Warehouse Club Focus - November 1999
A profitable warehouse club relationship is an accomplishment that is earned over time. While several manufacturers have sold their products/brands to the warehouse clubs at one point or another, few can claim to have had continuous leadership presence. This article can guide your organization (large or small) to build it's own leadership path.
To attain profitable warehouse club business requires an understanding and compliance against a set of internal and external factors. These "necessary success factors" encompass two different compliance responsibilities that must function interdependently to create long-term and stable warehouse club growth.
Internal factors require a manufacturer to focus on organizational preparedness to profitably grow and compete in the warehouse club arena. External factors require a manufacturer to work closely with club buyers and their brokers to understand the rapidly evolving trends of the warehouse club industry (including its members). Management of both the internal and external factors relies heavily upon a manufacturer's ability to create a balance of focus between the two. This balance is necessary, as an organizations' ability to adapt internally to the constantly evolving external factors will allow their products/brands to gain a competitive advantage. While it sounds simple, many manufacturers weigh their warehouse club strategies too heavily against short-term successes and their existing retail/foodservice strategies. Subsequently, they fail to grow and compete profitably.
The following outlines the primary elements that truly identifies and captures the interdependency of the internal/external factors and how they can best determine your ability to create profitable warehouse club relationships.
To support entry and development in the warehouse club business, one must critically examine the resources, products and services that its organization can offer. This is referred to as the functional design process; the process that identifies the operating infrastructure and value chain to best optimize the performance of your products/brands (see figure 1).
Figure 1:
Like retail and foodservice channels, the warehouse club business has its own unique personality and set of service requirements. As a result, the organization must treat the warehouse club business as such by applying the necessary management resources that allow it to function as a mutually exclusive business unit. Most companies fail to grow and compete when they don't. This is especially apparent when manufacturer's categorize/define the warehouse clubs as an "extension" of their existing retail and/or foodservice business as their lack of warehouse club knowledge is reflected in their product/brand management strategies.
Therefore, determining the functional design is the critical first step for manufacturers to create a leadership presence with the warehouse clubs. The functional design is a valuable tool that allows a manufacturer to accomplish the following:
The functional design represents the "backbone" by which a manufacturer assembles the organizational infrastructure to create its warehouse club value-chain: that go-to-market strategy that defines how and why a company's products/brands succeed and how they can facilitate profitable customer relationships. As noted in figure 1 the functional design focuses on optimizing your warehouse club value chain objectives and strategies to ultimately determine "push (attaining product distribution)" and "pull (product purchase & consumption)" tactics for your products/brands.
To maintain strength and focus in your functional design, the following external factors must be continually monitored and reviewed:
A manufacturer (large or small) must possess a strong organizational infrastructure to make smart and timely decisions to support the warehouse club business. The development of a strong organizational infrastructure is derived from the functional design and its foundation should focus on two primary areas: 1) decision making accountability and 2) the strategic planning process.
Decision making accountability should be designated through a decision making tree that assigns core departmental responsibilities. The purpose for establishing decision making accountability is to increase speed in warehouse club execution. The decision making tree should be developed as part of the strategic planning process whereby organizational roles, responsibilities and departmental support functions are designated to proactively service warehouse club demands for it's products/brands (see figure 2).
Figure 2:
Based on the size of the manufacturer, appointing a warehouse club task force creates a more interactive environment to support business development. This task force should be lead by a senior management member who is accountable for profit & loss and/or general management responsibilities to allow the decision making tree to function smoothly; with less bureaucracy. Figure 2 illustrates the most optimum task force and decision making tree design to succeed in the warehouse club business. These departments should work cohesively as their responsibilities must operate interdependently to maximize value chain strategy performance for their products/brands. You will note that the decisions each are responsible for, addresses a critical external factor(s) that influences the performance of their products/brands.
Finally, do not ignore the importance of strategic planning to support the warehouse club business. Unfortunately, too many organizations view the warehouse clubs as an outlet for the following "short-term" strategies:
While these approaches to the warehouse clubs are options, they are not advisable. The following explains why:
Club buyers are savvy and know what they are searching for from manufacturers. The club buyer is the single greatest resource (asset) to a manufacturer; but this relationship and buyer confidence is earned over time. In fact, buyers do not hesitate to offer recommendations to assist manufacturers who have made a strong effort to introduce their products/brands. However, should a manufacturer appear too confident by attempting to use the same approach and methods that were successful for them in retail and/or foodservice, the probability of failure is inevitable.
4CLUB TIP: Strategic planning begins and ends with a simple tool titled "O-S-T" (Objectives, Strategies, and Tactics). O-S-T is a planning technique that challenges an organization to clearly identify WHAT they want to accomplish (objectives), HOW they plan to accomplish the objectives (strategies) and the ACTIONABLE STEPS that are required to accomplish the strategies (tactics). If you have trouble answering these questions in your warehouse club planning process, you are not prepared to solidify a leadership presence in the warehouse club business.
Now that you have determined your functional design, and have created a strong organizational infrastructure to support the warehouse club business, you must now offer supply chain management solutions to your club buyers fast, free and proactive. As mentioned in the holiday article on October 25th, the warehouse club business manages a merchandising assortment plan that can only be executed through an efficient supply chain. The warehouse club supply chain requires manufacturers to provide on-going cost savings recommendations to enhance category performance. These recommendations include, but are not limited to:
For the warehouse clubs, inventory management, merchandising space allocation and sell-through against multiple SKU's requires club buyers to work with closely with their manufacturers (vendors). Club buyers search for vendors that design their product/brand management strategies to support their supply chain needs. Because the warehouse clubs support strong cost management systems to support their supply chain, manufacturers should recreate this model internally to find areas to control, stabilize and or reduce costs to continually improve their product quality/value attributes.
As an example, Power Insights recently participated in a sales appointment with Sam's Club. During this appointment, the Sam's Club buyer addressed the steps they had taken to enhance the quality/value attributes of their existing frozen products. The following identifies the primarily variables that were viewed as most important to increase category performance both in units and dollars.
Sam's Club felt by working more closely with existing vendors versus inviting "new and unproven" vendors, they could resolve their primary category performance needs. It should be noted that the Sam's Club buyer also mentioned that these steps made it more efficient to evaluate and assist new vendors with their product offerings.
To offer supply chain management solutions, manufacturers must recognize the strengths and limitations within the operational capabilities they offer through their products/brands. These operational capability areas include, but are not limited to product development, sales & marketing, manufacturing, quality control, supply, and administration & logistics. To understand these areas critically is important, as manufacturers must continually improve their functional design and organizational infrastructure to specifically service the warehouse club supply chain that requires flawless service, unlimited product supply, and a cost efficient service program. The following outlines (4) critical manufacturer operating areas to support supply chain management solutions for the warehouse clubs (see figure 3):
Figure 3:
In general, the warehouse club broker has been trained by the buyer to understand and translate their needs to the vendor community. In many cases, a manufacturer can feel that a warehouse club broker works for the club buyers. The fact is -- they do, but not directly as they will work closely with manufacturers to protect their product/brand management strategies that integrate anticipated needs and desires of the club buyer. Subsequently, warehouse club brokers save you time, save you money, and save your credibility. This is important as unlike the retail and foodservice business - you generally only get ONE chance (with each buyer) to prove yourself as warehouse club buyers have the uncanny ability not to forget vendors that made their jobs difficult. In sum, the warehouse club broker increases your success probability, if you listen.
Offering fast, free and proactive supply chain management solutions is the single most important factor in creating profitable warehouse club relationships. As noted in figure 3, these aforementioned solutions contribute to enhance the performance of the traditional warehouse supply chain. In addition, these solutions will give you the competitive advantage to assume a leadership presence in the warehouse club arena.
4CLUB TIP: Take the time to create a best practices supply chain service manual for the warehouse clubs that is supported by your club buyers and broker(s). This manual should become the premise for how you develop your warehouse club value chain strategies and how your functional design and organizational infrastructure should evolve over time. If you don't - your competition will.
Unlike the retail and foodservice business, creating profitable warehouse club relationships requires a product/brand management strategy that emphasizes the following:
It does not require a large manufacturer to satisfy these recommended product/brand management strategies. It fact, it should not intimidate the small/medium size manufacturers from participating as they often offer a more flexible operating platform to comply against these strategic recommendations. Remember that it is the small/medium size manufacturers that are often more prepared than most. For these types of manufacturers have been trained to meet strict product quality, service and packaging specification requirements as contract packers of large private label customers.
According to Vern Hunt, President of Synergy, Inc. a package design company that specializes in club merchandising notes that "large manufacturers have a tendency to retrofit their existing retail packs and position them for the warehouse clubs. They [large manufacturers] must focus not necessarily on the brand, but must focus on creating and selling innovative product concepts. Hunt concludes that, "for small/medium size manufacturers, the product offering [initially] outweighs the impact and importance of the brand. These types of manufacturers can still leverage their brand but must emphasize and sell the product first."
Branding in the warehouse clubs is a process that evolves over time. It generally results from the warehouse club member who builds a confidence and association with the brands' product quality and attributes. The warehouse clubs are aware that they have the power to assist in the brand development process. These "power factors" include, but are not limited to:
In fact, the warehouse clubs constantly monitor their competition to assure that some level of product/brand exclusivity exist within certain categories. Hence, Costco, Sam's Club and BJ's are sensitive to their product/brand mix, as they want to support a proprietary offering for their members. In many cases, this leads to the development of their own private label programs; a program trend that is evolving and that all manufacturers' should carefully monitor while forming their product/brand management strategies.
In conclusion, the warehouse club business is changing the means and ways of the food & beverage industry as they continually strive to reinvent how products/brands are purchased and sold. For manufacturers, the competition is intensifying as participation in the warehouse clubs is expanding. As a result, a manufacturers ability to critically assess and apply the four necessary success factors will determine their ability to create profitable warehouse club relationships. Memorize these four factors and make them a part of your organizations' warehouse club business development language. To recap, they are:
Glenn Llopis brings extensive experience in the food & beverage industry where he has served in senior management positions for both large and small manufacturers. Llopis offers an objective viewpoint to the warehouse club industry as he brings multi-channel expertise. He specializes in creating "value-based" brand platforms from traditional "commodity-based" product categories.
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