You are on page 1of 12

Putting the Wholesaler

in the Drivers Seat


Best practices from the retail industry to improve profitability
and gain competitive advantage
W
holesalers are more than supply chain intermediaries con-
trolling the flow of goods between manufacturers and their
customers. They are value chain partners, providing purchas-
ing power and market access to their customers, credit management
to manufacturers, and a competitive supply chain to both. Wholesalers
are also buyers, which is a critical performance driver of the wholesale
industry. As buyers, wholesalers can emulate best practices from the
retail industryto boost profitability and gain competitive advantage.

Wholesalers typically consider their roles in the trolled to keep the related benefits within their
supply chain as intermediaries. They think they bottom lines (see figure 1 on page 2).
have little influence over purchasing conditions as Despite their size, wholesalers sometimes
prices are either set by the strength of a manufac- endure less favorable purchasing conditions than
turers brand, or by the market (if the product is one-time-only and smaller customers. The best
a commodity). Because wholesalers typically use a prices are typically offered in the project busi-
cost-plus approach to setting prices, they focus ness where large customers request competitive
primarily on improving their cost-to-serve perfor- bidding directly from suppliers. This lack of
mance and their bottom lines. sourcing competitiveness may represent a major
The wholesale industry is typically character- threat for the wholesaler business model
ized by an extremely high share of cost of goods encouraging larger customers to bypass the whole-
soldaround 70 percentand profitability in a saler and go directly to the manufacturer to
range from 3 to 5 percent. Profits, therefore, are demand better prices.
sensitive to variations in purchasing conditions. For wholesalers, the answer to this increas-
All things being equal, a 1 percent improvement ingly challenging situation is to adopt a retailer
in purchase price can lead to a 14 percent improve- approach to buying leveraging their commer-
ment in earnings.1 In short, purchasing has a huge cial value to manufacturers while also strengthen-
impact on wholesalers overall profits, provided ing their price negotiation skills to increase
that pricing models are adjusted and strictly con- purchasing power and profits.
1
Throughout this paper, earnings refers to earnings before interest and taxes (EBIT).

A.T. Kearney | putting the wholesaler in the drivers seat 1


Figure 1 Source private labels globally by leveraging
Purchasing has a large impact on wholesalers volume across countries and through buying
overall profits consortia with other non-competing retailers.
Employ sophisticated negotiation techniques
Example:
with A-brand suppliers. These negotiations are
% of selling price Construction material wholesaler based on a deep understanding of each suppli-
100% 70% ers contribution to retailer performance, and
comparisons to the commercial support retail-
1% decrease ers provide to each supplier; comparisons are
in purchase
price led to a made with regard to share of sales, sales growth
14% increase
in EBIT* with a retailer compared to the market, promo-
tions, shelf space, and suppliers brand visibility
25% in catalogs and websites, among other things.
These practices have helped leading retailers
5% such as Colruyt and Tesco increase operating
margins up to 6 to 7 percent from an average of
Sales COGS* Cost-to- EBIT 3 to 4 percent. In our experience working with
serve
Cost structure wholesalers, those that employ these same prac-
*EBIT is earnings before interest and taxes; COGS is cost of goods sold tices can also increase their margins by several
Note: Cost structure changes with the dynamics of the business (for example, volumes,
consumer prices, fixed costs absorption and store openings) percentage points.
Source: A.T. Kearney analysis
The following discusses the ways in which
wholesalers can emulate the practices of their
Wholesale and Retail: The Similarities retailer counterparts to boost profits and competi-
The wholesale business and the retail business tive advantage.
have several things in common. They both have to
deal with the high cost of goods sold, low margins Develop Private Labels to Increase Value
and a combination of both strong brands and Retailers began developing private labels not
commodity products. But this is where many of only in response to A-brand pressure but also
the similarities end. Unlike wholesalers, retailers to differentiate from other retailers. Over time,
have learned to deal with these challenges by they improved the quality of their private labels
developing powerful category management and and developed a multi-tier private-label strategy
leading-edge purchasing practices. Specifically, to cover all consumer needs while also securing
retailers: customer loyalty by offering unique products.
Develop private label brands to provide an Today, retailers private labels range from low-
alternative to strong A-brand suppliers and to cost entry-price products, and me-too products
differentiate their products from other retailers. (equivalent to brand products but cheaper), to
Apply tendering and open book practices with premium products such as those that are bio-
private label and commodity suppliers (such as and eco-friendly. In most European countries,
fresh categories) based on a thorough under- private label penetration is between 20 and 40
standing of value chain dynamics. percent in value.

2 putting the wholesaler in the drivers seat | A.T. Kearney


Wholesalers, by comparison, have yet to Which private label structure (low-cost, me-too
exploit the true potential of a private label strat- or premium) is best for each category?
egy, which still accounts for just 5 to 10 percent of Figure 2 illustrates a framework for prioritiz-
total sales in non-commodity products. This is ing private label development per category. Key to
primarily because wholesalers lack the capabilities defining the strategy is understanding customer
to develop and source private label products, and buying behavior especially, knowing when and
because they are concerned about how A-brand why they are willing to switch from A-branded
suppliers might react to their entry in the market. products to private label alternatives.
Wholesalers have a great deal to gain The starting point is to gain a thorough
from private labels. A private label strategy can understanding of supply market dynamics.
help improve margins, develop unique product Wholesalers must be able to identify a potential
offerings and build a credible alternative to supplier base, evaluate category innovation inten-
A-brand suppliers. However, the success of a siveness, and perform a detailed cost-structure
private label initiative depends on the robustness analysis, including determining the key sources
of the implementation. of cost advantage such as labor, raw materials,
Defining a private-label strategy typically volume, and location. Armed with the assessment,
begins with answers to three questions: the wholesaler can then define the optimal role
What is the wholesalers credibility as a manu- the private label will play in the value chain, and
facturer in a specific category? the innovation strategyusing new specifications
Which categories are best suited for private instead of sourcing off-the-shelf products. Private
labels from a market, supply base, supply chain labels can also help leverage the full value chain, for
and financial point of view? instance, by buying raw materials or intermediates

Figure 2
Categories are prioritized to balance potential benefits with ease of implementation

Illustrative
Evaluate potential impact High Evaluate ease of implementation
Direct Priority 2 Priority 1 Technical complexity
Calculate potential margin Determine wholesalers capabilities
increase Evaluate supplier base experience
Indirect Market pull
Potential impact

Assess supplier negotiations Assess brand dominance


Review current dynamics Gauge suppliers end-user activity
Gauge potential OEM sales Estimate degree of private label
Evaluate degree of direct already in the market
retail sales Calculate degree of product
Calculate project pricing commoditization
Determine wholesaler impor- Evaluate price sensitivity
tance to supplier Consider if wholesalers customers
are end-users of products
Risk
Low Determine possible negative impact
Difficult Easy on supplier relationship with key
Source: A.T. Kearney analysis Ease of implementation branded suppliers

A.T. Kearney | putting the wholesaler in the drivers seat 3


products instead of finished goods and using con- commodity market volatility are also key when
tract manufacturing or in-house manufacturing. sourcing commodity products.
When sourcing private labels, wholesalers can Wholesalers can estimate the should-cost of
take a page from the retail playbookcombining a commodity product by understanding the
volumes across countries, and coordinating speci- products cost structure and the evolution of the
fications to leverage scale through global tenders. main cost elements. These insights also provide
Other retail best practices include forming buying a way to identify supply regions with the best cost
consortia with wholesalers in different countries advantages and to reach agreement with suppliers
to increase purchasing power, and developing an about adopting a pricing mechanism to cope with
open-book relationship with suppliers to ensure price volatility of key components of the product
price transparency. (usually energy and raw materials).
In addition, it is essential
to monitor the evolution of key
raw material prices over time
A private label strategy can since suppliers tend to pass on
higher raw material prices to
help improve margins, develop their customers but rarely reduce
their prices when commodity
unique product offerings and prices decline, unless encour-
aged to do so. Figure 3 provides
build a credible alternative to an example of such a scenario.

A-brand suppliers. Employ Fact-Based


Negotiation Strategies
Retailers know how the game
works. Suppliers of strong brand
Adopt a Global Approach for Commodities products emphasize the customers pull for their
Sourcing commodity products, such as copper products and therefore the necessity for retailers
and plastic pipes, is another matter. By their to carry them at any cost. Over the years, retailers
very nature, commodities have little differentia- have developed more sophisticated approaches to
tion and therefore brand value. A large share of retain control of their assortment decisions. In
their cost structure is in raw materials where particular, they negotiate more effectively with
markets can be extremely volatile. Sourcing them brand suppliers by applying differentiated, fact-
requires leveraging volumes across regions based negotiation strategies based on the transpar-
through global tenders using suppliers from ency of the combined costs and benefits of their
countries with significant cost advantages (for commercial relationship. Applying these tech-
instance, those with lower labor costs, proximity niques has helped retailers significantly increase
to cheap raw materials and markets for goods their profitability.
with a high share of transportation cost). Strict Wholesalers can learn from these retail negotia-
logistics tracking and tight risk management of tion tactics. For one thing, retailers do not simply

4 putting the wholesaler in the drivers seat | A.T. Kearney


request better prices or purchasing conditions. performance improvements, and steer discus-
They justify these requests with fact-based analy- sions with suppliers.
sessystematically benchmarking supplier per- Helps the buyer develop a roadmap with
formance against peers on a category-by-category a clear destination and alternative routes, help-
basis. For example, one key measure of a suppliers ing the buyer set priorities, tailor improvement
performance is its true contribution to a retailers efforts to each supplier, and determine alter-
profitability, moving beyond sales and gross mar- native courses of action whether to develop
gins to consider all relevant costs in the overall rela- the supplier relationship, maintain the status
tionship (including channels, stores and logistics). quo or scale back support.
There are four major advantages to this fact- Levels the playing field by raising the buyers
based negotiations approach: level of confidence in its negotiating position.
Establishes the rules of the road so the buyer In helping wholesalers with their branded
and brand suppliers are speaking the same supplier negotiations, we have found that fact-
language regarding profitability (and not just based negotiations allow wholesalers to balance
bonuses) and discussions are on a category- the power of branded suppliers and improve their
by-category basis. own margins by several percentage points.
Puts the buyer in the drivers seat by providing The following are the main steps in a fact-
tangible facts to develop a real understanding of based negotiations strategy for A-brand suppliers
the current situation, set fact-based targets for (see figure 4 on page 6).

Figure 3
Copper price versus product price

Price 1
LME copper index
130 1 Typical two-month
Product price
delay between decline
120 in LME* copper index
and product price
110
2 Immediate price
increase after
100
LME copper index
3 increase
90
3 In 18 months, LME
80 index decreased by
27% as product price
70 increased by 10%
2
60

50

0
2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 *London Metal Exchange
Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Source: A.T. Kearney analysis

A.T. Kearney | putting the wholesaler in the drivers seat 5


Figure 4
Three main phases of a negotiation strategy

Evaluate wholesaler and Determine Develop negotiation script


supplier relationship negotiation scenario

Review market size Gather data on:


and suppliers shares Annual targets
Market Gauge market and Inventory levels
suppliers growth Promotion plans (annual)
data Evaluate price indices Pricing strategy
3rd meeting
Discussion
Review
and
Category Decide on agreement
files performance 2nd meeting
Category negotiation
of each
files
Category Discussions
supplier in strategy and
files the category
negotiations
1st meeting
Analyze sales, purchases, Perormance
bonuses, promotions and Talk to purchasing team about: review with
inventory Historical relationship with supplier
Internal the supplier
data Supplier hot spots
Source: A.T. Kearney analysis

Evaluate the wholesaler-supplier relationship. dations from their sales force, technical support,
The relationship between wholesalers and suppli- and spare parts management.
ers can be assessed on a category-by-category basis How much the supplier contributes to the
to determine (1) how much the wholesaler sup- wholesalers performance. Suppliers contribution
ports its suppliers and (2) how much the supplier to wholesalers performance requires an assess-
contributes to the wholesalers performance. ment that combines insights from internal and
How much the wholesaler supports the external data sources. The assessment is performed
supplier. The share of sales a wholesaler gives at category levels evaluating sales performance
a specific supplier contributes to the suppliers in the market and with the wholesaler in terms of
ability to increase market share. Wholesalers can market share and growth. It should also establish
support and differentiate their suppliers in a the true profitability of each supplier for the
number of ways. For example, they can make wholesaler, comparing them to other brand suppli-
product available at different levels, such as ers and private labels in the category.2 The return
immediate in-store delivery or one-to-two day on marketing investment (sales uplift related to
availability by delivering from distribution cen- specific commercial investment) should also be
ters. Wholesalers can also provide different types included in comparing supplier performance.
of sales and after-sales support, such as share of Determine negotiation scenario for each
catalogs and position in showrooms, participation supplier. Armed with the fact-based assessment,
in promotions and loyalty strategies, recommen- wholesalers can evaluate a suppliers performance
1
Based on gross margin and year-end rebates and additional costs such as inventory (capital cost) and logistics.

6 putting the wholesaler in the drivers seat | A.T. Kearney


and commercial relationships within a category, scenario to use with which suppliers. For example,
and then use this knowledge to decide on a cate- scenarios can be determined by evaluating aspects
gory negotiation strategy. For each supplier, there of the category marketing plan including the
are three possible scenarios: categorys role, marketing tactics, SKU substitu-
Positive scenarioincrease sales support and tion possibilities between A-brand suppliers, and
supplier share in the category the private-label development plan.
Status-quo scenariomaintain sales support Figure 5 illustrates the different scenarios a
and supplier share wholesaler might apply within a category, and
Negative scenarioreduce sales support and depicts the way in which categories are used to
supplier share, increase share of private label or determine the appropriate negotiation strategy.
alternative suppliers Develop the negotiation script. In line with
Again, wholesalers can take best practices a category negotiation strategy, it is necessary to
from the retail playbook to determine which define a supplier negotiation script for each sup-

Figure 5
Scenarios wholesalers can apply in category negotiations
Over-seller

Bubble size indicates


sales in the category
Supplier
Negotiation strategy 3
Supplier 2

Positive scenario:
more items, more promotions, Supplier 1
more inventory space
Suppliers position

Supplier 1
(status quo
scenario)

Negative scenario:
less items, less promotions,
less inventory space

Supplier 1
Under-seller

Less than More than


category average Net margin percentage category average

Note: Over-seller has more share at the wholesaler than in the market; under-seller has less share at the wholesaler than in the market
Source: A.T. Kearney analysis

A.T. Kearney | putting the wholesaler in the drivers seat 7


plier. Scripts are developed for the initial perfor- prices as they see fit. And a typical cost-plus pric-
mance review, initial discussions and negotiations, ing policy tends to pass automatically all sourcing
and to close the deal. A good script will have gains on to the customer. This limited control
a request to improve buying conditions while over pricing prevents wholesalers from captur-
also insinuating a credible threat; for instance, ing the expected bottom-line results from their
suggesting the very real prospect of developing sourcing programs. Developing a centralized and
private labels or relationships with other suppliers. structured pricing strategy and processes will
Category managers can use the script to create allow for allocating sourcing gains on a category-
by-category basis either to the bottom
line or to commercial investments on spe-

Differentiated, fact-based cific products or customer segments.

Think Like a Retailer


negotiations puts whole- By adopting retail buying strategies, large
salers in the drivers seat. wholesalers can fully leverage their size to
increase their operating margins, thereby
gaining competitive advantage over smaller
players through price and product differ-
arguments and establish the conditions whereby entiation. Gains achieved by improved buying
suppliers are encouraged to either maintain or conditions (a bottom-line impact of 2 to 3 per-
improve their performance. That said, wholesalers cent) give wholesalers the necessary flexibility to
must be willing to pull the trigger on a threat if address changing market conditions, and can be
a supplier is not performing satisfactorily. reinvested in the business to fuel growth or trans-
ferred directly to the bottom line.
Control Buying Gains To capture these opportunities, wholesalers
Unlike retailers that manage prices centrally, need to start thinking like retailers. They need to
wholesalers have far less control over their selling develop market intelligence, buying skills, and
prices. A wholesalers sales force, both in the field information systems to transform data into market
and in the store, has the freedom to discount insightsinsights they can use to increase profits.

Authors
Laurent Dumarest is a partner in the Brussels office and can be reached at laurent.dumarest@atkearney.com.
Joakim Karlsson is a partner in the Stockholm office and can be reached at joakim.karlsson@atkearney.com.
Benoit Nachtergaele is a principal in the Brussels office and can be reached at benoit.nachtergaele@atkearney.com.
Guillaume Cretenot is a consultant in the Brussels office and can be reached at guillaume.cretenot@atkearney.com.

8 putting the wholesaler in the drivers seat | A.T. Kearney


A.T. Kearney is a global management consulting firm that uses strategic For information on obtaining
insight, tailored solutions and a collaborative working style to help clients additional copies, permission
achieve sustainable results. Since 1926, we have been trusted advisors on to reprint or translate this work,
CEO-agenda issues to the worlds leading corporations across all major and all other correspondence,
industries. A.T. Kearneys offices are located in major business centers please contact:
in 36 countries.

A.T. Kearney, Inc.


AMERICAS Atlanta | Boston | Chicago | Dallas | Detroit | Mexico City Marketing & Communications
New York | San Francisco | So Paulo | Toronto | Washington, D.C. 222 West Adams Street
EUROPE Amsterdam | Berlin | Brussels | Bucharest | Copenhagen Chicago, Illinois 60606 U.S.A.
Dsseldorf | Frankfurt | Helsinki | Kiev | Lisbon | Ljubljana 1 312 648 0111
London | Madrid | Milan | Moscow | Munich | Oslo | Paris email: insight@atkearney.com
Prague | Rome | Stockholm | Stuttgart | Vienna | Warsaw | Zurich www.atkearney.com
ASIA Bangkok | Beijing | Hong Kong | Jakarta | Kuala Lumpur
PACIFIC Melbourne | Mumbai | New Delhi | Seoul | Shanghai
Singapore | Sydney | Tokyo

MIDDLE Abu Dhabi | Dubai | Manama | Riyadh


EAST

Copyright 2009, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form
without written permission from the copyright holder. A.T. Kearney is a registered mark of A.T. Kearney, Inc.
A.T. Kearney, Inc. is an equal opportunity employer.
PDF ATK909104

You might also like