By Bob Anderson
Billbacks, deductions, diverting and funny money ultimately hurt both the retailer and manufacturer — not to mention the added costs to shoppers.
I get asked a lot about supplier/retailer relationships — or lack thereof. For years, retailers and CPG companies have debated how the other side makes its profit. So let’s be clear. No matter what side of the sale you’re on, you have many of the same costs — for wages, insurance, transportation, utilities, and such. So let’s take them out of the discussion.
IT’S GONE OFF THE RAILS
How you make a profit is quite simple: you earn it. Yes, that sounds so simple it’s almost laughable. But let me explain. You earn a profit by having a sound business plan for all aspects of your business. From employment to shipping, from procurement to sales, you need a plan that ensures you can pay your bills, pay your employees and still have something left over. Unfortunately, the ethics of earning a profit have gone off the rails.
It started back in the 80’s when the government decided to implement pricing guidelines, which regulated manufacturer prices. On the surface it sounded good, but it wasn’t thought out well. It was just a matter of time before the “maximum allowable cost” was much higher than the item had ever been. Manufacturers built in a cushion to protect themselves in case of inflation.
To further protect themselves and their sales, they started the term that retailers all would grow to hate: billbacks. Money they would send you after the sales of their product. This is different from off-invoice — the money that was deducted before you paid the invoice. Well, this billback system, tied to promotion execution, only proved to be a pain, adding more cost to administrate and manage. It proved to be an expense center for retailers.
Well, as this was going on, a new “practice” began, called diverting. Seems that for a variety of reasons, CPG companies didn’t have a consistent off-invoice price list across the country. So a retailer on the East coast might pay more or less than a retailer on the West coast.
It didn’t take long before retailers across the nation set up diverting offices in their buying offices to exchange “their deals” with others outside their selling area. Nor did it take long for the CPG folks to create their very own “diverting police” to watch trucks going to and from retailers’ warehouses. They were hoping to catch these actors, even marking cases and changing UPCs.
So let’s put a star here as the starting point for making a profit that isn’t really earned. Let’s be honest — until then the expectation from all was that the retailer was to sell the products to their customers and not to be “middle man” for another retailer.
‘A BRILLIANT DEDUCTION!’
This brings us to today’s new creative ways to make a profit that aren’t really earned. With the help of some pretty smart consultants, new types of deductions began appearing on CPG companies’ desks. Deductions were hardly new, but they began to be used very differently. Retailers were now charging for anything from a nail sticking out of a pallet to a load that was delivered either too late or (yes!) too early. Before I start getting letters from buyers: Yes, I too asked and expected that loads should be on time (within reason), that loads should match the quantity on the purchase order and that agreed-upon lead times should be met. The same goes for payment terms that are signed off on. But here again, the “partnership” failed.
Seems that all these deductions were really the retailer’s version of the vendors’ billbacks. These deductions wound up on the retailers’ P&Ls and hit their bottom lines.
This process accelerated when retailers began bringing in large consulting companies. These outside firms poked around and found new ideas for deductions from vendors, and then shared these ideas with their other retailer clients. The consultants would focus on different departments, and highlight areas that were “not up to speed with current practices.” Even worse, they got a cut of the “new money” they found via these new deductions. Questionable — and even unethical — practices spread like cancer.
At this point one not in the industry might ask, why couldn’t this be worked out between all parties? Good question. Why was a new profit center just stuck like an addict’s needle into the retailer’s arm? It didn’t matter if a truck was late due to weather, not being able to get an appointment or even if the lead time was less than agreed. LOL — it didn’t matter that there was a major truck driver shortage going on or even a pandemic. I love driving behind a retailer’s truck and seeing “we’re hiring” on the side of the trailer being pulled by a third-party driver.
But this new love affair didn’t stop at the warehouse or even the backdoor. Nope, it hit the shelves, too. Deductions for lost sales were now a new means for profit. Again, I agree that a supplier has an obligation to fulfill its commitments. But here again, the dance begins. In their own defense, CPG companies will point to lack of commitment and follow-up on forecasting and lead times. They complain about orders being placed and then canceled after the product is made. What’s more, the lost sales in many cases are not the vendor’s fault. It can be but due to retailers not having enough help to stock the stores, thus leaving empty shelves while the product is sitting in the back rooms.
EXPLAIN THIS, PLEASE?
I love it when the buyer from chain X goes in to chain Y and sees a better price — or an item that they did not take. How does he or she explain that to the boss?
Well, first, retail prices don’t equate to cost, because not all margins are created equal. Second, maybe if the buyer had met with the supplier, they too would have the new item on the shelf. It’s been my experience that new items drive sales and profits.
I’m actually not on the side of the CPGs — they all know the rules of engagement when they sign the vendor agreement. Their only defense is in living by what they agree to. Hopefully, if there is an exception like weather, both sides can call no foul. That buyer may remember a saying by a wise retailer named Wilfred Von der Ahe (founder of Vons Grocery Company) “that if they are not in business, we won’t be in business, that there is a reason why we have buying offices and don’t negotiate on the sales floor or discontinue items from a supplier only to punish our customers.”
My points are simple. We’ve taken a simple industry (food), a simple process (buying and selling) and allowed a lot of cost to be added to both. We don’t need retailers sent to drug rehab for their addiction to these new profit centers, and we don’t need diverting police. We certainly don’t need folks on either side spending time on ways to make a profit except by the old fashion way: buying and selling at a fair and reasonable price.
I’m afraid that like many things today, common sense and sitting down and truly negotiating with each other is becoming a thing of the past. That it’s become easier to pick up a pen and write a billback/deduction than it is to pick up the phone.
HONOR THY COMMITMENT!
Let’s hope that knowing how to buy and sell, and how to negotiate and honor one’s commitment, is not a lost practice. And let’s hope that profit has not become a dirty word. There’s an old African proverb: “When elephants fight, the grass suffers.” The truth is, CPGs and retailers need each other in order for both to survive. When they fight, consumers suffer the most. ■
Bob Anderson is the retired VP/GMM at Walmart, where he worked for 17 years. He also spent 20 years at Vons Grocery Company and 5 years at Pace Membership Warehouse. He can be reached at [email protected].