an extension of the gourmet food business the company started in 2003 and the dry grocery service that was launched last summer.

What lessons could Amaazon take away from it's earlier efforts in this distribution growth area and also from pioneer Peapod? As with any market, it's essential to understand segments, and target them appropriately. Early research we did into online grocery distribution is instructive. What consumer segment will Amazon appeal to? How the company create an exciting enw total experience for these consumers?

High Frequency Stores Key to Emerging Markets Distribution

P&G plans to conquer more of the globe.

A recent article in the WSJ (P&G's Global Target:Shelves of Tiny Stores, Ellen Byron, 7/16/07; Page A1) discusses a retail format in critical overseas growth markets that is surviving the rise of mega-chains: so called High Frequency Stores.

Background. In emerging markets, P&G estimates that 80% of people buy their wares from mom-and-pop stores no bigger than a closet. Rather than stock up on full-size goods, which cost more per item, they buy small portions of soap, laundry detergent, and single diapers as they need them -- even though the smaller sizes are usually sold at a premium. P&G calls such locally owned bodegas, stalls and kiosks "high-frequency stores," because of the multiple times shoppers visit them during a single day or week. P&G estimates there to be about 20 million high-frequency stores world-wide.

Survive Dominant Retailer Onslaught. Many industry observers initially believed that these independently owned shops would die out as major retailers expanded their reach into developing markets. Instead, high-frequency stores, considered in aggregate, are P&G's largest customer, with Wal-Mart coming in second. Though Mexico is one of Wal-Mart's most successful markets, high-frequency stores are still regularly visited by 70% of the population, P&G estimates. By the company's count, Mexico has 620,000 high-frequency stores. Annual sales total about $16 billion.

Three Strategic Implications for Branded Product Makers:

1. Product visibility: one of the biggest challenges to selling in high-frequency stores. Shops tend to be poorly lit and in Latin America average just 250 square feet in size, P&G found.

2. Merchandising Support. P&G-employed merchandisers visit the stores about every two weeks to tidy the shelves of their products, post signs with the items' prices and hand out promotional items, including posters. Also, sales representatives deliver inventory to stores themselves, often sparing owners a trip to the local distributor.

3. Salesforce Structure. Initially, P&G had its own exclusive sales force in Mexico to supply store owners with its products. Then, two years ago, the company decided that it lacked the scale and resources to maximize distribution -- especially in far-flung regions. P&G began offering basic sales training to independent agents and encouraged them to build their own teams. Today, the company is experimenting with allowing agents and their workers to earn commissions from markups on products sold to stores. By relying on local agents, P&G is also able to strengthen its ties to store owners. This is especially important, since owners can be very influential in the brands their customers choose.

Read More...

Tesco Improves Customer Experience for US Entry

The Financial Times reports this morning that Tesco is to focus the operation of its new Fresh & Easy stores in the USA around a “customer assistant".

Planet Retail goes on to report that according to a recently posted job advertisement, the customer assistant will be “the face of your Fresh & Easy store” whose “main job will be to ensure that customers are delighted”. Tesco has already said that its new stores will be focused around a “Kitchen Table” information desk, where staff will answer questions and make suggestions about products and possible menus.

Tesco’s customer assistants will apparently keep customers informed about Fresh & Easy’s products and about special offers, as well as a variety of traditional store operations tasks such as rotating and date-checking food, and keeping aisles clear and tidy. The customer assistants are also set to be the retailer’s main conduit for customer feedback. Assistants will be encouraged to make recommendations.

Branded Products and Distinctiveness

Branded product manufacturers will continue to get a boost from rising concerns about the "three S's" of global supply chains: source, safety, and sustainability. This window of opportunity for Brands to reassert their influence in the face of mass discounting and price obsession will be a battle.

An article in today's Wall Street Journal highlights the enduing importance of continuing to emphasize distinctiveness from the end customers view.

Mark Hellendrung (President, Narragansett Brewing Co.) : "I've learned over time that you've got to start with a unique reason for being, something that makes you clearly different from every other product or service out there...Another key is staying true to that brand message, which is incredibly hard because the temptation always comes to be all things to all people."
Read more...

Return of Trusted Brands: "China-Free" Raises Stakes

There's a battle raging over control of consumers' hearts and dollars - between branded product manufacturers and dominant retailers that leveraging low cost supply chain procurement to feed extremely profitable private label lines. But they're learning the hard way that trusted brands are not the same as affordable labels.


When trouble emerges with tainted pet food or toothpaste, retailers simply pull the product and shift damage control to manufacturers. But what if the brand in trouble is actually the retailer's own low-cost import? Could the retailer's overall brand image suffer irreparably?


Consider this inevitable development in the procurement wars:

Food for Health International, based in Orem, Utah, makes whole food nutritional supplements for people and pets, and President Frank Davis said the company will begin trumpeting the fact none of its ingredients come from China. Plans call for a "China-Free" sticker on products such as Food for Health's "9 a Day-Plus" capsules, "Active Adults" whole food shakes and "Healthy Dog" supplements. The company also will use "China-Free" in advertisements and promotions. (Source: http://www.reuters.com/article/healthNews/idUSN0618941720070706)

Of course the strategic question is, if dominant mega-retailers are more and more constrained in where and how they source products for lowest cost (ie: highest Gross Margin), will power shift back to trusted branded manufacturers? If so, how will fortunes shift?

Stay tuned!

Is Safeway a Retailer or Manufacturer?

"SafeWay signed up as premium supplier for D&S"

Sourcing a few private label items to round out a line or category has been a part of 'Retailing 101' for quite a long time. But taking on a vast retailer-owned branded manufacturing system starts to beg the question: just what business are some of these dominant mega-retailers in?

The headaches and risks of running a 'generics' program seem quaint compared to the fundamental 'bet the company' moves some dominant retailers are making today.

...Safeway has shifted its private label approach from reactionary to innovative, aligning its private label effort with its overall strategy of building its offerings around consumers. O Organics plays a major role in Safeway's strategy to be the health and wellness advocate for its shoppers. The O Organics line is currently comprised of nearly 200 products across the store, including beverages, bakery goods, cereals, canned and frozen foods, dairy products, and snack items."We created O Organics as a consumer packaged goods style brand within Safeway. We brought the same kind of passion, research, and rigor in developing this brand as you'd find among leading consumer packaged goods companies...said James D. White, Safeway Senior Vice President, Consumer Brands(http://www.pbdsf.com/press/pbd_press2007_0123.html)

When did the job of running a running a retail business rest on manufacturing programs rather than innovating the consumer experience in the stores? Should Safeway shareholders be thrilled or concerned with the latest news that private label king Loblaws has pulled out of D&S (Chile) and that Safeway is moving in to supply products?

D&S replaces Loblaw with Safeway for private labels Safeway is to arrive in Chile via an agreement with D&S. The US-based group has been signed up to replace Canadian Loblaw's private range President's Choice. Late last year, Loblaw informed D&S that it would no longer be sending its products to serve as premium products in Chile due to a business reorganisation. (http://www.planetretail.net/default.asp?PageID=EAlert& Article=56753&Date=2007-07-12)

Safeway shareholders might wish the leadership of the retailer would re-allocate back to basic retail competitiveness all the time and resources that will inevitably go towards managing the global supply risks of running a manufacturing (really "sourcing") business. More and more there's evidence it takes more than a clever procurement system to manage a massive product business.

When Does Local and Personal Trump Lowest Price?

In Australia, the national business development manager at AUR Foodworks, Simon Thompson, has said that success for the group hinges on providing what Coles and Woolworths can't - local stores that are personal in scale.

"There seems to be a polarisation in the marketplace," Mr Thompson said.

"Coles and the Woolies seem to be driving for overall operation efficiency in wanting to get bigger and bigger, and what we're finding is that it is opening up the neighbourhood centre-type opportunities. We're finding that the big guys are not really interested in those medium-sized businesses, that can sit within a community. They want to get people to drive 15, 20, or 30 kilometres to go to regional centre owned by Westfield, and we're saying `No. We want to be part of a community.

Providing your range is not too bad, and your price is good, and you're reasonably convenient, then people would prefer to shop with you than go to a faceless store that they don't know who the manager is going to be..."

Source: http://www.planetretail.net/default.asp?PageID=EAlert&Article=56708&Date=2007-07-11

Over-reliance on Private Label Backfires

Speaking at the recent CIES World Food Business Summit, the chief executive of Carrefour, José Luis Duran, admitted that the retailer made a mistake when it culled its supermarket ranges.

Mr Duran said the company was now undoing the damage, expanding its range by 15% annually, with an even balance of branded and private label products.

Between 2000 and 2004 the company significantly reduced the number of SKUs on its shelves and also rolled out its own house brand lines. But Mr Duran said customers had responded negatively to that policy and Carrefour now understood and recognised that choice was a major expectation of its customers.

Mr Duran said Carrefour respected three core consumer rules today: Just for me, right now and at my price.

"We’re moving to (an era) where to a certain extent the price is dictated by the customer. Adjusting costs and margins is the retailer’s problem. Will we change or are we going to die? There are those retailers who are not able to change and they are going to become a part of the (current) consolidation process country by country.”

Source: 'CARREFOUR boss admits mistake in reducing product ranges', http://www.planetretail.net; DailyNews, July 5, 2007

Disruptive Distribution Case Study: Dean’s Milk Leaves the Porch

Some folks still remember milkmen and the glass bottles they delivered door to door. For about fifty years in much of the U.S., your milk came to you. Dean’s changed all that. Around 1930, Dean’s, one tiny rural milk processor among thousands across the country, broke from the pack and chose to distribute its milk indirectly, through grocers.

Over the years, Dean’s had learned how grocers operated, what grocers and consumers needed, and what they liked or didn’t. Dean’s decided to back a new form of packaging, the paper carton. Cartons were light. They didn’t break or need to be recycled, washed, or handled with the same care as glass. They could be folded for volume shipment and storage. Cartons changed the economics of milk distribution fundamentally. And they moved milk delivery from the customer’s back door to the refrigerated closet of any grocer with the wherewithal to put one in. Inexpensive milk in cartons, in other words, became the booster rocket for the launch of the supermarket in the 1950s, a staple that was obtainable in no other outlet.

In itself, the new carton packaging wasn’t enough to accomplish that. For twenty years, Dean’s patiently taught the safety and convenience of cartons to consumers, who almost to a woman distrusted the flimsy paper boxes. By the time supermarket chains were beginning to their extended surge, Dean’s had won consumers over. And only Dean’s was ready to serve them through the growing chain stores. Dean’s then leveraged its inside track with the supers to drive down processing and distribution costs, meanwhile buying up regional milk processors one at a time. Even as late as 1980, no producer controlled more than a few percent of the liquid milk market. Today, Dean’s is the largest liquid milk producer in the world, with a 35-40% share in the U.S.

Independent C-store Market Cries Out For New Distribution Model

Convenience stores are fast becoming stores in name only. Without much notice, most have been morphing beyond traditional fuel, beer and cigarette products into new in-store categories and consumer service offerings. Eighty percent of “C-stores,” for example, now offer some form of foodservice, which is today their fastest growing source of profit. Consider also: C-stores’ in-store (non-gasoline) sales are rising at roughly 10 percent a year.

Emerging From Shadow of Grocery

• Grocery and C-store distinctions are rapidly blurring – over 30% of grocery sales are ‘quick trips’ for purchases of about $20.
• 60% of convenience stores are single-store affairs today – up from 50% in 2000 – and 70% have annual sales under $1million
• 80% of convenience stores today see some form of prepared food concept as key growth driver - $16 billion market growing over 13% annually
• C-store industry profitability up 17% in 2006 - foodservice gross margins 2x average for in-store merchandise

Packaged Goods companies, food service suppliers, broad line distributors, buying groups, food brokers, national wholesale clubs, and an assortment of other players are all jockeying for territory in the great single operator Convenience store land rush.

How can companies break from the pack and leverage new trends in C-store purchasing channels to reach this critical growth market more effectively and economically?

It is no small task. Sixty percent of convenience stores are still single-owner proprietorships. Capturing share in this fragmented, thinly financed collection of filling stations and small town mom-and-pops demands a unique go-to-market approach that integrates suppliers and their carefully managed marketing channel system.