Warehouse Club Focus
Presentation - When making a presentation of their products to club buyers, manufacturers should present only two or three items. Club buyers concentrate on the top selling products within a category. They do not want to see a "laundry list" of products, but want to see the best of what a manufacturer has to offer. Manufacturers should provide compelling reasons to purchase each item that they present. Those reasons should appeal to the club buying philosophy. For example, a manufacturer should show data supporting the fact that an item is the top selling product in a category or show that the product quality is enhanced due to new technology. Also, a manufacturer can let the club buyer know that the product is either exclusive to the club industry or exclusive to the particular club. In the end, the presentation should provide a clear connection between the item and why the club buyer should purchase it.
Competitive Price Evaluation - When analyzing competitors who have merchandise in the clubs, manufacturers should pay attention to the price range of the category and the retail prices of non-club operators. Knowing the category price range helps to develop a package size that meets the buyer's needs and helps to understand the competitor's cost of goods. Remember, the clubs generate gross margins of approximately 12 to 14% on average, so you can estimate your competitor's cost of goods by deducting the gross margin dollars from the retail price. Analyzing a competitor's retail pricing at non-club locations enables the vendor to see its product from the eyes of the club member. Members are constantly comparing the prices of club and non-club operators to make sure that their membership fee is worthwhile. Understanding what they are accustomed to can help to structure a product program that meets or surpasses their needs.
Retail Price Points - After the cost of goods is reduced by all discounts, rebates and promotions, you can estimate the retail price that the club buyer will generate by using the gross margin range of 12 to 14%. Manufacturers should develop their programs so that club buyers are able to achieve their gross margin goals and retail the product for a price point ending in $0.49 or $0.69. When an item ends in $0.99, the club buyer is reluctant to raise the price to the next dollar. In the event of a cost increase, the buyer would most likely try to force the vendor to absorb the increase. However, $0.49 and $0.69 price points provide the buyer with the flexibility to increase prices without having to raise the price to the next dollar. In addition, a price point that ends in $0.19 or $0.29 may cause the buyer to go back to the manufacturer for further discounts so that he is able to go down below the dollar to the $0.99 price point.
Samples - Sending samples, especially food, may not always be a good idea. First, no matter how well a sample is packed, it may not arrive in good condition. Manufacturers that send food samples must rely on the buyers to prepare it correctly. Also, the sample may get lost, as the buyers are busy and managing all of their samples is not a priority. Manufacturers should bring their samples to the buyer meeting themselves. When presenting food items, the vendor should bring a company chef along to prepare the item for the buyer correctly. This ensures that product samples get to the buyer in the proper condition and are prepared correctly. Finally, a vendor should never send a sample to the buyer before meeting with him for the first time, as the vendor is relying solely on the buyer's perception of the product without getting the full story. In that case, the buyer may make a decision before the meeting occurs.
Product Rotation Plan - Club buyers constantly rotate new and interesting products into their merchandise mix. A vendor that has a number of items that meet the buyer's needs should create a rotation plan, instead of trying to sell all of the products at once. By developing an in-and-out strategy that is centered around a theme, the vendor may be able to generate sales across a larger number of items, even though they are not stocked at the same time. Additionally, there is always the possibility that an item will perform beyond expectations and warrant everyday consideration by the buyer.
Sales Call - It is a given that buyers will always try to put their own touch on a product's packaging. However, a manufacturer should never tell a buyer that the packaging samples will be sent after the meeting. Buyers are able to make quick decisions and the chance for success is diminished any time a manufacturer slows down the decision making process. Vendors should come to the meeting with all of their packaging samples so they can be discussed in person. Follow up changes can then be sent after the meeting. This philosophy also applies to both pallet layout and display cases.
Pallet Quantity - Manufacturers should be flexible with the number of selling units on a pallet. For example, a pallet of vitamins is not feasible for the clubs, as it would take too long to sell through, so the clubs merchandise such items on a false pallet bottom. Manufacturers of many items are able to increase or decrease the number of selling units in a display case. The result is that the clubs are able to sell through a pallet of merchandise more efficiently. Although this is just one component of the equation, manufacturers should let the buyer know that it was part of their strategic plan.
Visibility - Members should be able to read product packaging from at least 15 feet. Since displays are large and members are always looking around the club location, being able to promote products from that distance will more easily draw the shoppers' attention.
Display Case - Test the durability of the display case so that it does not crush or become damaged in the distribution process. This is especially important in the freezer department as a master or display case can weaken due to freezing and thawing conditions. As can be seen in the picture, the Tyson display on the left does not support the product as well as the newly designed and fortified Tyson display on the right. With the extra support on the top and bottom of the display case, the warehouse clubs are able to stack the display cases on top of each other without the cases crushing.
Frozen Products - The freezer and refrigerated merchandising space is typically 30 inches wide and 32 inches tall (two shelves). BJ's shrinks the height as it adds a third shelf. Manufacturers should design their display cases and product packaging to make full use of that space. When a vendor does not do this, its product could lose merchandising space or be displayed in a way that was not intended.
A focal point of the seminar was the importance of designing your organization to meet the needs of the club buyers. Llopis covered all functional areas of an organization. These include the following, along with key tasks for some:
1. Product Sales - product volume plan for manufacturing and broker management.
Llopis believes that manufacturers should teach the employees in these functional areas about the needs of the club industry so that they can design their own controls and operations to meet those needs. Additionally, these functional areas should work together as a team to meet the broad need to efficiently supply the clubs. Executives at each of the three clubs still feel that manufacturers think of the industry as an afterthought when developing products, operations and strategies. Manufacturers who approach club buyers with a functional team approach that is focused on their needs are more likely to achieve tremendous success in this industry. Where product volume and finances permit, vendors should consider creating a mutually exclusive operating unit that focus totally on the club industry.
Cost Accounting - One of the most common reasons for manufacturers' disappointment with the club industry is poor financial planning. Manufacturers underestimate the associated costs of doing business in the club industry. Packaging, demonstrations, shipping and brokerage fees can eat away at net profits if they are not planned for and worked back into the cost of goods. Vendors should budget all of these costs to the penny before making any presentation to the clubs to avoid potential problems.
Pro Forma Profit and Loss Statement - The chart on the right is an example of a typical profit and loss statement for a product that is sold to the warehouse clubs. The consignment percent is for perishable products (refrigerated or frozen products) only and the shipping costs represent the cost of shipping perishable, dry grocery and non-food products to the consignment center, club distribution center or to the club locations. In the end, this manufacturer was able to generate net profits that represent 10% of gross sales.
Fast Inventory Turnover - The high sales volume nature of the clubs, combined with the limited SKU count, creates rapid inventory turnover. Generally, the clubs are able to sell product before they have to pay the manufacturers for it. This enables the clubs to finance their inventory from their working capital. For example, the chart below displays the 30 day progression of toilet tissue sales at a typical club. On day one, a truckload of toilet tissue that costs $50,000 is delivered to a warehouse club location. The terms of the purchase are net thirty days. Toilet tissue is one of the highest volume items in a club and some locations can sell the product in two weeks. After fourteen days, the club has generated $55,000 in revenue (9.1% gross margin). On day fifteen, another truckload worth $50,000 is delivered. The second purchase of $50,000 is made with the revenue from the first purchase and the club never had to use its own cash. Its accounts payable now stands at $100,000. After another fourteen days, the club generated an additional $55,000 in revenue. On day 30 another truckload worth $50,000 is delivered and the club sends a check for $50,000 to the vendor for the purchase that was delivered on day one. The result is simple. The clubs are frequently able to use the vendors' money to finance inventory purchases. For financial analysts, a key figure to track this phenomenon is the accounts payable ratio which measures the percent of accounts payable versus inventory. In our example, the ratio is 200%. In the real world, the clubs are slightly below 100%, but the closer they come to 100%, the closer their overall inventory situation is financed by vendors.
BJ's Half Pallets - Unlike Costco and SAM'S, BJ's merchandises product on a shelf above each pallet in the dry grocery and non-food departments. BJ's asks its vendors to supply them with pallets that are half as tall as the typical pallet so that it can easily slide those pallets under the shelves. BJ's uses the shelves to stock more SKUs and to provide its members with a greater selection. This half pallet program is being rolled out to many categories and is the main reason that BJ's is able to stock approximately 6,000 SKUs versus approximately 4,000 at a typical Costco or SAM'S location.
Cost Reduction - The warehouse clubs are constantly searching for more efficient ways to manage their business. Once savings are found and verified, it is industry policy to try to further reduce the cost of goods. One example is Costco's film developing program. In the past, a member would drop off his roll of film in one package and, when he picked up the pictures, they would be in a different package. Costco developed a new package that is used as both a drop off and a pick up package. Costco saves money, as it no longer has to produce or pay for two packages and it is easier to track one inventory item than two.
Wait, Wait, Wait, Hurry Up - In many cases, "wait, wait, wait, hurry up" is the motto of the club industry. It can take buyers a long time to make decisions, but when they finally decide on a product, they want the manufacturer to react quickly and efficiently. Manufacturers can gain competitive advantages if they are prepared for the speed necessary to supply this industry and can react to opportunities. The following true example shows that opportunities can come from anywhere. A buyer planned to purchase two in-and-out items for the 2000 grilling season. The first item was to be purchased from Vendor A and delivered the week of May 8, 2000 and the second item was to be purchased from Vendor B and delivered the week of May 22, 2000. However, in late April, 2000, Vendor A notified the buyer that it would not be able to meet the scheduled delivery date. The buyer contacted Vendor B to see if it could ship early. Vendor B was able to meet the May 8, 2000 delivery. As it turned out, Vendor B's product sold very well and the buyer committed to an additional four in-and-out promotions during the upcoming year. The buyer decided to cancel Vendor A's order as a result of its inability to meet the initial delivery date and searched for a new product.
Field Presence - Manufacturers must monitor their products at the club level. By doing so, merchandising problems can be found and corrected, product demonstration effectiveness can be observed and new ideas can be gathered from other vendors. Club buyers appreciate the hard work that goes with a consistent presence in the clubs and are more likely to do business with those manufacturers, as they tend to be more knowledgeable and experienced.
Club Industry Myths - The following are three common myths about the warehouse club industry and the reasons each is not true:
1. Myth - The club industry is all about price.
The industry is actually about understanding how the clubs operate and managing your business and operations in a comparable fashion.
2. Myth - Clubs only focus on brands.
As the warehouse clubs have shown with their private label programs, the clubs focus on providing value to their members. If a club can create a product whose quality exceeds the competing national brand and is able to retail it for less than that national brand, then it will develop that item. Also, a number of manufacturers have created brands exclusively for the club industry and those brands have become so successful that the vendors have expanded distribution to the supermarkets and discount stores. While existing and recognized brand names are very important to the club industry, manufacturers can leverage the size and scope of BJ's, Costco and SAM'S operations to introduce products and brands that do not currently exist.
3. Myth - Club margin structure makes it difficult for a vendor to make money.
As the clubs have shown, there are quantifiable benefits that are associated with the fast inventory turns, high sales volume and brand exposure of the club industry. Manufacturers should analyze those aspects of the industry to find savings.
One manufacturer that attended the seminar discussed its distribution program with one of the clubs. In this case, as part of its program, the manufacturer provided the club with a pick up allowance at its manufacturing and distribution facility in the South Central part of the United States. The club would pick up product at this facility for all of its locations. For its East Coast locations, it would deliver product directly to its distribution or crossdock facilities. For its West Coast locations, it would take the product to Chicago and ship it by train to its distribution or crossdock facilities. The net cost of the item, even though it traveled further to get to the West, was actually less expensive than the net cost of delivering the product to the East. The manufacturer stated that the savings that the club generated for its West Coast locations was passed onto the member in the form of lower retail prices. This is a perfect example of how the clubs constantly search for savings and when those savings are significant, the member benefits as retail prices are lower.
Video Demonstrations - One seminar attendee said that video demonstrations are a good investment at SAM'S and sometimes come with an added bonus. Such demonstrations cost $40 per item for one week. However, depending on the club and the video demonstration location, the product may be placed on an end cap at no charge to coincide with the demonstration.
Effectiveness - Another manufacturer that attended the seminar brought up the point that product demonstrations are inherently more productive at Costco than at SAM'S and BJ's due to the fact that Costco generates significantly higher average weekly sales per club.
Split Demonstrations - Costco does not encourage vendors to do split cost demonstrations. In the past, Vendor A and Vendor B would be able to share the cost of one product demonstration using each other's products. However, Costco wants Vendor A to pay for one full product demonstration using Vendor B's product and wants Vendor B to pay for one full product demonstration using Vendor A's product. In this scenario, Costco gets two products demonstrations where it would have only received one in the past.
When evaluating potential warehouse club brokers, manufacturers should first become knowledgeable about the club industry and they should interview three or four brokerage companies. The following guidelines are a good basis for evaluating those brokers:
1. Has the broker been successful with products that are similar to your own?
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