March 5, 2003 - Distribution Channel Commentary (DCC) # 14 Merrifield Consulting Group

















March 5, 2003 - Distribution Channel Commentary (DCC) # 14

 

Greetings:

    If you know what these commentaries are about, go to “TOPICS” below; otherwise, read on.

 

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If you would like copies of some or all of the past 13 DCC’s, please go to www.merrifield.com and download them. The DCCs are posted under the “article” button. DCC #11, dated 2-12-03, has both an index of all topics from the first 10 DCC’s plus a summary list of a number of previously offered documents that we will e-mail to you upon request.

 

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THIS WEEK’S TOPICS

 

1.       “ACHIEVING SUSTAINABLE PROFIT POWER FOR DISTRIBUTORS”; THE PRESENTATION, THE NEW STUFF AND THE OFFERS

2.       US. FOODSERVICE, PLUS OTHER REFERENCES; KEY ACCOUNT RE-THINKING

3.       READERS OFFER HOW-TO IMPROVEMENTS FOR 10 X 10 MARKETING AND ACTIVITY BASED PROFIT PER CUSTOMER APPLICATIONS

4.       AN INTRO OFFER TO THE BEST NEWS LETTER WITH THE RIGHT PHONE NUMBER

5.       ECONOMIC OUTLOOK WEEKLY READ; WARREN BUFFET AGREES WITH ME (?)

 

1.         “ACHIEVING SUSTAINABLE PROFIT POWER FOR DISTRIBUTORS”; THE PRESENTATION, THE NEW CONTENT AND THE OFFERS

 

On March 15th, I am scheduled to speak to the Health Industry Distributor Association’s (HIDA) Executive Conference in Bonita Springs, FL on the topic that is in quotes above. For users of our video, “High Performance Distribution Ideas for All”, this presentation includes a lot of new thinking that would

 

easily double the methods and tools for managing change that is in section 5 of the video. For regular readers, it builds substantially on what is touched on in the article entitled “Why Aren’t Best (distributor) Practices Happening” which is one of our few new articles that is now posted on our still evolving web site. Check it out under “articles." If you would like 14 more articles under the e-booklet title of “Different Tactics for a Different Kind of Downturn (45 page word document), email karen@merrifield.com and request the “e-booklet”.

 

The feedback from the video users who are already through the total tape drill tells us two important things:

1.       The video is a successful corporate transformational (from “good to great”) tool that gets enough key players and employees educated, motivated and confident enough to make breakthrough results happen.

2.       There still is enough trepidation and reluctance from traditional thinking, hide-bound, although often solid, past contributors to undermine some of the collective will and momentum of an organization to move ahead.

 

The new problem or question being raised is can we get even better at transition management methods and skills to cope with this anti-change energy? Yes! Although the new stuff in the handout would probably not have helped to accelerate the Catholic Church’s 300+ year acceptance process of Galileo’s new conclusions about the heavens, it could help more distributors to get more employees on board faster to be part of new solutions. There will always be, however, some orthodox die-hards and perhaps some too timid to be responsible commonwealth capitalists; they may ultimately have to join someone else’s payroll.

 

For readers interested in improving their change management skills and results, here are a few proposals:

1.       If you have already run all of your employees through much of the video or have that intent, would you be interested in attending a 1 to 2 day forum with other similarly qualified distributors (only one per channel) to help me work on Edition II of the video product? If so, please let me know. If and when there is enough energy for such a confab, it will happen!

2.       If anyone would like a copy of the HIDA handout, here are the (e) logistical facts and options. The handout is 20 pages which includes 78 PowerPoint slides and 7 pages of non-slide exhibits.

a.       We would be happy to email an abridged version of 8 pages to anyone with the broadband patience for a big file. Email karen@merrifield.com and request the “abridged HIDA handout."

b.       We would be glad to mail a free, hard copy of the total handout to any past client or video purchaser. We will put the handout in the box for all new video purchasers. Check out our web site under “articles” for a current list of resellers of the video who typically sell the video for 50% or more off of our “list price” of $995. If you don’t have an affiliation with one of the resellers, it’s easy to get some group that you are affiliated with to become a reseller; call us for details.

 

2.         US. FOODSERVICE; SOME WEB DOCS; RE-THINKING KEY ACCOUNT TACTICS 

 

On Monday, Feb. 24th, Royal Ahold of the Netherlands (NYSE: AHO) announced that they had a $500 million dollar overstatement of earnings from improper accounting in their US Foodservice (USF) distribution subsidiary. Ahold’s stock price tanked by 60%+ and they are now in the process of beginning an asset liquidation sale because they have too much debt and too few depreciating assets. Plus the company has a much lower interest rate service capability than they had been reporting to the banks.

 

Who’s U.S. Foodservice? It’s a $17.6 billion dollar distributor of food products to the eat-away-from-home market (not the grocery food distribution channel). They have about 300,000 customers served out of 100 DC’s. Until now, the company had been a big roll-up “success” story that started in 1989 when

James Miller did an LBO of a roll-up of foodservice companies put together by Kraft in the ‘80s. Starting with sales then of $600 million, Miller did a lot of deals, including going public in 1994. The cumulative goodwill that Ahold must have on their books for the acquisition costs in excess of book value -before, during and after their acquisition of USF - must be staggering. Prepare for huge write-off announcements.

 

What did U.S. Foodservice exactly do to over-report $500 million in earnings over the last two years? We can only speculate, but it is probable that management reported more profits from promotional allowances than they actually received or deserved from product sales. Public companies like Ahold that have borrowed heavily to buy companies at market bubble prices are under pressure from both the markets and their lenders to keep reported profits growing while they are actually declining in today’s post-bubble economy. The heavy pressure, along with big incentive plans, makes subsidiary managers do illegal reporting activities.

 

For a case example of how USF has been dealing with their suppliers, go to Google and type in “How Olive Oil Led to a Dispute at US Foodservice”; it was a 02-28 Dow Jones newswire. It’s basically dishonest, hardball action by purchasing executives. I think it should raise these questions in any supplier’s mind:

a.       Is this a long-term win-win strategy for the suppliers to such an actor?

b.       What should current suppliers do as far as forward-thinking investment of extra resources into a company with rollup-rot and/or hardball, make-it-off-the-suppliers purchasing tactics?

c.        How do you say no to a lot of volume today? Fleming may now wish that they had decided K-Mart was moribund as I did in March of ’93. Back then, the K-Mart CEO, Joe Antonini, had a special meeting to apologize to suppliers for being so abusive while trying to make continuous replenishment work. Fleming instead went on to become the sole supplier for the groceries to K-Mart’s supercenters that were a poor, higher cost imitation of Wal-Mart’s.

d.       How much volume should a supplier have with any one customer in a consolidating customer world?

 

For more food for thought on these issues I can recommend two web articles:

a.       CIT Financial Services and Home Furnishings News did a survey on concentration levels for the sales volume of home goods manufacturers to big retailers. Here’s the URL for the news release dated 02-24: http://www.prnewswire.com/micro/cit. The gist is that concentration of sales is increasing in these particular channels with the top three customers (think Wal-Mart as most everyone’s #1 customer and growing) and that once a customer gets passed 10% of a supplier’s sales they start to get concerned. For your business, the true answer to the concentration/risk question is "it depends." If your number one account has survival and growth prospects like Wal-Mart’s, put more eggs in the basket and watch it very closely.

 

For an article worth reading very carefully for ideas on how to partner gazelle accounts, check out this excellent one that was published in a recent Fortune magazine: “One Nation Under Wal-Mart” at http://www.fortune.com/fortune/print/0,15935,423053,00.html?

 

Here are a few quotes and comments out of the Wal-Mart article that relate to USF’s hardball tactics and how to partner gazelles better than the competition:

 

“There are two types of (supplier) executives these days: those who have learned to play by Wal-Mart’s rules and those who still haven’t learned the right answer to the (Wal-Mart) cheer’s closing question – who’s No 1?” The answer is the customer! Always! Whoomp!”

Case examples of supplier do’s and don’ts from the article are: Disney declined to allow one of their characters to do an in-house Wal-Mart video to get associates pumped about selling a new DVD. It was against Disney policy. Jeff Katzenberg, CEO of DreamWorks, on the other hand, made three trips to Bentonville to participate himself along with a Shrek character to do the “give me a W” cheer. Sales of the Shrek video set all time records; associates in stores were wearing Shrek ears during the promotion.

 

Newell Rubbermaid gets 15% of their volume from Wal-Mart and that volume is growing at better than 15% per year. They have an office in Bentonville that along with 200 other corporate embassies that surround Wal-Mart headquarters in a ring referred to as “vendorville."

 

“In batteries, perennial third place Rayovac has used a low-cost Wal-Mart uber alles strategy to challenge Energizer and Duracell. Tattered Levi Strauss, once too cool for discount stores, has bet its future on sub-$30 jeans to hit Wal-Mart racks this summer. As for toy companies, if Toys-R-Us goes under (I think that in time it will given their leases, this economy, etc.), and then K-Mart too (which, I believe, will not make it successfully out of bankruptcy), are you selling 60% of your toys to Wal-Mart?”

 

“How does Wal-Mart choose to wield this (purchasing) power (over suppliers)..cracking suppliers’ heads and stealing their lunch money(?)…” In a survey of 122 manufacturers Wal-Mart towered over others as the best retailer to do business with."

Wal-Mart is famous for boiling all funny money terms, rebates, special fund allowances down to an everyday lowest price, then they partner with information sharing to keep suppliers’ plants and trucks running full and steady. “They would rather extract fat from the process than extract their supplier’s profits." Can you either find or teach the 3% of your potential customer base with good long-term, profitable growth prospects to buy like this?

 

“Should you enjoy the privileged position of category manager…start thinking like a retailer (not a product line, brand, ship-it-now, load-the-channel supplier). Suppliers to independent distributors should stop pressing them to stock more of a line and ask instead how to help the distributor sell more of what they already stock to active customers that are the best prospects for incremental buying (see topic 3 below for more on this).

 

“How much more dominant can Wal-Mart get?" Two times bigger in 5 years? (says) CEO Lee Scott. “Sure. Could we be three times bigger (in time)? I think so”.

 

What are their organic, innovative initiative targets to keep growth going? Some areas mentioned in the article were: Small-Marts; used cars; $199 PC’s running Lindows; wire transfers and money orders; online DVD rentals. “The company has long excelled at using itself as a testing lab, tweaking and refining a concept until – boom - its everywhere.”

 

In past DCC’s I have written on key account identification and marketing measures. Here are some references: DCC 1.1, 7.3, 9.3, 10.3, 13.2. And, in our “High Performance…” video modules #ed: 3.1,

3.4-7, 4.11- 13.

 

It still amazes me how many manufacturers and distributors are still so activity oriented with the un-spoken assumption that selling more new products to more new customers is a good thing. I think that they first need to focus a lot harder on selling more old products to the right few old and new target accounts. In a post-consumer, post-bubble, mature, consolidating industry channel, 97% of the players could do a much better job of:

 

1.       Measuring the profitability of all customers in a ranking format. Identifying the much smaller sub-group of profitable accounts that are growing faster than their competitors in a responsible, organic way instead of by financial engineering and “cracking suppliers’ heads.” Finally betting your company’s resources according to the “discounted cash flow, net present value” potential profit stream from such accounts. It will make you want to spend 80%+ of your marketing resources on less than 5% of your accounts and shaping up or out a lot of going nowhere marginal accounts. If some take their losing activity to paralyze your competitors and free up more resources to focus on the ones with a future, all the better.

2.       Defending and further penetrating their top 5 to 10 most profitable customers with total team focus (like Newell Rubbermaid, et. al, have done with Wal-Mart).

3.       Identifying and targeting the 3% or less of the existing customers within a company’s (or a branch’s) “number 1 niche” that are “true gazelles” and partnering them. Even if you have been out of the account, if you do a full-court, full-team effort with the theme of “how can we build your bottom line” effort like DreamWorks, Rayovac and Levi Strauss have decided to do with Wal-Mart, then you can beat the incumbent. They probably have a sales rep on the account following company policy (like Disney) and are too busy being democratically responsive to all of their accounts. Don’t wait, though, to pursue this target partnering strategy with gazelles until you are desperate like Rayovac and Levi Strauss. It didn’t take too much to realize, for example, at the end of 1990 that someday Wal-Mart was going to be the biggest grocery retailer in the US, which they now are, or in 1993 that K-Mart wasn’t going to make it.

 

3.    READERS OFFER HOW-TO IMPROVEMENTS FOR 10 X 10 MARKETING AND
ACTIVITY BASED PROFIT PER CUSTOMER APPLICATIONS

 

In last week’s DCC, we covered the “wisdom of 10 x 10 selling” (13.2 dated 2-26), and we were pleased to uncover the following two enhancement ideas from clients:

 

One client has an elaborate activity based software capability that can determine not only total customer profitability, but break it down further by these sub-categories of business – special order, direct ship; special order, indirect ship (comes to the DC first); normal warehouse activity; and, integrated supply, on-premise volume. They discovered for one account that the total average, estimated profit before interest and taxes (PBIT) as a percent of sales was 9.8%, but the warehouse volume was a slight loser while the special order business was averaging over 16%!

 

The two solutions for this discovery? First, work with the customer on warehouse orders to both lower the customer’s total procurement cost by re-thinking their order quantities to get a bigger average order size which will also reduce the distributor’s transactional activity costs to make that chunk of business profitable.

 

Second, pull a ranking report off the database for all industrial accounts ranked by the number of special orders that they have placed in the past year including columns for total sales, total margin, average margin per order and estimated PBIT percent. Then think about offering some sub-group of these full-time professional buyers two extra services regarding special orders:

a.       A fast “P and A” response time to get paper off the PA’s desk. If a PA should call for a price and availability quote, promise to get back to them within a half a day by finding the person at the manufacturer who can at least quote an earliest, likely and latest date for when the product will be shipped. Then, let the customer put in the date they want. They will put in the latest date to be safe, BUT THEY GET THE PAPER OFF THEIR DESK IN RECORD TIME WHICH THEY LIKE.

b.       CREATE A SPECIAL SUMMARY REPORT for these target buyers OF ALL OF THEIR OUTSTANDING SPECIAL ORDERS AND BACK ORDERS. This tool will allow PA’s to answer in-house questions regarding where/when for specific items by looking quickly at one sheet. Send this report to them every two weeks or as requested. Every time it arrives, it reminds them of your great response time, get the paper-off my desk service. And, the tool only works if THEY BUY ALL OF THEIR SPECIAL ORDER NEEDS FROM YOU WHICH AT 16% PBIT MARGIN COULD BE A GOOD THING.

 

The second client-suggested another sub-application for 10 x 10 selling as a SOP to best niche suppliers that keep pestering them to stock more of the suppliers’ non-turning, non-selling special items.

(Test question for manufacturers: Why don’t you offer to take back all of the slow-moving inventory from your distributors each year at no charge? Answer: you would go broke stocking several years of excess production for total annual demand for many of your products. Well right now, your distributors are sharing the total carrying costs of this inventory. Maybe as an extra service for a supplier’s best X number of distribution locations (not the entire chain?), you might do a take back concessions in exchange for the 10 x 10 sub-app below).

 

How should a distributor parry a suppliers whining about stocking and selling more new items? Suggest that you both focus on the manufacturers top 10 items that are already movers out of the distributors warehouse. Then go down the customer profitability ranking list far enough to find 10 target accounts that should be likely to buy those niche items but aren’t. Then, the supplier can work with the reps on those accounts to try and convert them to achieve the highest, incremental, flow-through to the PBIT line for both companies.

 

4.       AN INTRO OFFER TO THE BEST NEWS LETTER WITH THE RIGHT PHONE NUMBER

 

In the o2-19 DCC, topic numbered 12.4, I lionized Tom Gale, the publisher and editor of “Modern Distribution Management”, the best newsletter in the independent distribution channel space. I had persuaded him to give you a great free trial deal that was good until the end of February, but I gave you the right, but wrong contact phone number. Their recent move caused the problem. So, read DCC 12.4 on our site and jump on the extended offer which is now good to the end of March and contact Chris at 651-771-5420 to get the “Merrifield deal”, a user name (your email address) and to choose a password. Then, roam the best archive of distribution management literature in captivity at www.mdm.com.

 

5.       ECONOMIC OUTLOOK WEEKLY READ; WARREN BUFFET AGREES WITH ME (?)

 

It’s always nice when the all time greatest security investor comes out and endorses your view on things. If you go to www.fortune.com, you can read what Warren Buffet has to say about investing in the stock markets (don’t), junk bonds (very selectively and he didn’t offer specifics) and what he thinks of derivatives (time-bombs waiting to go off in global financial markets.) Buffet already personally owns over 130MM ounces of silver stored outside of the US in some most safe haven place where the US government can’t take it away from him like gold was confiscated from US citizens in 1933.

 

If Warren thinks that we are in a secular bear market and that current trailing earnings valuations are too high by at least half, what does that say for the publicly traded roll-ups like USF with all of their acquisition goodwill left over from the go-go late 90’s? What kind of exit strategy are the LBO roll-up players expecting directly or indirectly from the stock market in the next five years? Maybe its time for everyone to figure out how to become a high performance service company that can generate excess cash-flow sufficient to pay down debt and eventually dividends until the markets come back in the more distant future than most had assumed.

 

That’s it for this week. Keep the comments and emails coming.

 

Warm regards,   Bruce