Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Dairy Buyer magazine.
It's a tricky road ahead for wholesalers with both risk and opportunity as the market evolves, according to Paul Weitzel, managing partner, Willard Bishop, the Barrington, IL-based consultancy. While the trend is still for major chains to gobble up independents, "I think we could see an easing of consolidation as people try to get closer to shoppers. If that happens, more independents will crop up and they will need wholesalers. Everyone is still looking for scale, but a lot of people have found that bigger didn't always mean better," he said.
This could mean fewer big retailers, and perhaps even some spin-offs of small chains down the line. Of course that's conjecture at this point -- and in this poor economy people are focusing on efficiencies. For wholesalers, Mr. Weitzel pointed out, fuel prices and SKU rationalization are key issues.
Let's take fuel prices first. The move to consolidation has led to fewer DCs serving larger areas than before. But as the economy improves, you can expect fuel prices to rise. If fuel hits $4 a gallon again, there will be pressure to keep borderline DCs open to stay closer to customers.
But SKU rationalization is the biggest issue here, since independents want more variety so they can differentiate. Mr. Weitzel said 60 percent of SKUs in a typical DC cover 95 percent of demand. The trick, then, is to slowly convert the other five percent of demand into your core assortment.
The more you can cut away unproductive SKUs, the better you can leverage your assets and build ROI. Everyone knows how Walmart had to backtrack on its reduction in SKU counts since customers rebelled at loss of their favorite items. "People have learned you have to be smart about SKU rationalization," Mr. Weitzel said. "You can't just take 15 percent cuts across the board."
But in a flat sales environment, growing profits calls for cutting costs -- and slow inventory is an obvious cost and drain on working capital. Not only that, fewer SKUs in the warehouse can mean tighter pick zones and better labor efficiencies. Mr. Weitzel suggested wholesalers measure the cost of carrying specific items and reflect this in menu pricing. Helping retailers maintain shelf compliance on planograms can also help weed out slow movers. "None of this is easy, but it's important," he noted. "It's all a delicate balance."
Discussion Questions: What are the risks involved in wholesalers' own efforts at rationalizing SKUs? Should wholesalers be setting themselves up to serve larger retailers at the possible expense of independents?