August , 1998

From the Editor

The Day A Manufacturer Said No

Here is a true story: A large regional supermarket chain received a substantial sum of money from a branch of a big distributor. The money was a payment to obtain the status of “exclusive specialty food distributor” in a particular area. The chain thought it might gain from the efficiency of dealing with one supplier as well as from the initial payment. The distributor saw a way to freeze out competitors while also gaining the efficiencies that went from handling the chain’s large volume.

The champagne was poured, the toasts were made, and a brave new world had arrived. Then, to the shock of both parties, there was a hitch. A manufacturer said no.

It seems that the supermarket chain very much wished to carry a particular kosher food line that had long been provided by a competing distributor. When the supermarket chain told the manufacturer to ship through the chosen distributor, the manufacturer said “No can do.” It seems the manufacturer had exclusive arrangements of its own with its distributor in that region and wasn’t willing to alter that relationship to accommodate the supermarket chain’s new operating procedure.

Voices were raised, the arguments got shrill, but when the supermarket buyers pulled their chins off the floor, they wound up adjusting their “exclusive” arrangement so they could buy that kosher brand from a different distributor.

It’s a story to warm the hearts of all those who feel big chains are imperious and demanding and all those who believe that the growth of retail power is damaging to distributors and manufacturers. If you are of this mindset, don’t take too much solace, however. For the story, though true, is almost certainly the exception that proves the rule. After all, how many specialty food brands are of sufficient power that a supermarket would break its established distribution agreements simply to have that brand on its shelves?

This summer I had the privilege of attending the summer meeting and trade show of the National Food Distributors Association (NFDA). I attend trade shows from Paris to Australia and must say this is among my favorites.

The NFDA is an unusual trade group.

Unlike most trade associations, which promote many modes of distribution, the NFDA’s raison d’être is the promotion of the DSD channel of distribution for specialty food products.

This presents a challenge for a trade association. It is not that the DSD distribution industry is declining. All evidence points to the volume moving through the DSD channel as increasing. The problem for the association is that a business that was once highly regional is now rapidly becoming national.

This may prove advantageous for the industry. Certainly it means that a DSD distributor is in the position to sign a contract to supply a supermarket chain which operates in several regions or to provide distribution over a broader area for a manufacturer.

For the trade association, however, it poses problems. Ten independent distributors may each send two people to an NFDA meeting and show. If a bigger company acquires all ten, the whole group might only send three or four people. So consolidation makes it difficult to sustain a show. Add a bit of fuel to the fire by noting that all these large distributors have their own shows and one sees the problem.

NFDA has recognized the challenge and has responded by consolidating its two traditional annual shows, one winter and one summer, into a unified, more substantial enterprise.

It is hard to know exactly what to make of an association such as the NFDA. It is that rarity in the modern world: an organization that does not seem destined to self perpetuate. Long after polio was eradicated the March of Dimes marches on, doubtless doing good work, but nonetheless work far afield from its original purpose. Think hard and try to name an organization that served its purpose and just closed.

If NFDA had a personally ambitious director looking aggressively to build a career for himself – instead of a staff focused on its current members’ desires – he would doubtless be finding ways to expand the definition of a specialty food distributor. Perhaps all those produce distributors could be brought in the loop. Maybe the big wholesale grocers or the specialty food sections of those retailers who self-distribute could be allowed to join. Surely there could be a retail advisory board.

It doesn’t seem likely, however. These distributors know who they are and what they want from their association. For better or for worse, the NFDA fortunes will rise or fall with this particular breed of DSD distributors. That is the right of these people and their companies, and I wish them well.

One solution may be to separate the future of the NFDA from the future of its trade show. Although traditionally the trade show provided financial support for the association, that is not the only way for an association to be financed. An annual meeting or convention could still be held but with an educational program designed to help distributors run their businesses better.

If the trade show is to continue, the long-time exclusion of retailers may have to be reanalyzed. After all, today, the surest way for a manufacturer to have a product picked up by a distributor is for a big chain to issue a purchase order for the product. A given retailer buys through a distributor because it has decided that getting delivery through the DSD method is the most favorable way to work. In this sense there is no reason to exclude retailers from the show.

Even the definition of a DSD distributor may start to prove problematic. Today, if a retailer buys out a specialty food distributor or starts one from scratch, the company is not eligible for NFDA membership. Yet how important is ownership? Today, with distributors signing contracts to be a retailer’s exclusive specialty food distributor, it is not clear that, operationally, this is much different from a retailer buying a distributor. It gets hazy why one should be entitled to membership and the other excluded.

Manufacturers are perhaps most flummoxed by the wrenching changes in specialty food distribution. After all, if distributors are going to have exclusive relationships with certain stores, it means a manufacturer can no longer turn to a distributor and count on that distributor selling the product into all the stores in the region. In fact, it means that most manufacturers will have to be ready to supply all distributors so that they can reach the chains that buy through each individual distributor.

In effect, the situation is identical to manufacturers having to sell directly to the warehouse of each chain in the region. What these exclusive contracts are about is specialty food distributors agreeing to provide certain levels of procurement, warehouse and delivery services to the contracting retailer. In a sense, the exclusive distributor arrangements are a final reminder, if one is still needed, that the distributor is really working for the retailer.

It might be for the best if this fact awakens manufacturers to the reality that getting into a distributor is just part of the battle. The product still has to be sold into retail and onto the consumer. In paying attention to our internal industry convulsions, we would all be wise not to lose sight of this fact.  FDM