The Consolidation Numbers Game By Glenn Llopis President / CEO Power Insights Consulting www.powerinsights.com

Retail/Foodservice industry consolidation has created a "numbers game" that has changed the balance of "brand" power, fragmented consumer confidence and accelerated the emergence of warehouse clubs

Wal-mart reinvented retailing through low-price selling tactics that were fueled by low cost/high volume purchasing strategies and efficient logistics and warehousing programs. While Wal-mart's philosophy of buying and selling consumer products has been duplicated, its approach has not. As a result, several "juggernaut" retail-supermarkets and foodservice distributors have assumed high debt ratios through aggressive merger and acquisition activities that have significantly affected product merchandising, product selection and brand assortment strategies. Subsequently, these distributors and retailers have assumed aggressive private label business development programs to control margins, maintain positive cash flow and ensure strong shareholder equity value. In sum, retail/foodservice industry consolidation has created a "numbers game" in which the cost to compete is high, regional brand loyalty is low and sustainable profitability is at risk for consumer packaged goods (CPG) manufacturers. Subsequently, this numbers game has changed the balance of "brand" power, fragmented consumer confidence and accelerated the emergence of the warehouse clubs.

Consolidation has created new ground rules to which distributors and retailers must adhere to grow and compete. Recent M&A activity has changed the face of a business whose success was based on the execution of simple "buying and selling" strategies, to one that is now both unpredictable and unstable as the focus has shifted away from the consumer to cash management. For most brand manufacturers, efforts are focused on short-term survival tactics to optimize shareholder equity, rather than the development of long-term strategic initiatives. Additionally, the impact of consolidation has made it difficult for small- and medium-size companies to profit, as they have fallen victim to large CPG manufacturers that have leveraged their "financial strength" to thwart competition and initiated price wars that have eroded the benefits of quality. Subsequently, the impact of consolidation has created a wave of "commodization," where price is now king and branded monopolies have taken control of the "numbers game."

The results and consequences of retail/foodservice consolidation are still unfolding. However, it is safe to say that CPG manufacturers are not secure with the future; lower prices have led to lower quality standards; consumers have been forced to be more purchase-destination drive; and that warehouse clubs have capitalized on new market conditions by giving consumers more quality, price/value, innovation and purchasing confidence than traditional suppliers have been able to offer in recent years. As a result, consolidation has created supply chain fragmentation, leading to an inbalance of goals and objectives amongst manufacturers, suppliers, brokers, retailers and consumers. Therefore, each supply chain partner is seeking to serve different needs, which is making it difficult to create an industry that is both stable and financial secure.

In today's operating environment, there exist four main ways for retail/foodservice manufacturers to grow and compete profitably. First, they can focus on creating a preeminent brand position. To support profitable customer relationships, solidifying a brand franchise by establishing a set of uncompromised standards that focus on increasing consumption is the essence of building loyalty and demand. Second, manufacturers can create a strong position as leading private-label suppliers. Because private-label supplier standards have become more stringent, a manufacturer can extend these capabilities and competencies to build a brand franchise. Third, suppliers can solidify a position as low-cost, low-quality manufacturers. As more branded companies "escape" the manufacturing business, this presents an opportunity for many low-cost producers to increase plant capacity and profitability without exposure to "go-to-market" risks. The fourth and final option for manufacturers is to leverage proven and existing resources to build a warehouse club franchise.

Unlike retail and foodservice channels, the warehouse clubs (estimated to reach $97 billion in revenue by 2004) are focusing on the fundamentals of selling and marketing consumer goods. According to AC Nielsen, the dollar basket ring at Costco, Sam's Club and BJ's in 2000 averaged $82.97. This is in comparison to grocery retailers average of $33.58. This comparison and contrast indicates how channel purchasing behavior is changing and why warehouse clubs cannot be ignored. In addition, it illustrates the "power of household income" amongst club shoppers, whose average income of 70k+ in 2000 represented a 66% household penetration.

This extraordinary reach represents an opportunity for CPG manufacturers to market products whose high-end positioning, premium quality and value proposition is complimented and not compromised by heavy-spend program requirements. Warehouse clubs' focus on satisfying their members (consumers) long-term. These clubs continuously strive to satisfy their members through innovative products and pack-sizes, new products, seasonal offerings, exclusive merchandise and services at a value that stimulate purchase frequency and membership loyalty. In simple terms, warehouse clubs have redefined value for both retail consumers and foodservice operators by offering products and services that represent better quality and value.

Creating an association with quality is what has made the warehouse clubs successful. For example, today a consumer associates Costco with quality. In other words, Costco, Sam's Club and BJ's are now established brands. Thus, consumers now have confidence that when they shop at Costco they will find high quality at a good value. Warehouse clubs have associated themselves as a "quality retailer." While national brand vendors originally shaped the club image, regional brands, as well as "unknown brands that have become recognized brands," have fueled club growth in recent years. As a result, small and medium-size companies have stopped investing in the "high-cost" of retail/foodservice business, preferring, instead, to go in for "partnership-building" in which the merits of their product-quality, service and organizational capabilities become the equitable points of difference that lead to profitable sales.

In short, retail/foodservice consolidation has changed the profitability landscape for CPG manufacturers, who have been challenged to survive today's numbers game. Clearly, warehouse clubs have become equity builders, in whose stores product marketing, quality and innovation are all valued and promoted to expand sales. This is allowing clubs to approach the numbers game with a collaborative strategy, joining with manufacturers to create a profitable supply chain to service consumers. This is in direct contrast to retail and foodservice channels that view the numbers game as a cash management process that requires them to manage high debt ratios that dictate product selection and consumer choice. Whose approach is better able to build long-term consumer confidence and ignite "real" industry growth? The numbers speak for themselves.

Power Insights Consulting is a Brea, CA-based consultancy that specializes in retail, foodservice & warehouse club sales, marketing and organizational strategies for food& beverage companies.