R&FF Retailer: Get Your Hand Out of My Pocket!

Discussion
Apr 08, 2008

By Vinnie Vendor

Through a special arrangement, what follows are excerpts of a current article from Refrigerated & Frozen Foods Retailer magazine, presented here for discussion.

Rhonda, you ignorant scut. (Look it up, sweetie.) First of all, might I just note here that the “dog” that we are taking off your shelves is doing very well in stores that match your chain’s demographic (you may have to look that up, too) all over the country. But since you botched the introduction and merchandising so badly, I’m not entirely surprised at your lousy results.

And yes, Rhonda, we do want our new product on your shelves, and badly. It’s already racking up sales far higher than products it has replaced at other chains. You’re right to say that we are both missing opportunities here. The longer this takes, the more it costs everybody.

But pray tell, what did you do with all the markdown money we already gave you? Because while it worked out to 50 cents a package, we saw only about half that come through to the shopper. And there was no real merchandising we could find. So what happened to the money? Were you planning a second 25-cents-off promotion at Christmas? I hope not, because you know it’s best to just take one deep cut quickly and be done with it.

I don’t know. Perhaps you bought a new car. But knowing how well you move product, I doubt that even a Ferrari would move for you.

The takeaway: Retailers shouldn’t be greedy with markdown money, and should pass it all on to shoppers.

Discussion Questions: Do you think retailers are still being overly abusive with markdown and coop requests from their vendors? What’s the best way to improve this part of the retail/vendor relationship?

[Author’s commentary]
Vinnie Vendor is a pseudonym for a group of manufacturers eager for industry improvement. Messages for Vinnie are being taken by Warren Thayer, the editor of Refrigerated and Frozen Foods Retailer, at thayerw@bpnmedia.com.

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11 Comments on "R&FF Retailer: Get Your Hand Out of My Pocket!"


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Ryan Mathews
Guest
14 years 1 month ago

Obscure references to rabbit tails aside this is one of the eternal questions dogging the industry.

Simply because “Item A” sells in stores that seem to look the same as a store discontinuing that item doesn’t mean the retailer is guilty of fraud. At the same time, well, some retailers are guilty of fraud.

How to solve this ongoing problem? Who knows. As long as manufacturers continue to pay, some retailers will continue to abuse. And, if manufacturers stop paying, it’s going to get harder and harder to get some new products to the shelf.

So it comes down to dueling greed–the manufacturers’ desire to sometimes put questionable products out there and the the retailers’ desire for new or inflated revenue streams.

Will we resolve it? Probably not in this incarnation.

Peter N. Schaeffer
Guest
Peter N. Schaeffer
14 years 1 month ago

There are honest retailers and crooked ones as well. Unfortunately for the manufacturers, retail consolidation has once again put the retailer in charge and manufacturers are beholden to their customers.

Certainly, markdown money and co-op advertising dollars are included in the price the retailers pay for goods (with the exception of net-net buyers such as Wal-Mart.) Thus, the hardship on the suppliers is somewhat mitigated. But there are times, when business is particularly tough, and retailers’ demands are far and above what would be considered reasonable. There are suppliers who take the high road and refuse to give in to retailer demands, but with the exception of companies like Nike or Ralph Lauren, this could be suicide.

Retailers are passing the markdown money on to the consumer. Take a look at the amount of product sold on-sale or marked down at America’s stores. Over 85 percent of a department store’s business is off-price.

Retailing is tough, supplying them is tougher.

Mark Lilien
Guest
14 years 1 month ago

Every supplier already knows exactly what each retailer will do with markdown allowances, co-op funds, and category management offers. Every supplier already knows which retailers build the displays on the dates promised, and which retailers pretend to build the displays on the dates promised. The behavior is so consistent, and retailing such a public industry, that your competitors have had this information for years, not just the suppliers.

No matter how big you are, if you make your suppliers’ lives hell, ultimately you’re probably hurting yourself, with your customers as well as your suppliers. And suppliers, if you’re breaking the spirit of the Robinson-Patman Act, by favoring some retailers unfairly, that’s no secret either.

Dan Raftery
Guest
14 years 1 month ago

Another old saw that comes to mind during this conversation is “you take cents, not percents to the bank.” In addition to the hand-wringing about retailer dependency on internal margin evidenced above, this industry has another dysfunctional habit: focusing on the points rather than the profits.

Certainly Wall Street’s influence is at work here, but so are a slew of old habits that DPP and ECR tried to kill, but failed. Maybe it’s time to recognize the business for what it really is–food distribution–and to recognize what it takes to deliver.

Rather than commiserating about how the system can’t be fixed, we could figure out a way to legitimize the fundamental processes that keep it working. For example, we could do like the banking industry and sell ownership to those who bail out the companies distributing food.

Don Delzell
Guest
Don Delzell
14 years 1 month ago
In the end, there really is a symbiotic relationship between brick and mortar retailers and suppliers. OK, that’s an obvious statement. Yet, when the two entities do not act symbiotically, both suffer. Let’s not discuss or analyze toward the outliers, but rather toward the bulk of retail activity. Here’s a reality that good suppliers understand: no one cares more about the performance of your product than you. Do not expect a retail executive, saddled with hundreds of SKUs to manage, to take the kind of insightful, proactive and decisive actions behind your product that you would. Pricing, certain software companies to the contrary, is not an exact science. And very few retail companies have the resources (technical and human) to quickly and efficiently analyze selling trends and determine relative price elasticity around the markdown options which exist. If you, as a vendor, want your markdown money used properly, then take the responsibility to model the outcome and address the problem before it becomes insolvable. Yes, a dollar spent earlier in the PLC is worth more… Read more »
Robert Emery
Guest
Robert Emery
14 years 1 month ago
Markdown? Coop? Slotting Fees? Marketing Support? Promo Allowances? Extortion? Bribery? Category Captains? These terms all conjure visions of deception, misdirection, and fraud. As a child and for a very short time, I was able to defraud my younger brother and trade my nickel for his dime by showing him that the nickel was bigger. This quickly ended when he converted both to the their equivalent in pennies and saw the true value. Are these remanded funds, regardless of whatever incarnation they take, being measured at store level in the dimension of profit contribution. Is the retailer losing in the exchange? There is an old riddle that asks, If I hire you for 30 days and gave you the choice of one million dollars up front or a penny the first day and double it every day for 30 days, which would you accept? Most retailers are taking the million and forfeiting the compounding value of numerous retail locations. There is a point of diminishing return for the million up front. If you took the million… Read more »
Gene Hoffman
Guest
Gene Hoffman
14 years 1 month ago

That refrigerated and frozen thought-provocator, Vinnie Vendor, has apparently been listening to the sound of the suppliers’ wail. Doesn’t he realize that Deep Pockets are like a dance floor? When a retailer sees them he/she is inclined to dance to a much faster extraction tempo. Cut down the size of those pockets and the music gets more mellow.

Marc Gordon
Guest
Marc Gordon
14 years 1 month ago

Large chains have for a very long time forgotten that without vendors, they have no products. And without products, they have no business. But despite that concept, retailers still seem to think they are doing their vendors a favour by “letting” them place products in their shelves. And as such have their hands out for plenty of discounts and rebates.

It would be nice to live in a world where vendors and retailers understand that there can be a win-win situation when it comes to merchandising. However from what I have seen, it will never happen. Too often I see large retailers squeezing smaller vendors, and large vendors making unreasonable buying demands on smaller retailers.

Can all this be good news for the consumer? Not when their favourite product’s manufacturer or retailer has been forced into bankruptcy.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 1 month ago
Some years ago I was hired by Meijer as a consultant to meet with manufacturers in their stead to offer mea culpa[s]. I was tasked with solving two problems: 1.) Meijer finally realized that manufacturers were bypassing them and going to the second-largest players in various markets with special promotional funds because they skimmed less off the top and passed more along to shoppers; and 2.) When Meijer set up appointments with manufacturers’ marketing departments (who controlled the special funds) to pledge better performance and get those funds back, members of the sales departments showed up at the meetings instead of marketing department representatives. We enjoyed some success in this endeavor. Retailers budget brand dollars and assign them to various projects. By far, the most popular “project” for brand dollars is the bottom-line profit number on the retailer’s annual balance sheet. At one of my supermarket advertising stops, my annual coop ad income budget was almost $100 million and my ad spending budget was $22 million. You do the math. The old saw, “supermarkets make… Read more »
Ed Dennis
Guest
Ed Dennis
14 years 1 month ago
The national landscape is littered with the remains of “chain retailers” who have gone bankrupt. I don’t know of one case where the retailer didn’t look on vendors as profit centers. On the other hand, we see retailers who prosper and seem to do better and better every year. I will promise you one thing, the difference between the two examples above is their attitude toward their customer. In case one, the customer is hardly recognized, a gray mass controlled by deceptive advertising, disappointed by OOS, etc. The other case worships the idea of delighting the customer. In case one, allowances are seen as a profit center, in case 2 they are seen as a way of increasing value to the customer. I can remember a time in years past that vendors used coupons to force distribution, to insure sell through and in general take control of their product marketing. This still works, but moves the volume control from sales to marketing. Shouldn’t marketing be in charge of volume and sales in charge of distribution… Read more »
Dan Gilmore
Guest
Dan Gilmore
14 years 1 month ago
I know a little about markdowns and allowances, but am by no means an expert. But the above comment that many grocers earn more profit from allowances than product sales, often heard, says something interesting if true. It says to me that if the allowances were directly in the price paid per unit, the retailer couldn’t help itself (or else would be forced to by competition doing this) but to lower prices based on the lower “purchase price”–and the profit would be lost. Gross margin percents would stay the same, at the now lower price level. But by treating it as a different number, if you will, for accounting purposes, the retailer is able to maintain some discipline with this bounty, and eek out some additional profits, or maybe some in the first place that wouldn’t be had without this funds transfer. Some may remember the computer wholesaler Merisel, which went down in a scandal in late 1990s or so when it turned out almost all of its profit was not from selling gear but… Read more »
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