Thursday, June 2, 2011

The Case Against Category Management – SRDC and Suppliers -2

You, not having knowledge of items in categories, leads to all kinds of opportunities for suppliers to compete on other issues besides price, and as the old saying goes, “when elephants fight, natives get killed.” Discounts for a given percentage of cooler space, wall space and shelf space; rebates on deals and shippers, have an ominous side that’s not helping anyone.

I got a call from a store operator the other day who told me he now buys his cola products from Sam’s Club because his distributor wanted 70 percent of his cooler space to give him a decent price. I’ve known of cases where retailers have switched suppliers over product rebates, even though his first supplier offered him a fair deal.

It all boils down to this simple fact: There is only a finite amount of profit to be made on any item, and disguising it with deals, rebates, discounts, free big-screen TVs and trips to play golf in Maui, only serve to screw up everybody’s books.

I had a meeting with a large grocery distributor last week who echoed the same feelings. Suppliers don’t like these kinds of arrangements any more than we do, but suppliers will continue to come up with all sorts of gimmicks until retailers put their foot down. As long as you don’t know the actual cost of the products on your shelves, suppliers have no better alternative than to chop your income into little, bitsy pieces and use it for incentives to make you think you’re getting a better deal.

I often wonder if retailers really don’t know how much they paid for that Las Vegas junket their supplier provided out of the goodness of his heart. Merchandise and vacations you might feel are ill advised in your current condition, don’t get a second thought when they’re free – and that’s the problem.

Last week, I was in a store and found hundreds of cases of cola and beer that the retailer couldn’t possibly sell within the next six months. If this customer spent 1/10th the effort he spends on worrying about employees smoking his cigarettes, on how much this dormant inventory is costing him, he’d be a great deal richer. There is something to be said about saving money by ordering ahead, but it must be based on intelligent facts, and not on the promise of deals and rebates offered by suppliers.

Hidden from view is the cost of the products you acquire and how much it cost you to maintain that level of overstock, and of course the cost of confusion it causes in your stores

The minute a product arrives, the value of that item begins to deteriorate. At today’s borrowing rates, $60,000 (at cost) of inventory cost an additional $15 a day just to store it. If you have 100 stores, it’s an easy bet you’re losing $1,500 a day because of this single issue. Even a one-store, Mom & Pop is losing $450/month just on the cost of storing their supplier’s inventory until a customer buys it. The longer unnecessary inventory sits in you stores, the more profits you are losing.

Let’s consider the average convenience store having $100,000 worth of retail inventory, with annual non-fuel, retail sales of $800,000 and the cost of money at nine percent. The value of that much inventory is immediately reduced by $5,400; spoilage adds up to another $300 loss; shrinkage and theft- $1,700; losses to damaged products- $600; personnel accidents- $840; lost business due to out-of-stocks and overstocks- $1,200; time to manage the inventory- $2,400. A total annual loss of 21 percent goes to the cost of inventory alone. No wonder retailers are seeing 2 percent or less in net profit before taxes. The above figures don’t have to be dead-on accurate to make you stop and think. One item too much is an unnecessary reduction in profits.

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