The Specialty Distributor and Retailer Relationship
Who Is Accountable for Specialty Product Line Performance / Category Profitability?

The specialty distributor has created high barriers to entry in the specialty
product categories that have been fueled by financial agendas versus consumer demand.

The specialty distributor plays an important role for supermarket retail chains as their primary partner to manage, sell, distribute, merchandise and control schematic sets for the slower moving specialty product category. Although the specialty distributor is instrumental in assisting retailers in this category, they have also become a source of competition. The specialty distributor has taken an active role in developing it's own private label program to increase their margin control. Additionally, specialty distributors are forming exclusive alliances with established import brands. These import brand partners are now accessing immediate market penetration through an established supply chain in exchange for equity. Clearly, the specialty distributor has made it more difficult than ever for new & emerging brands to grow and compete profitably. In many cases, the retailer who has empowered their specialty distributor partner is unaware of how or why their specialty product selections are performing or under performing. For emerging brands, they must create new performance standards and introduce new category awareness for specialty products to avoid the specialty distributor barriers to entry, as well as their increased participation in the market, that is fueled by financial agendas versus consumer demand.

Barriers to Entry & Growth
As private label development and import brand alliances move to the forefront of specialty distributor strategies, does category management at the retail level suffer? The emerging brand players have been forced to assume longer return on investment cycle. However, are these investment cycles based upon product performance or specialty distributor financial focus? From the moment specialty distributors evolved from regional (entrepreneurial) service providers to national (bureaucratic) juggernauts, their objectives have been fueled by financial agendas versus consumer demand. Subsequently, this operational shift has dictated their go-to-market approach that now surfaces from the executive suite through field level execution.

More than ever, product selection in specialty segments are prioritized based on financial alliances that start with private labels, import brands alliances and then emerging brands who are willing to spend money for specialty distributor management time and attention. But the payoff appears to be limited. The perception is that the specialty distributor controls the process through the direction given by their supermarket retail partner. However, the reality is that specialty distributor tends to favor the products that cater to their financial (equity / margin) objectives. Based on a survey conducted by Power Insights Consulting with emerging brands that utilize a specialty distributor, the following top 5 areas of highest concern were uncovered:

1. Shelf Management
   90% expressed concern about poor shelf management / product placement.
2. Slotting
   95% expressed concern regarding the required payment of slotting by the specialty distributor when their retail partner did not require it.
3. Unsaleables / Spoils
   80% expressed concern regarding the unusual high levels of unsaleables / spoils that were deducted by the specialty distributor
4. Lack of Volume / Sales
   90% of emerging brands were confronted by the specialty distributor for not generating enough volume to warrant management time and business development attention.
5. Lack of Senior Management Access / Decision Making Assistance
   75% expressed concern with not being able to find a "real decision maker" to immediately address and find resolution their concerns.

Clearly, these findings result in less retailer power. As one emerging brand manufacturer puts it, "in an industry that has become controlled by a few, what alternatives do we really have?"

Creating New Performance Measurement Standards
For emerging brands, identifying a "call to action" against each of these barriers should be on the forefront of their strategic agendas. After surveying all these barriers it is apparent they are all interrelated. The following addresses 3 core management areas for emerging brands to consider when creating performance standards to avoid the aforementioned barriers to entry & growth.

1. General Management
   The management of emerging brands in the specialty products category requires "micro-management." Most emerging brands in specialty product categories are generally owned by small / medium sized companies. Therefore, they rely on third party brokers (sales agencies) to manage their product lines. When evaluating the broker, emerging brands should consider the relationship that the broker has with both the specialty distributor and retailer partner. In many cases, a broker carries a strong relationship with either the specialty distributor or the retailer partner (but rarely both). Also, the manufacturer should be proactive in establishing strong "top-to-top" relationships with the specialty distributor while serving as a support partner with the retailer.
   
   An emerging brand cannot be "laissez-faire" about touching the business and should not solely depend upon the specialty distributor, retailer and / or broker for the performance of its products / brands.
   
   
2. Shelf Management Blitz Program
   Shelf management / product placement with specialty products is the single most important factor in sustaining the maturity of the products life cycle and the brands exposure. Now that you can no longer assume that your specialty distributor will optimize your shelf management requirements, you must increase your store level call frequency through broker partners and / or independent merchandising companies. Store level management should be frequent and powerful. Require that your broker "blitz" (100% store coverage within a specified period of time) for your retail partner until your product / brand has established consistent turn cycles and sales performance patterns within each store location. This blitz program will allow you to control and understand the "real vs. perceived" performance for your products. In addition, this blitz will allow you to proactively share your findings with the retailer to further define the most optimum manner in which to merchandise and position your product to reach peak performance.
   
   Finally, implementing a strong shelf management program allows the emerging brand to control the cost of unsaleables. As previously mentioned, 80% of emerging brands expressed concern with the unusual high rate of unsaleable products. When further researched by Power Insights Consulting it was determined that the specialty distributor sales representative affects this high rate of spoils. Because the specialty distributor sales rep gets additional credit for new item placements, they were found to pull product off the shelf and declare them as unsaleables.
   
   Subsequently, this led to lost sales for the emerging brand but allowed the specialty distributor sales representative to earn credit for replenishment of the item. Furthermore, it was found that the percentage of declared unsaleable merchandise that was actually damaged was less than 2%. As a result, a controlled shelf management program can save the emerging brand from spending unnecessary funds that could otherwise be utilized to promote the products performance.
   
   
3. Promotional Program Execution
   Optimizing and controlling return on investment is a critical performance variable for emerging brands in specialty products. Due to the breadth of product lines that are controlled by a specialty distributor, it is common that emerging brands get "lost in the mix." Therefore, when introducing new products, it is difficult to attain optimum volume performance within the first 90 - 120 days. As a result, specialty distributors will require that emerging brands "spend more in promotional programs" to ignite product performance. Again, this is a classical example of how the specialty distributor is in search of satisfying a financial objective. If it is clear that the specialty distributor poorly manages shelf management requirements and unsaleables (to name a few), then what should give the manufacturer confidence that spending directly through the distributor will increase sales?
   
   A specialty distributor takes (on average) a 28% -- 35% margin against emerging brands. Depending upon whether it is a specialty distributor private label or equity alliance partner, the margin may be lower. For an emerging brand to control and optimize the performance and profitability of their products that are serviced by a specialty distributor, they must resort to a promotional program strategy that is triggered directly through the retailer partner. This will further allow the emerging brand to control price points and spending that should be fueled by performance-based programs to optimize return and investment
   
   

In summary, for emerging brands to grow & compete profitably in specialty category segments it is imperative that they proactively manage the entire supply chain spectrum that stems from the store through the distributor and retail management levels. Clearly what was once thought of as a self-managing distribution system, the specialty distributor / retailer relationship has become one that requires a hands on approach for emerging brands to successfully compete.

Glenn Llopis is president and CEO of Power Insights Consulting (www.powerinsights.com), a Brea, Calif.-based consulting firm that specializes in creating "value-based" brand platforms from traditional "commodity-based" product categories.