The End of the Line?

Take control of your destiny to survive, improve profits, distribution execs say

LAS VEGAS -- Consultant Kit Dietz, co-author of the American Wholesale Marketing Association's 2006 Distributor Value Equation study, urged distributors last week during the AWMA EXPO session Controlling Your Destiny to change their thinking and embrace strategies that can reverse the trend of steadily declining profits. Failure to do so, he cautioned, will mean the end of the line for some companies.

Tony Frankenberger, vice president of merchandising and procurement at The McLane Co., Temple, Texas, and Ray Ryan, vice president of purchasing and distribution [image-nocss] at Sheetz Inc., Altoona, Pa., also spoke at the Las Vegas event, which offered strategies to help distributors improve profits. Frankenberger discussed McLane's recent decision to use activity-based costing (ABC) to determine pricing practices for packaged beverages, which had been causing a significant profit drain on thousands of truckloads of those products. Ryan outlined the steps Sheetz has taken to apply ABC internally as a self-distributor to help improve decisions about product mix and pricing.

We need to think like the major cigarette manufacturers, said Dietz, noting that those firms are focused on providing shareholder value and take whatever steps are required to achieve that goal. Distributors, he said, should do the same whether they are family-owned or publicly traded companies.

It is critical, Dietz said, to understand the cost/profit relationship of products, vendors, services and customers and then apply it. Pointing out the significant role that distributors play in the success of the convenience channel, as outlined in AWMA's Value Study, Dietz said it is critical for distributors to use that document to educate their customers and suppliers alike about distributor value and the need for equitable compensation.

We have an opportunity to control our own destiny, and we're starting to take action that is long overdue, he said. We bring this incredible value for miniscule profitunacceptable profit. We don't get the financial rewards that we should.

Pointing out that distributors' typical return on investment is only 4%, Dietz said it should be at least 16%. To do that, we need a 1.4% improvement in gross margin. We can get there over time.

The study recommended that distributors improve their pricing policies with heavy, high-cube products like beverages and bottled water in order to receive fair compensation for delivering and handling those products. McLane recently adjusted its pricing policies for such products, and several other distributors also have independently taken similar action since the study was published.

We as an industry do not react to changes in our own environment, Frankenberger said. Change is needed by everyone in this industry.

He pointed out that beverage and bottled water sales have increased dramatically in recent years, but that when ABC was applied, it was clear that his company was delivering those products for less than three-cents per case. McLane delivered nearly 48.5 million cases last year. That was 35,000 truckloads of low or no margin product, he said.

Such policies cannot continue if distributors are to survive and prosper, Frankenberger said, urging companies to understand their own distribution costs and establish their pricing accordingly.

Ryan outlined the dramatic growth of family-owned convenience store chain Sheetz, which now operates 337 stores in six states with 2006 sales of $3.8 billion. To understand, internally, the contribution to profits of individual product categories, the company in 2005 launched a review of its financial accounting system for distribution to determine if there were inefficiencies in cost reductions and visibility to information.

The new model is designed to clarify product cost to allow for more effective management of changes in product mix and cost, Ryan said. It separates distribution expense from product costs, eliminates administrative expenses where possible, streamlines reporting and clarifies the impact of product changes, developing a greater understanding and use of spend management.

The company communicated the new model to all management personnel and it was implemented at the beginning of 2007, he said, adding that it will accurately allocate distribution center expenses and profit to individual items. Net-net cost will be visible to everyone in the company, he said. That is something we never had before.

He added, By accurately allocating DC [distribution center] expenses and profit, the organization will be able to make better decisions around product offering and retail strategy.

Dietz told distributors to learn from the actions taken by McLane and Sheetz. It's not as big a deal as you think, he said, pointing out that by implementing policies that will modestly increase the price of beverages, a huge step can be taken toward improving overall profitability with little lasting impact on consumer sales.

He also suggested that if distributors reconsider their approach to cigarette pricing and use a percentage markup rather than a fixed penny profit system in that category they could benefit from price increases implemented by the cigarette companies. If we fixed the cigarette and bottled water problems, that would be about 80% of where we need to go, he said.

(See related story, left, in this issue of CSP Daily News.)