Grocery Headquarters Food forum – March 2000

The industry needs a "common change language" regardless of channel or segment, as the underlying dynamics are constant. We must address and resolve the burning issues for long-term survival.

The underlying issues of change facing our industry today are not complex, but they are time consuming. Yet if a movement to support change against the burning issues is delayed, those issues will force change compliance.

In the food and beverage industry, we tend to fear the concept of change. This leads us to ignore change or to approach it in a way that is ineffective. This doesn’t result from a lack of interest so much as it does from a lack of understanding of what the "burning issues" are that face the food business today.

The real issues that retailers, manufacturers and brokers must confront and resolve are that:

• Most branded companies are working to maintain and build brand/shareholder equity, not consumption demand.
• Most small and medium-size companies cannot afford to build brands, as the cost of doing business is making it impossible to profit.
• The "commodization" of categories and products is forcing suppliers to shift financial resources to support cost reductions in manufacturing and existing product formulations (therefore impacting quality) in an effort to lower prices and maintain desired margins.

Consider how the industry has evolved from a simple business of buying and selling products and brands to a complex forum of buying the lowest cost of goods and selling assets through mergers and acquisitions. With cost accounting and asset management tactics directing the operating platform for most retailers, the cost of doing business has become a new and time-critical survival challenge for manufacturers and brokers.

Accountability against these cost components--from inventory control, logistics, procurement and deductions, to new product development, information technologies, private label and brand building--is the single most important function in the retail industry today. As a result, manufacturers and brokers have been forced to critically re-evaluate their corporate goals, capabilities, organizational strategies, competitors and resources to find financial security.

Retailers have changed the ways and means of doing business. They have lost sight of the big picture, leading manufacturers and brokers to adopt short-term survival tactics to stay in business. Retailers' attempts to promote "partnerships" have been used to get closer to manufacturer cost of goods, to further encourage multi-tiered promotional allowance programs, and to leverage broker services at no cost to them.

Yet manufacturers' and brokers' ongoing struggle to "partner" with the retailer does not guarantee them a profitable return on investment. This leads the manufacturer to question the value of the retailer, which in many cases results in a shift of financial resources to support alternative channels such as warehouse clubs, the Internet and restaurants, where investments are more stable, predictable and at times more profitable. For example, greater private label participation and less support for brands is a dangerous sign of commodization, where costs and price, not "value-added" products or services, drive decision-making.

If we accept the theory that commodization breeds consolidation, here’s what we can expect:

• That only the lowest-cost manufacturer or most powerful brand will prevail.
• The retailer will continue to be operations-driven rather than market-driven.
• Profitability in retail will be questioned and investments by manufacturers and brokers will erode over time.

These consequences do not support stable growth for our industry. They promote short-term asset gains for retailers to strengthen their balance sheets, not consumer confidence.

The underlying message to small and medium-size manufacturers is clear: To survive, one must change--and change quickly." The underlying issues of change facing our industry are not complex, but they are time consuming. The issues are not difficult, but the language that is used is difficult to interpret (consider category management). But if a movement to support change against the burning issues is delayed, those issues will force change compliance.

The industry needs a "common change language" regardless of channel or segment, as the underlying dynamics are constant. We must address and resolve the burning issues for long-term survival. For small and medium-size manufacturers and brokers, survival is a constant issue. Yet it is frequently those companies that are the true innovators and pioneers. Our industry needs more, not fewer, pioneers.

We share a common goal. We should be in this business to increase the consumption of food and beverage products; to build consumer confidence through high-quality products and brands; and to invite new participants into our industry. Instead, we are tainting our industry's image and misdirecting its future. How? What have been deemed as activities to advance our industry are indeed retracting growth and limiting competition, participation and profitability for small and medium-size manufacturers.

What are the consequences of this trend?

• Consumer spending is fragmented and supermarket loyalty has diminished. Consumers are willing to participate in destination shopping more than ever (i.e., at specialty outlets, warehouse clubs, restaurants, Internet grocers, etc.).
• In an era that promotes overall entrepreneurship, the retailer makes it too difficult and investment-intensive to support small business development.
• The supermarket industry has made product innovation a risky proposition for small and medium-size manufacturers as they quickly convert new products into private label offerings. This allows only established brands and private label to survive profitably.
• Retailers, manufacturers and brokers will continue to consolidate. This will further erode the resources that are necessary to support small business development and put a strain on national brands to grow and compete profitably.

Given the magnitude and consequences of these burning issues, it is important that retailers critically assess how their growth initiatives are negatively impacting the manufacturer/broker community. Without the manufacturer, there are no products to sell, no brands to build, no industry to grow. Everyone is waiting for someone to take action, but we can no longer afford to wait. Now is the time to collectively protect and build the industry's future profitability.

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

Food Forum is an opinion column designed to open discussion on industry issues. Submissions may be sent via fax to Priscilla Donegan at 203-730-9553 or e-mail at PrisDone@aol.com.