TGroup Marketing

The decline of the independent drug store

The 2008 NACDS (National Association of Chain Drug Stores) Marketplace Conference will be held from June 28-July 1 at the San Diego Convention Center in San Diego. This is the largest drugstore-related trade show in the industry. It's where buyers from most all of the major chains come to attend meetings, network and look at the latest in merchandise to stock their shelves. We were at the show last year and although it's a great show, we won't be going to San Diego in June.

While browsing the NACDS "Facts & Resources" page I saw that sales at "all drug stores" have risen from $50.5 billion in 1986 to $189.3 billion in 2006. In 1986, $30.2 billion of this was attributed to chain drug stores (about 60%). In 2006, chain drug stores' portion of total sales was $144.8 billion (about 76 %). It shouldn't come as a surprise to anyone that there are far fewer independent drug stores and local chains than there were 22 years ago. Where I live in South Florida I can think of just a few independents that are still around.

That means that there are fewer players to approach with new products and ideas so competition heats up. Add to this the fact that buyers are already overworked and over-stressed and you've got a new product launch landscape that is much more difficult to navigate than it used to be. It doesn't mean though that small businesses don't have a chance at finding success in the mass market. It does mean that now more than ever before, companies need to do their homework and be fully prepared before they approach a buyer.

Launching a new product in the mass market

Just about everyone with a great idea for a new gadget dreams of launching a new product in the mass market. It used to be a lot easier for a small company to launch new products than it is today. Years ago, a small company with a new product or idea could start with neighborhood retailers, first building a local customer base and then fanning out across the region, the nation, or the globe. But the retail landscape has changed tremendously with huge chains with thousands of outlets dominating the market today. Over the last 15 years countless small chains and independent operators have either been swallowed up by their larger rivals or just gone belly up because they couldn't compete with the behemoths. This makes it much more difficult for small companies to launch their products because a) there are fewer retailers to approach and b) there are thousands of companies competing for the attention of fewer and fewer buyers. 

Twenty years ago, trade shows could often be a cost-effective way to introduce a new product to thousands of potential buyers but like retail, the trade show industry has seen a wave of mergers, acquisitions and drop outs. A lot of the trade shows that used to cater to the small- and mid-sized operations have seen their attendance dwindle and lots of them have just disappeared entirely. 

U.S.For example, the North American Men’s Sportswear Buyers (NAMSB) show used to be one of the biggest apparel trade shows in the US but now it’s gone. For years, NAMSB was the trade show that retailers of all sizes attended to check out the latest and greatest upcoming styles. It was also where some now-famous names got their start in the mass market. At a NAMSB show (many) years ago a friend wanted me to meet the owner of a new company that she knew was going to be hot. We walked up to a small booth staffed with just one guy showing off his new t-shirt designs—his name was Stussy and a year or so later his company took off. For him, the NAMSB show was the ideal springboard to success. Today though, there are fewer shows to choose from and they’re a lot more expensive, making them a bigger gamble. So if you’re thinking about doing a trade show you’d best be prepared to do your homework, invest some money and do it right or you’ll be setting yourself up for failure. 

What does this mean to a small business with a great product or idea? What it means is that yes, it can be tough to launch a new product in the mass market but it also means that a company can hit the big time a lot faster today than in the past. So what is the secret to selling to Wal-Mart or other large retailers? For the novice, the answer is that there is no easy answer—launching a product in the mass market is not for the faint of heart but it can be done. The answer lies in doing your homework: 

• Know your business—how are you going to produce the product and how will you distribute it? Do you have the capacity (production and financial) to meet the demands of the mass market?
• Know your product—what sets your product apart from the competition? What makes it unique? What is its special appeal?
• Know your retailer—where does your product fit in the store and how are you going to display it?      Research your target vendors—what are they looking for in new products? What is their process for reviewing new vendors?
• Know your customer—who is going to buy your product and why are they going to buy it?
• Know your marketing plan—how are you going to get the word out about your product to your      customers? 

Knowing the answers to these questions will help prepare you and your company for successfully launching your new product in the mass market.

Some acronyms and retail terms explained

Here are some more retail terms and acronyms explained:.

Action Alley: The sales area of a store located immediately after entering.

ANSI: American National Standard Institute

Breakpack: A carton received in the warehouse with two or more inner selling units that can be broken down and shipped to the stores.

Case Pack: Merchandise shipped in full cases. Cartons cannot be broken into smaller cases.

CO-OP: An advertising allowance offered by a vendor, payable upon proof of an ad having been run.

FOB: Free on Board or Freight on Board - the point at which the ownership of merchandise passes to the purchaser. Used to indicate that the seller provides transportation from the factory to trucks, railcars or consolidators after which the buyer pays all the carrier charges.

Gondola: Primary merchandising fixture consisting of a base, free-standing vertical wall, and a number of four of sections of shelving.

Gross Margin Percent: The Gross Margin Percent is calculated as follows:  Sales - Cost / Sales = Gross Margin Percent.

Letter Of Credit: The method of payment for import purchase orders.

LIFO: Last In, First Out - A method used in rotating inventory.

LTL: Less then Truckload - mixed freight, not all the same supplier or purchase order.

MABD: Must Arrive by Date - The date in which a purchase order must be received at the warehouse. 

Master Carton: Several cases being shipped in one package. These can be broken down into the individual cases and sent to stores.

Master Pack: Carton received that contains more than one warehouse pack or shipping unit inside it. This is very common in certain orders, such as imports.

TI/HI: Also called Pallet Pattern. TI refers to the number of cases that make up a tier or layer on a pallet. HI refers to the number of tiers or layers on the pallet. A pallet holding five cases of an item on a layer, stacked four high has a TI/HI of 20.

Turn: Sometimes called a cycle. The number of times a product completes a cycle of moving through a warehouse generally measured within a year’s time.

UCCNET: Uniform Code Council Network - A not-for-profit subsidiary of the Uniform Code Council, provides globally-endorsed item registration and synchronization services that reduce the costs and delays associated with bad data. By utilizing UCCnet services, companies and their trading partners can achieve significant improvements in supply chain efficiency by using and exchanging information that is: accurate, up to date and compliant with industry standards.

Vendor Pack: Original packaged quantity or merchandise as shipped from the vendor.

Getting your stuff on the floor

I talked about how important it is to follow up to make sure that once your merchandise is delivered, it also makes it on to the selling floor. A couple of recent incidents made me think of a few more things that are good to know so that maybe you won't have to deal with the same headaches:

1. Pre-load your display with your product before you ship. I was just talking with someone who shipped merchandise to a couple hundred drug stores (to the distribution center). The merchandise was on two pallets and the displays were on the third. The displays didn't make it to the stores so the product went on the shelf without the display. This was bad because it's a new product and the display tells the story very nicely. It was a big hassle to get the displays out to the stores but there's still no guarantee that they will make it on the shelves. A LOT of times, even if you ship the displays along with the merchandise you can't count on them being used. These folks are extremely busy and if it's not something that they can just open the master carton and put on the shelf, they usually won't go to the trouble.
   
   • Speaking of displays, don't invest a ton of money into making long-lasting ones. You can plaster "DO NOT THROWAWAY-PLEASE REUSE" in a hundred places on the display but it's still going to end up in the garbage. Most displays are disposable and a new one comes with each shipment. Again, these folks are busy and are used to getting disposable displays. Unless it's just too big or too heavy to haul off to the trash, there's a pretty good chance that your display is going in the garbage when it's empty.
2. If shipping a hanging display (sidekick) make sure to stick a few extra hangers in the box. Clips have a habit of getting lost somehow. If the clips aren't right there when they go to put out your display, then it's probably going to end up on the floor.

The point is that if you want your products to make out to the selling floor in a particular manner, then it is your responsibility as the manufacturer to do whatever you possibly can to make sure that it happens. That means no assembly, no complex instructions, no having to make two or three trips to the back room, no putting shirts on hangers, etc. Big manufacturers might be able to get away with shipping unassembled displays or whatever but I can tell you from experience that 99% of the little guys can't. So, do yourself a favor and do whatever you can to make it a short, quick trip for your goods to go from the back door to the selling floor.

Moving at the speed of a giant

Becoming a vendor with a chain or mass merchant requires a lot of patience because these large companies typically move at the speed of drunken snail (unless you're in the hot seat, then they want it NOW). Generally, the time it takes to get vendored ranges anywhere from one to six months (or sometimes more), but it depends on the retailer, their policies and their bureaucracy. For example, there are seven layers of approval to navigate before a company completes the process at Wal-Mart. It can be done in as little as a month but it generally takes a little longer. At least at Wal-Mart everything can be done online, which speeds things up a lot.

At K-Mart, they're still doing things by hand (literally). I received a K-Mart vendor application in the mail recently that weighed about four pounds. Every single page had to be filled out with a pen and in order to be able to fit everything in the allotted space, I think you have to be one of those artists who can write someone's name on a grain of rice. I soaked my hand in a bucket of ice when I was finished. Luckily, I had the good sense to make copies before loading the application and all of the required attachments onto a pallet and hoisting it all into the back of a semi for its trip to their home office because after it arrived, they promptly lost it and needed another copy. I just received a vendor application for JC Penney in the mail too and it looks to be about the same size as K-Mart's.

In any case, the point is that becoming a mass merchant vendor requires patience, determination and tenacity. Be sure to read everything carefully and have a clear understanding of what they require before you get started. A simple mistake (for instance, the Wal-Mart system doesn't accept commas in address lines) can kick out your application and send it to the back of the line where it might linger for eternity.

Alternative to guaranteed sale

If faced with a situation where a buyer is insisting on a guaranteed sale in order to close the deal, you might consider offering markdown dollars (MDD) as an alternative. While each retailer has its own system for managing MDD, here is basically how it works when offered as an alternative to a guaranteed sale:

• After a specified period of time (six - eight weeks, etc.), rather than sending the unsold product back to you the manufacturer (or distributor), the retailer reduces the selling price of the item(s). With MDD, you are offering the retailer a specified reduction in the price paid for the goods should they have to reduce the price to clear out the remaining inventory.

An advantage of offering MDD is that you are getting some money for unsold goods rather than having them sent back to you. Here's an example: A manufacturer sells a shirt to a mass merchant for $7.25 who in turn retails it for $14.99. At the end of six weeks the selling price of any unsold shirts is reduced to maybe $7.99. In offering MDD, the remainder of the shirts are billed to the retailer at $4.00 (or whatever the manufacturer and retailer negotiate). This way, you are able to cover your costs and the retailer is happy because they sell the rest of the goods and are still able to get a decent profit margin.

Here are a couple of potential disadvantages of offering markdown dollars:

• There are lots of ways for retailers (usually at the district or store level) to manipulate MDD and some have been known to do so in order to unfairly take advantage of it at the expense of the manufacturer or distributor;
• Usually, the retailer will want to withhold payment of some or all of the invoices for up to 90 days.

This is by no means a comprehensive overview of markdown dollars but it should at least give you a general idea of how the system works.

Following instructions

The assumption that I don't need to read the instructions has been a problematic fault of mine that has caused headaches and dollars. Here is just one example:

In Wal-Mart Department 3 (stationery), we pay the freight so doing invoices is straightforward--it's just the cost of the goods and that's it. In the Mens Department though, Wal-Mart pays the freight. Earlier this year, the first time we did business with this department, our total order was for almost $200,000. We shipped the goods and then invoiced Wal-Mart, adding the freight cost to each invoice. When the payments arrived I noticed that each invoice was paid minus the freight. I thought it was just an oversight so I called Invoicing at their headquarters and informed them of the error and was told to re-submit the invoices. I ended up going through this several more times but did not receive payment. I then tried invoicing each store but still no luck. After a couple of months I finally spoke to someone in Invoicing who fully understood the process (I'd spoken to lots of people but no one could identify the problem). She was very nice and asked me if I had read the Wal-Mart Supplier Guide--particularly the part about shipping freight collect. I told her that no I hadn't, it had somehow slipped my mind.

Afterwards, I did read that part of the Supplier Guide and learned how to prevent this from occurring again the future. Since then, we haven't had a problem. However, because of our failure to read the instructions beforehand, we had a heck of a time getting reimbursed for the $30,000 in freight. It took almost nine months to get it. We were actually very fortunate because I think Wal-Mart probably would have been within its rights to deny the payment being that we did not follow their instructions for billing the freight charges to them.

In dealing with other large mass merchandisers, we've had a few other issues with getting paid as well. But, after some hard learned lessons, we realized that reading all of the instructions and asking all of the questions beforehand was a tremendous time saver and a great way to avoid future problems. So do yourself a favor and learn from our mistakes.

Preparing your company

Before mass marketers sign the dotted line on your vendor agreement they will thoroughly investigate your company and be sure that it is financially stable and capable of fulfilling its obligations. Large mass marketers sometimes hesitate to do large-scale business with a very small firm unless they feel secure about its ability to fufill orders and maintain sufficient cashflow. While rapid growth sounds good it can also be the kiss of death if a business is under-capitalized. We'll discuss that in greater detail in another post.

Most mass marketers will require you to be listed with Dun & Bradstreet and will review your report before moving ahead with the process. Wal-Mart requires potential suppliers to purchase the report ($75) themselves. Firms that are rated as "risky" will not be invited to complete a vendor agreement and instead, will receive notification that they must improve their financial position before moving ahead. Several times we have seen where potential suppliers have been rejected due to a Dun & Bradstreet rating of 7 or more. Large retailers are generally very strict about this and don't allow much wiggle room at all so be sure to check your D&B report beforehand.

More on guaranteed sales

Like I said in the previous post, there are times when offering a product as a guaranteed sale is the only choice you'll have if you want to place your goods on a mass merchant's shelves. If and when that is the case, just be sure to take steps to protect yourself and your company. Here are a few tips to help you along the way:

• Don't oversell. While it might be tempting to get a nice fat purchase order, you will be far better off in the long run to have a strong sell-through even though the orders are smaller. Buyers will look at the overall percentage of goods sold over a specified timeframe when determining whether or not your products are going to stay or come back to you. Stores can always reorder.
• Use whatever tools the retailer has available to you to monitor your sales. If the merchant doesn't have an online system for you to use, then you can go to the individual stores (if they are in your area), call the stores or use a merchandising company. You want to make sure that your products are on the shelves.
• We recommend that you do not agree to a guaranteed sale on dated goods (e.g., products that have dates on them or relate to a specific event such as a sports championship, festival, etc.) or anything that you will not be able to sell again. Most buyers understand this and will not put up a fuss.

More about returns

In the last post I mentioned that we've seen several small companies go out of business entirely because of returns from a single large customer. Sometimes there isn't anything you can do to avoid returns (damaged product, spoilage, wrong merchandise, etc.) but there are steps that you can take to minimize their impact on your bottom line.

The first step begins when you negotiate your vendor agreement with a mass merchandiser. Sometimes they will ask you right from the start if you will offer them a guaranteed sale. That means that after a specified time period they can return any unsold merchandise if they're not happy with the sell-through. The temptation is to say yes because you don't want to rock the boat and risk losing the sale, but before you start bobbing your head in agreement, you'll really want to think about it.

When we negotiated our agreement with the stationery department in Wal-Mart we agreed to the guaranteed sale--not because we wanted to but because in this case it was necessary in order to get the agreement. Often times you won't have a choice because the buyer will make it a condition and if you say no, then the meeting is over. If there is no mention of a guaranteed sale though, don't go ahead and offer it up in the hope of getting a purchase order unless you've really thought about it and can financially handle it. More about returns in the next post.