June/July, 2006

Cover & Feature Stories

Five Seismic Shifts Shaping The Deli Industry

It is tempting to say that changes in the industry have transformed the role of the buyer of deli and other perishable foods, but a more accurate assessment is that a profoundly new situation has altered the role of every player in the supply chain. And if the job of a buyer has changed, it is no more so than the job of the seller has changed. How any individual retailer or vendor deals with the new supply chain realities will play a big role in the success each organization will enjoy in the years to come.

There are five earthquakes that have transformed procurement and are continuing to shape the new supply chain reality:

 

1. Consolidation

Not all that long ago, the big talk in the industry was fear of the “fax auction” where, as fax machines became commonplace, every vendor started faxing over offers every morning. It seemed like a race to the bottom for price. All of a sudden, without any work, buyers would have access to every vendor’s price every day.

With the development of e-mail and various electronic procurement systems, the sharing of information has made for an even more competitive environment. But, for large chains, the fluctuation in day-to-day price by vendors, or even the offer of special deals, is mostly irrelevant because nobody is sitting around with enough excess product to allow the sudden shifting of vendors.

This creates a dynamic not often noted. Although it is presumed that larger chains with more substantial buying power can buy for less, this is not always true. In many cases, larger chains are so constrained in their choice of vendors and so need to plan procurement in advance that they are unable to take advantage of fluctuations in supply and demand. In addition, large chains account for such a large portion of each vendor’s business that the vendors often cannot sustain unprofitable business to these customers. In effect, the buying organization has to consider supplier maintenance and development in its purchasing. What good would it do Wal-Mart, for example, if it continuously bankrupts its vendors and has to constantly scramble to find new ones?

Consolidation has created the need for operators to make sure that vendors have predictable sales at a sustainable price so as to insure adequate supplies and minimal out-of-stocks.

 

2. Micro-Marketing

It is said that for every action there is a reaction, and the action of retail consolidation — particularly as such consolidation has been undertaken with the explicit goal of reducing costs through centralized procurement, higher volume private label production runs, greater leverage with suppliers, etc. — is likely, if not counteracted in some way, to lead to a national chain of boring uniformity, unresponsive to the regional, ethnic and demographic differences and thus unable to maximize sales.

Indeed, this is not a hypothetical threat; it is an almost exact description of what happened when Safeway acquired such regional jewels as Dominicks, Randalls and Genuardi’s. In its attempt to drive costs from the system by leveraging buying power, Safeway eliminated popular hometown products, brands and private label items. Predictably, whatever costs were driven from the system could not possibly compensate for the alienation of customers, and Safeway has backtracked, in some cases by trying to restore certain items, in other cases by giving up and selling or closing stores.

If, on the one hand, consolidation has led to a need for volumes of product so massive that day-to-day trading is almost impossible, the same consolidation has led to a reaction in which chains are emphasizing micro-marketing — adjusting store assortment to meet the needs and desires of the clientele of individual stores. So Wal-Mart has a rabbi at a store in Tennessee and Albertson’s has a kosher deli in the store in Boca Raton, FL, and an ethnic hair center in a store serving a different demographic group 20 minutes down the road.

Indeed, sometimes this micro-marketing trend is so strong that chains are literally setting up different concepts: Publix Sabor, a concept focused on Latinos, for example.

The consequence of this micro-marketing is an enormous increase in the complexity of procurement and difficulty in managing the supply chain.

Large national chains looking to do a good job are running stores to appeal to Latinos, Asians, the elderly, kosher food consumers, halal food consumers, single urban professionals and much more.

In the past, most stores did not go beyond a region; now they go around the country. In an environment focused on removing costs from the system, the need to make this work is an enormous challenge in the industry.

For vendors, the question is how do you get attention for your product that sells well in communities with large Thai populations. For retailers, the question is how do you evaluate all these products, distribute all these products and manage vendor relationships with so many producers.

 

3. Product Mix Goes Upscale;

Foodservice Becomes Big Business

If micro-marketing does not increase the complexity of the product mix enough, two other trends really are icing on the cake of complexity in the deli department.

As Wal-Mart has staked out its territory, claiming ownership of the paycheck-to-paycheck consumer, supermarkets have done two things.

First they have emphasized a broad assortment of high-quality perishables. For example, stores that a decade ago sold a few types of slicing cheese now regularly have an assortment of specialty cheeses.

Second, finding difficulty competing with Wal-Mart on conventional grocery products, supermarkets have come to emphasize labor-intensive foodservice offerings.

Of course, procurement for this new array of products offers special challenges. The decision to sell specialty cheese, for example, means the necessity of selecting what cheese to sell since no store can carry every cheese and there are distinctions between cheeses based on the country of origin, the state of origin and the producer, which is not the case with the purchase of bulk commodities.

Foodservice has its own challenges, as there are enormous considerations with ease of preparation, equipment needs, branded programs, in-store vs. commissary vs. purchase from manufacturers.

Especially vexing is that few people in a traditional supermarket deli operation have any experience or competency in dealing with these issues.

Formal foodservice offerings and expansion into upscale specialty offerings share the same characteristic: They reject the traditional retail paradigm in which retailers just put out products and see if they sell.

Foodservice and, to a large extent, upscale items where no conventional supermarket can stock all available brands and types, depend on the vendor making a decision. This means retailers get involved in cuttings and tastings and similar evaluative techniques. It also means the need for consumer research to be able to make selections on behalf of one’s customers.

Many a kosher buyer successfully bought ham for supermarket chains. It was not necessary for him to personally taste the ham. The changing nature of the deli product mix, however, is demanding new competencies on the procurement end.

 

4. Global Procurement/Private Label/Product Development Once upon a time...

Few products were imported

Private label was rare in perishables.

Retailers considered products presented by manufacturers and producers.

Imported product was presented to retailers by importers or specialty food distributors, private label product was pushed by private label manufacturers, and every vendor was eager to tell stores what to sell.

The large scale of modern retailing, the use of so many imported products and the international scope of many of the large retailers have led to many efforts to directly import products. In some cases, it has led to the opening of separate global procurement offices. Buying around the world increases lead times, increasing transit times, and it can leave a retailer short of product if there is spoilage in transit or non-delivery. There are complicated issues regarding currencies and advances. Few deli buyers have any experience with these issues.

Wal-Mart has its Prima Della line. Safeway has its Primo Taglio and Safeway Select Lines. Kroger has its Private Selection line. The product mix at most chains today is heavy to private label. But procuring and handling private label perishables is another ball of wax. How does a chain make sure such perishable items are consistent and do not sully the brand name? How should these products be positioned in the mix with national and regional brands? Deli buyers are not used to dealing with these issues.

In today’s competitive environment, few deli operations have the luxury of sitting back and waiting to be presented with product ideas. When executives at Costco were interested in the prosciutto business, they knew the old-time model of having experienced people slicing prosciutto at store level would not fit its model.

So a team was dispatched to Italy to meet with top producers. The result: Pre-sliced, pre-packaged prosciutto is now a best seller at Costco. But old-style buyers could not make something like that happen.

Between global procurement, private label growth and the need to participate in product development, the skill sets for deli buyers are more varied then ever before.

 

5. Food Safety And Food Security

In the good old days, a buyer had a great deal of flexibility. The earnest young man (it was always a man back then) shows up on the doorstep with a smile, a shoeshine and a promise to make it work, and the old buyer, seeing a hint of himself 30 years earlier, decides to give the kid a break.

Today, that flexibility is much less. Now that buyer needs to know if the production plant is HACCP-certified, if it is properly registered in accordance with The Public Health Security and Bioterrorism Preparedness and Response Act of 2002, and if it meets internal chain requirements for food safety and food security.

Not only has consolidation limited the choice of suppliers since only a few can meet volume requirements, but food safety and food security concerns have also further attenuated the list of available suppliers. At very least, the lag time before a supplier can be certified has increased substantially.

It all adds up to a world in which buyers find their freedom of action significantly constrained by laws, regulations, rules and requirements.

 

What To Do Next

So, confronted with this new environment, how do retailers respond? What kind of competencies do retailers need in their buyers? What new responsibilities are put on vendors? How can retailers organize their procurement and operate a successful supply chain?

First, kill all the buyers. Well, not literally. But in many cases, the old job title of buyer does not exist anymore. Maybe someone is a category manager or a merchandising manager. But these are not merely semantic differences. The titles reflect the reality that buyers today have many responsibilities that go beyond haggling for a lower price.

Second, split the responsibilities high and low. It is very common today for the actual procurement responsibilities to be divided. On the one hand is the actual decision to carry a product and buy it from a specific company. This process often takes months, sometimes years. It involves, at base, a high-level deli person to “make the deal.” Then, once the deal is established, it requires a replenishment clerk to keep it going. The actual establishment of the deal can involve many other people as well. For example, a separate food safety person may have to sign off on a vendor’s facilities and paper trail.

It is also possible that certain types of procurement can be assigned to specialized procurement agents. The global sourcing office, for example, might buy prosciutto for stores on several continents. Because making the deal usually involves contracting for certain volumes, setting either a price or a reference off which the price will be determined, etc., the deal involves significant financial liability and thus usually is negotiated by a person with great responsibility and a position of trust in the retailer’s organization. The actual title of the person will depend on several factors including the size of the retailer, the importance of the product and the scope of liability.

In some chains and situations, it may be the deli director; in other situations there may be procurement personnel just for that purpose. Commitments over a set dollar amount may require approval of a chief financial officer or a buying committee.

Third, make the vendor do the buying. There are a lot of programs and a lot of names: Vendor managed replenishment and collaborative planning, forecasting and replenishment (CPFR) are among the most common. Once the basic decision has been made to handle a product, there is a substantial argument that vendors should do the buying.

One of the biggest costs in manufacturing is the maintenance of excess inventory. By giving the vendor exposure to real-time sales and inventory data, the vendor is able to better anticipate need for product, plan production runs and coordinate transportation — all things that drive costs out of the system. Increasingly, we are seeing situations where vendors are being asked to maintain title to goods until the product leaves the distribution center. This model also frees up retail staff to focus on where they can add value: Selecting product, effective marketing and merchandising.

Fourth, work the metrics. How do you determine if a supplier should be retained or replaced? The old way allowed for a lot of judgment calls, which meant everything from personality conflicts to bribery could influence supplier retention. New systems now enable the procurement staff to carefully monitor sets of metrics and, typically, vendors are informed, in advance, what metrics they are obligated to reach.

Out of stocks, late delivery, rejected product — for each product category, metrics are established and communicated. The evaluation of the vendor thus switches from a subjective, emotionally driven experience to an analytical skill. And, indeed, the skill set of buyers switches from an ability to make substantive judgments about product quality, character and performance to a database-driven, quantitative ability to review, manipulate and evaluate the data collected from various systems.

Fifth, someone has to be in charge of the food. It could be the vendors. If they are appointed as a kind of category captain for, say, wet salads, they may have the expertise and experience with other retailers to know what products are worth trying. In other cases, retailers may sign up for a branded program, such as the ones Boar’s Head and Dietz and Watson offer, and allow the vendors to handle the merchandising mix. Typically, though, retailers like to maintain control over their offerings, and this is more so as chains try to position themselves as upscale.

In such cases, a system has to be established for identifying likely products and evaluating products. So at Whole Foods Market, with an enormous focus on specialty cheese, the chain has a national cheese buyer, Cathy Strange, who has been in the restaurant business, is the former president of the American Cheese Society and has an affinity for the Slow Foods movement and the cultural richness of cheese.

But she is the exception — most chains do not have people in the procurement positions who are “foodies”, able to evaluate subtle distinctions in flavor and texture. These chains lean heavily on vendor expertise, may do in-house cuttings with staffers, may have formal test kitchen evaluations and may run consumer focus groups; they may look at competitors and what they are doing.

But no matter how high-tech and demanding the procurement of deli products has become, no matter how complex the supply chain is to manage, somebody, somewhere, still has to select the food to sell.  DB