by Gerald Peck National Association of Wholesale Grocers of America
It’s a privilege to be here this responsibility for distributing food
morning as part of this panel addressing products at the lowest possible cost and the challenge of providing consumers acceptable terms of sale, for providing with their “desired level of living.” maximum quality and safety control, The question assigned me is “what should optimum consumer choice and optimum wholesalers and retailers do?” availability of product. Wholesalers and retailers also share some responsi- As some of you know, I work with bility for informing consumers about wholesalers, not retailers. Therefore, conditions in food marketing. I will speak directly to the wholesaler responsibility. The retailer obligations The answer to what wholesalers can are in many ways the same, but I can’t do about food prices is summed up in the speak to them except in general terms. word productivity. Increased produc- tivity is not only desirable from the To respond to the question of what standpoint of keeping prices in line for wholesalers should do for consumers, I consumers, it is acknowledged today by first listed what I see as consumer wholesalers as necessary to their own wants. I included: information about survival. Productivity is the whole- the product and the terms of sale...the saler’s biggest competitive tool and lowest possible price...control over the biggest vulnerability. quality of the product...control over the safety of the product...nutrition Claims have been made that produc- built into the product...a choice of tivity in food distribution is decreasing. brands and sizes and types of prepara- I disagree with that and 1’11 explain tion...convenience..●nd, finally, why in a moment. It’s a minor point availability. because while our productivity is in- creasing, our costs are increasing faster. Obviously wholesalers have no The reasons we need productivity in- influence in some of these areas unless creases have been well documented in the item is private label. Because recent meetings of this group. It really private label is a minor part of the boils down to the fact that costs are wholesaler’s business, I will open the all going up, especially energy and discussion with references to the typical labor..., that grocery distribution is wholesaling function. That means, for labor intensive...,and that labor rates the moment, we will consider the nutri- are increasing faster than productivity. tion built into the product and the A conventional grocery warehouse operation convenience built into the product. is over 80% labor intensive. Fully mechan- Information about the product is the ized it can be reduced to perhaps 60% responsibility of the people who produce labor intensitivity. More important is and process and package the product. the fact that the total wholesaling func- That leaves wholesalers with tion, incorporating all expense factors
February 77/page 22 Journal of Food Distribution Researc
except investment in inventory is over Unfortunately, this accounts for some 60% labor intensive. wholesalers who were viable 10 years ago and are out of business today. These For twenty years I have be ieved in same pressures encouraged mergers and the inevitability of warehouse mechani- amalgamations which allowed spreading zation. However, it has devel zed very increasing costs across greater number of slowly and all we’ve learned so far is units of merchandise shipped. These that successful installations are rare measures, to absorb cost increases, were and the payout takes twice as long as not enough. So wholesalers turned to anticipated. We still have a technology income derived from sources other than lag and we still have little hope for wholesaling. The most dramatic moves mechanizing anything but giant operations. have been into grocery retailing and retailing of other commodities such as If the rate of increase in produc- variety goods, clothing, or toys. There tivity equals the rate of cost increase is some venturing into vertically inte- we have a healthy standoff. Consumers grated businesses such as grocery man- win and labor wins and there is no con- ufacturing and processing. A few got into tribution to inflation. totally unrelated types of business, such as church construction or trailer manufac- The fact is, that the rate of in- turing. Among the more common income crease of productivity has lagged devices are use of the wholesaler’s behind costs for the last decade. Whole- printing facilities for commercial print- salers and retailers were able to absorb ing purposes or selling computer services some of the difference but they had to or adding general merchandise lines or find options outside of grocery distri- expanding the types of customers serviced. bution to cover the rest. For whole- salers, these other options amount to We have long identified the whole- subsidizing food distribution. saler’s primary objective as lowest cost food distribution. Other distributors Our data may not be typical for all share the objective, but improved produc- wholesaling, but for a changing group of tivity in an individual operation is just 40 wholesalers, total margin has increased one of our opportunities to impact food over the past 10 years from 6%% to 8%. prices. Net margin remains under one percent after tax. The increase in gross reflects We need also to seek productivity changing mix in products sold much more improvement at points of interface than covering cost increases. The mix between shippers and carriers, between includes more perishables and more gen- carriers and receivers and between distri- eral merchandise. butors and their customers. And finally, we must seek productivity improvements in Our concern is that wholesalers have the total food industry through function- not covered the cost of replacement of ing as a total integrated system. equipment and facilities with generated income. Nevertheless,they did absorb a Now, I’d like to comment on claims major share of cost increases through that productivity in food distribution more sophisticated systems and through has been decreasing in recent years. maximizing economies of scale. This First of all, Dr. John Kendrick, chief allowed most wholesalers to remain economist of the Department of Commerce, competitive. Some operators were just reporting to NAWGAfs productivity con- not equipped or were just too small. ference, identified that grocery
Journal of Food Distribution Research February 77/page 23
wholesaling sales per hour has averaged means that each ton requires a greater a 3% per year increase compared to 2%% number of handlings before the retailer for all merchant wholesaling. No one is receives the merchandise. Finally, it is happy with sales per hour as a produc- common today that a ton of merchandise, tivity ratio, even when the dollars are received by a retailer, contains a more meticulously adjusted, but it is a good complete mix of the products required in indicator of the trend...and the trend the store. This again reduces the re- is up. tailer’s receiving and handling and re- ordering costs. The second fact I would point out is that NAWGA has measured productivity If we could calculate the impact these in tons and pieces per hour for 14 years. things have on the value of a ton as the This has been for the warehouse only, output in our productivity ratio I am not total wholesaling. In 1976 the confident that the tons per man hour average warehouse performance was figures we measure would trend upward and, exactly the same, 1.08 tons per man because warehousing is nearly half of all hour, that was recorded in 1962. In wholesaling costs, the trend would sug- intervening years it has gone as high gest that productivity overall is improv- as 1.20 and as low as 0.94. ing. So much for productivity.
That’s a pretty dismal record con- In conjunction with wholesaler’s
sidering the advances in equipment and responsibility for lowest cost distribu- facilities during that time. But in tion, I mentioned a related responsibility 1962 we did not have specialists on the for terms of sale. This refers to the payroll for security, safety and sanita- whole area of merchandising cooperation tion, and we didn’t need traffic managers between wholesaler and retailer. An and energy managers. During the same advertised price, for example, is a term period of time, the nature of a ton or of sale and the consumer is entitled to a piece of merchandise has changed. that sale item at that advertised price. That’s significant because to measure a The wholesaler’s problem is to anticipate productivity trend you must have a the consumer response to ads in three or constant output value. It’s easy enough four hundred different stores in as many to adjust the dollar value of a ton of different neighborhoods. The product must merchandise but there are other character- be ordered long in advance of the sale and istics that have changed to make that be physically in place in the stores at ton worth a good deal more to the re- the time of the sale. That’s all fairly tailer who buys it. For one thing, it straightforward, but not easy to do. There is being received today on pallets or on is another hidden responsibility, shared carts which expedite the receiving func- by retailer and wholesaler, not to buy tion at the store and expedite the shelf too much safety stock to protect the stocking function in the store...for position taken in the ad because what is another thing, each case of merchandise left over represents additional cost in is delivered now with a label affixed handling and storage and possibly an which provides information which helps inventory loss. It’s a difficult tight in pricing the merchandise in the store rope to walk. It’s easy to understand and, in some instances, in providing unit why ad feature items are frequently those pricing information...for another thing with a promotional allowance that compen- the number of pieces per ton have in- sates for the added inventory investment creased. This means that the shipping and handling. case quantity is related better to the needs of the retailer’s shelf. It also
February 77/page 24 Journal of Food Distribution Resear(
Unit pricing might be considered a We have also improved our capabilities term of sale, and the retention of in maintaining sanitary warehouses. The prices on individual packages might be Food and Drug Administration has really considered a term of sale. These things captured our attention on this one. Some the consumer encounters only in the people maintain that FDA requirements retail store, but as we all know, the are exaggerated for food products that wholesaler has some working responsi- are handled only in consumer packages bility. The highly sophisticated backup packed inside shipping containers. computer work for unit pricing i’sim- Nevertheless, wholesalers and all other possible for individual stores. It’s distributors continue efforts to achieve burden enough for a chain distribution the perfection mandated by FDA regulations. center when all of its retail outlets are on the same merchandising program. Wholesalers are also working on When a wholesaler becomes involved in control of damge which affects both unit pricing for 100 or more individual sanitation or food safety and productivity. independent customers the technical task is a big one. It’s a penalty but When consumers think of food safety it’s being done. they are not referring to, or even aware of, all of the handling practices of Pricing individual packages may wholesalers. Consumers are only concerned become a term of sale. If that’s what with what goes into the retail package. consumers really want, the price may be They are alerted, on rare occasions$ to a the benefits of scanning. Wholesalers danger of contaminated or spoiled food. have a responsibility to help retail When this happens, wholesalers are in- customers who are in a position to get volved in the process of product recall. into scanning. That means technical NAWGA has established a working arrange- help in feasibility analysis, equipment ment with FDA and the computers at selection, systems development and Western Union which permit us to provide personnel training. It also means instant information directly to all our providing the backup computer capability members any time of any day. It’s an and technicians to keep all equipment expensive device and we’re delighted that functioning. we get very little use out of it.
Another area where wholesalers Another consumer service due from
impact a consumer desire is protecting wholesalers is protection of quality of the safety of food products. This is food products. This really overlaps the achieved through maintaining a properly function of protecting the safety of sanitary facility and providing the products. Nevertheless, the wholesaler right temperature and humidity controls does assume specific quality responsi- for product storage, and the right bility when providing perishable items practices for product handling. Temper- for retail customers. Whether the com- ature, for example, is of prime impor- modity be fresh meat or produce or dairy, tance in handling frozen food. Ten bakery, or delicatessen products, the years ago it was a serious problem. selection and purchasing, handling and Today there are few distributors who do storage functions of the wholesaler must not have adequate freezers and the be timely and correct and effective. This proper vestibules for receiving and is another area that could provide the shipping operations which insure that total agenda for a meeting like this. product stays below zero degrees at all times.
Journal of Food Distribution Research February 77/page 25
It’s worth noting that today more retailer wants is what the consumers wholesalers are building perishables want in each individual neighborhood. handling facilities. These same whole- salers were content to let local job- I don’t believe there has ever been bers have the business, especially a problem, because wholesalers or produce, until recently. Historically, retailers make choices of what items to wholesalers have gone into the produce handle. If any want is missing, con- business only when necessary to keep sumers simply turn to the competition. their retail customers competitive and The industry may actually be guilty of insure a continuing quality source of trying too hard. For 25 years,I have supply. heard distributors say “It’s time to eliminate the slow movers that cost There’s another aspect of quality more to handle than they produce in gross which bothers a great many consumers. margin.” But they have not been effective I have a friend whose respect for me is in weeding out slow movers because they strained because I’m part of an industry are unwilling to discontinue an item that which practices the monstrous crime of even one customer wants. selling snacks and cereals with sugar coating. He sincerely believes the The other side of the coin from practice should be outlawed. He’s also consumer choice is the problem of proli- a heavy smoker and he wants to make his feration of items. New item introduction own choice to smoke or not. There is has been slowed down, first by the wage/ an inconsistency somewhere even if the price controls, then by recession and dangers are not exactly comparable. the cost of capital. New items add to proliferation only when they are success- There are a few people willing to ful and some other item is not dropped make arbitrary decisions for all 200 to make room. This illustrates another million of us on what we can buy or tight rope the wholesaler must walk. whether we should have nutritional when the consumer looks for green beans, additives in some foods or whether to there should be a choice of canned or exclude additives of any kind from all fresh or frozen and a choice of sizes in foods. These are pretty heavy decisions each. There should be choice in the way raising serious questions of individual the beans are prepared for use. There freedom. I’m excluding of course, those should be a choice in brands which means decisions that must be reserved for the a quality and price distinction. The Food and Drug Administration on food wholesaler must find the middle ground safety. I believe that choice is a between choice for consumers and un- privilege that should be preserved for economic proliferation. consumers whenever possible. As the industry moves toward regional Wholesalers are required to make distribution centers serving all types choices that affect the consumer. These of retail outlets, the job of providing are the choices of what specific items choice will get tougher. There will be will be handled. There is an economic fewer distribution centers and they will limit on the number of items that can each have to provide the full range of physically be handled and stored and item choice. protected. The wholesaler therefore, selects the items wanted by retail cus- This leads us to another wholesaler tomers. In many cases committees of responsibility, making products available. retailers make the choice. And what the We’re all happy that fresh fruits and
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vegetables are available year round The last and newest wholesaler rather than just during local growing responsibility is information for con- seasons. But “availability” is a great sumers. I submit that most wholesalers deal more complex than shipping produce and retailers are doing a good job in from one country to another. It means the other areas I mentioned. But accept- having the product in the store the ing responsibility for informing consumers consumer wants to patronize on the day is a new concept. Some wholesalers, and at the hour that the consumer wants but too few, have consumer panels or to visit that store. staff positions representing consumers. All such effort is made in the name of One aspect of this logistical respon- retail customers because consumer contact sibility has been measured by what the is limited to retailers and consumer industry calls service level. 100% awareness is directed primarily to service is delivering every case wanted grocery retailers. by retailers on the day they want them. Ten years ago, many wholesalers were Dialogue with consumers and providing able to deliver whatever the retailer information to consumers is a great ordered 97% as ordered and on time. opportunity and it must be expanded. Some called it a 97% service level and others just called it 3% outs. An in- I have tried to respond to the vestment in safety stock was required question directed to me. It has meant to maintain that service level. covering a lot of old ground with just a reference or two to some new areas. Since that time, we have had a succession of shortages of many products and periods of rapid price increases. Replacement costs became a serious burden. Protection stock could not be maintained with available cash flow. As a consequence, service levels dropped from 97% to as low as 85%. With stabil- ization during the last two years we have a return to service levels that insure product availability to consumers.
Journal of Food Distribution Research February 77/page 27