By Stew Bishop, President and CEO
Spring has arrived in most parts of the country and the landscape is green. At retail, Easter displays have been cleared out for Mother’s Day, Summer BBQs and Graduation. Every year the seasonal displays go up earlier with a plethora of new items stacked alongside traditional favorites. But more items do not always mean more profit.
Whether one is a manufacturer or a retailer, the trick to sustained, enduring profitability is the disciplined limitation of variety with one’s distribution. The businesses that will survive focus on what they can profitably deliver to consumers.
As reported in last week’s Wall Street Journal, the Walmart-led price wars are helping extend the largest food price decline in decades, all the while pounding on their suppliers for lower acquisition costs, as another quick fix for their over expanded distribution across all categories. I remember when Walmart stuck to higher margin hard goods and non-food products. Even when they decided to get into the grocery business, they initially focused on faster turn, larger sizes with higher margins. But now that they have been influenced by marketers brought over from the manufacturing side, whose modus operandi is to garner more space and sales via sku proliferation, they are stuck in the same financial vortex as their suppliers, with a long tail of less productive skus consuming company resources.
How did they get here? Have stores gotten so large since the historic dry goods days because people need so many different things, in so many varieties, or because retailers have been unable to make tough decisions when tempted by the investment in their operation that much higher margin manufacturers are willing to bring?
My wife and I regularly eat at a restaurant in a space that was once an outlet of a successful regional grocery chain, which of course has now moved to multiple spaces more than ten times the size of the original. Did variety seeking become a need versus a want over the time frame that store first opened in the 1930’s, or did the chain just keep accepting more and more new items? Do retailers fear their competitors will have an edge by giving in to sku proliferation if they don’t?
What if they were not afraid? Clearly they could they be vastly more marginally profitable if they were smaller. Aldi and Trader Joe’s, even with their very different product profile, are winning with smaller stores carrying limited items that produce more per square foot on the top line and far more on the bottom. True, both of these retailers negotiate pricing and terms veraciously with their suppliers of choice; but, I would also like to emphasize that they are making choices…tough ones.
It is my assertion that marketers, whose internal political power in a CPG company nearly always outweighs that of any retail operations manager in that same organization, is an unwitting driver of these issues in the marketplace. They are not helped by the finance folks, whether they be the internal employees or external private equity firms, who drive the marketers in even the smallest, developing CPG manufacturers to create unending varieties of ideas. And when a really new idea does come along, these same entities ride that idea with as much variety and spinoff as is financially feasible, hoping for a return on investment, typically packaged as a flip to a larger manufacturer.
Can manufacturers and retailers create more of a bottom-line focus moving forward? Is this not what investors ultimately want?
The fastest growing CPG retailer in most categories has become Amazon, as its investors’ willingness to continue to bet on the come for future profitability continues to be extraordinary. With them also moving in the typical variety seeking direction, literally carrying everything under the sun, traditional retailers are competitively teased even further into the financial vortex. But in spite of Amazon’s continued push to add products, must traditional retailers do the same?
I believe their survival depends upon doing something very different. Their response should be two fold: 1) Evolve to smaller retail outlets that are easier to shop and focus on high-turn inventory. 2) Exercise more courage and discipline in dealing with manufacturers who wish to over-distribute their stores. Most retailers charge “slotting” because they have realized the cost of “me too” and “flanker” sku’s, but how about just saying no as an option?
What about manufacturers? Not only do they have immediate opportunities to prune current product portfolio; but more importantly, they must exercise greater discipline with their longer term plans for capital investments. And here’s an idea as I prepare to discuss pricing in my next blog post….why not use this opportunity, where large retail customers are asking for lower acquisition costs, to actually do just this on the sku’s one can afford to do so and simply remove the rest? Although topline would likely suffer; a seemingly taboo idea in the current world of business development and investing, one would be surprised how much healthier the bottom line would become…like the verdant spring.