Spring, 2004

From the Editor

Tear Down That Wall

Top supermarket chains have long had retail executives attend the Fancy Food Shows. Sometimes it is to source specific product, but just as often, supermarket retailers come to the Fancy Food Shows for the same reason department store executives walk down Madison Avenue…to get a feel for what is hot and happening.

If gourmet food stores are buying everything hazelnut, then a year from now it will be in every supermarket and in two years on the bargain rack at Marshall’s.

The New York and San Francisco shows have had the cache. As the great port cities, gateways to Europe and to Asia, New York and San Francisco have had all the advantages.

The Chicago show, however, because of its co-location with FMI, may prove to offer the specialty food industry a crucial opportunity…if the industry is ready to capitalize on it.

Major supermarket chains are in a pickle. They are either competing with Wal-Mart directly, in which case the top executives are watching the chain’s base of middle class consumers defect to the lower prices and one-stop shopping conveniences of the Wal-Mart Supercenter, or they do not compete much with Wal-Mart, in which case the executives of the chain live in fear of the competition to come.

The fact that food retailing at the chain store level has become obsessed with Wal-Mart is leading to business decisions that are bad for the supermarkets and bad for the specialty food industry.

This issue’s cover story is an incisive report on the way slotting fees and all manner of pay-to-stay fees are distorting the buying process at conventional supermarkets. The report points out that this is not simply an issue that might hurt small manufacturers. It is, in fact, an operating procedure that is hurting supermarkets themselves.

The classic advice for supermarket chains looking to compete with Wal-Mart is to focus on areas, such as specialty foods, in which Wal-Mart is weak. Fees, of any kind switch the attention of the buyer or category manager to selling shelf space, making the fee budget – something other than serving the consumer. And this is an obstacle to success that supermarket chains throw before themselves.

Even if one believes the key to fighting Wal-mart is not merchandising but is, instead, operating efficiency – well, once again the same fees take their toll. How many hours do both the seller and the buyer spend in negotiations? If a distributor is used, then three parties are involved in the negotiations. All this adds costs to the system and the consumer must ultimately pay all costs. If your supermarket demands this procedure, your supermarket’s customers must pay the price.

It isn’t only fees that are a problem – though they contribute more than is obvious. Category management seems divorced from slotting fees, but as practiced today in supermarkets, category management is really just an excuse to eliminate slower-selling items and replace them with other items.

The lowest selling balsamic vinegar may also be the premium product that attracts consumers who spend freely on high margin prepared foods, exotic produce or fresh fish. But few indeed are the category managers who can trace such a thing and even fewer still who have the responsibility to look to overall store profitability, although that is the only thing that really matters.

It is interesting to ask why stores like to go through this phony category management exercise since, as often as not, they eliminate slow-selling lines and replace them with lines that sell as poorly or worse.

Ah, there’s the rub. Because of slotting fees, the store doesn’t care that much if the new items sell much better than the old – they just care that they are new. If they had to pay for every case of the old brand, but got a free case per store of the new brand, well, that is a big profit right there. Next time you hear a supermarket executive whining about the horrible failure rate for new products and claiming the need for fees to compensate, remember that those high failure rates were achieved under a regime that made product failure a profit center as it welcomed new products paying new fees.

Nothing will happen simply because the Chicago Fancy Food Show is co-located with FMI. Many top supermarket executives won’t take time to study the Fancy Food Show. But some will, and the specialty food industry has many booths with principals of the exhibiting companies manning the booths.

The natural reaction is always to show off the product: “Please Mr. CEO, try my fine delectable.” But no matter how great your product, the CEO doesn’t interfere on the product selection side. So if a supermarket CEO comes by a booth, or if you meet one at a bar, use the opportunity to point out that the supermarket today is a business model at war with itself.

Tell him the creativity and the intelligence of the whole specialty food industry is waiting to help participate in a supermarket renaissance. Point out the wall of obstacles put up by category management and slotting fees. Then say “Mr. CEO, tear down that wall.”  FDM