Wholesale change is now, so wholesalers must change.

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Author: Harris Jr., Kenneth

Over the past year, there's been a lot of talk about a National American Wholesale Grocers Association (NAWGA) study on wholesalers and the steps they need to take to compete in the '90s. For manufacturers who complain about the inefficiency of selling to wholesale-supplied retailers, or self-distributing chains who'd claim the demise of wholesalers is near, guess what? Wholesalers--who account for $230 billion--or 56.3%--of $410 billion annually in grocery store sales--are coming back with a vengeance, and both manufacturers and retailers will support them.

The wholesaler phoenix rising from the ashes is called the Local Market Distributor, a term that reflects fundamental changes that have occurred in bringing goods to the marketplace.

Local Market Distributors are regionally focused wholesalers turned logistics experts. They provide a spectrum of services and transportation of goods from manufacturers to retail outlets more efficiently than self-distributing chains.

The NAWGA study demonstrated that wholesalers delivered product at a cost of 1.9% of sales on average versus 2.6% for chains--which, in dollars, translates into about $2.5 billion. In some cases, direct chains have turned over their warehousing operations to Local Market Distributors, as Tom Thumb stores did with Fleming Companies in Dallas last year.

As one chain exec put it recently, "I am an expert in merchandising and marketing my stores. The days of gaining a competitive advantage through more efficient warehousing operations are over."

Key to all of this is that it's happening now. While many have said what should be done, some companies have quietly set about the task of doing it.

One such case is C&S Wholesale, Inc., in Brattleboro, Vt., which supplies a network of 616 stores, mostly in the Northeast. After a year-long pilot program that enlisted eight manufacturer participants, C&S has set the paradigm of the Local Market Distributor: Custom billing systems that give manufacturers and retailers more direct negotiation flexibility; warehouse consolidation services; consolidation for slow-moving items in continuous replenishment programs; cross-docking facilities--allowing manufacturers to move goods to market without warehousing--and forecasting models; custom merchandising programs for in dependent stores; newly developed category management reports for independent stores and manufacturers.

The C&S program took more than two years to develop. Contributing to the program's momentum: Eight large supermarket chains now represent over 75% of C&S retail business, in contrast to most wholesalers, who customarily serve a more fragmented retail customer base.

Additionally, C&S conducted strategy sessions with a carefully selected group of manufacturers to find out what services would be of greatest value. Most importantly, the entire program rests on the development of trust--the fragile denominator which allows for straightforward business practices between manufacturers and wholesalers.

Participating manufacturers have noted tangible results: elimination of diverting, the third-party operation that moves products from one retailer to another; reduction of forward buying; increased targeting of market development funds to consumers; elimination of double payment on promotions.

For a $10 million a year piece of business, up to $200,000 in wasted trade spending could actually go toward reaching consumers. Here is a critical benefit of the C&S program: As off-invoice allowances have decreased over the past five years--for example, from 5% to 2%--wholesalers have been unable to tap into performance funds available to self-distributing chains. As chains shift performance funds into price discounts, wholesalers can buy directly from these retailers at as much as 20% profit without involving third party diverters. As cases are diverted into a market, direct credit for those cases is reduced, drying up market development funds for retailers.

C&S has been able to eliminate this waste for the manufacturers who have participated. As C&S expands on its role as Local Market Distributor for more manufacturers, the firm is blazing a path for other wholesalers to follow.

DIAGRAM: Diverting may increase as off-invoice allowances decrease

Note: In 1986, diverting is minimized because the diverting upcharge (4%) is too great to warrant purchase (+1% extra). In 1994, purchase becomes attractive because even with diverting upcharge (4%) wholesaler can make 4 points more than buying direct.

PHOTO (COLOR): Kenneth Harris Jr.

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By Kenneth Harris Jr.

Kenneth Harris is a partner at Cannondale Associates, a marketing and sales consulting firm based in Wilton, Conn., and Evanston, Ill.