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    FEATURE: Strength in numbers

    Retailers here and abroad turn to buying alliances to level their playing field.

    By Jenny McTaggart

    Competitive times call for creative measures. That's why a growing number of midsize and smaller food retailers here and abroad are joining forces to strengthen their businesses. Instead of coming together permanently--as in mergers and acquisitions--many are turning to alliances in which they partner to get better prices for supplies and services by buying in bulk.

    The functions of these alliances range broadly from wholesalers and independents that use online reverse auctions in the United States to formal buying groups in Europe created to beef up retailers' buying clout. One thing the participants have in common, however, is an urgency to compete with global retail giants on a playing field that continues to get smaller and smaller.

    "Because of consolidation and increased competition in the grocery industry, more and more companies are embracing group procurement," notes Stuart Zlotnikoff, s.v.p. of the National Grocers Association. "NGA responded to this, particularly with wholesalers who are supplying the independent sector, in the face of competition not only from Wal-Mart and other alternative formats, but also from the high-volume, large-scale chain competitors.

    "These wholesalers and other grocers have had to look toward utilizing more sophisticated techniques, which on one hand includes such things as reverse auctions, but also means aggregating their volumes. So their negotiating clout is reinforced, and they're able to start approaching some of the levels of leverage for buying that some of the large national and international companies achieve," Zlotnikoff says.

    Meanwhile European food retailers, many of whom have been competing in highly concentrated markets for at least a decade, continue to develop alliances to increase their buying clout. Currently there are roughly a dozen retail groups, and although their primary focus is on getting the best prices possible from manufacturers, they also work together on promotions and marketing functions. Private label development has been another strong area for these groups.

    Hermann-Dieter Disselkamp, founder of AMS, one of the largest European retail alliances, says he'd like to see a U.S. retail buying alliance but acknowledges that it would be difficult to initiate. "You see the best example in the Ahold group. Even when Ahold had about 10 different organizations operating in America, they had no common buying," says Disselkamp, who now consults for retailers worldwide through his company, DC International Retail Services.

    "It's not a question of pooling volumes as we did in Europe and trying to find a price to compete with Wal-Mart," Disselkamp explains. "In the U.S., the other retailers are far away from this advantage. They must be sensitive in other areas, such as better information technology and better techniques."

    Technology is one area that NGA is focusing on as it looks for ways to give wholesalers a buying advantage. Earlier this year NGA conducted a pilot for a program that gives its members the opportunity to reduce their cost of goods on supplies such as packaging materials, capital equipment, private label products, and food processing ingredients through a Web-enabled reverse auction program developed and managed by San Francisco-based ecMarkets, Inc. With reverse auctions the seller sets its starting price and selling conditions, and buyers control the process by bidding down, all in real time on the Internet.

    Aggregation without aggravation

    NGA's pilot auction events, which included three independent supermarket chains and one regional wholesaler, generated an average savings of 25 percent for thermal paper, stretch wrap, plastic bags, and paper bags, with savings ranging from 12 percent to 40 percent on these categories, according to Zlotnikoff.

    Since then NGA has progressed to a full rollout of the program, called NGA Aggregation Group, and a large number of participants have joined, Zlotnikoff says. "We just had an event where a major wholesaler saved a half-million dollars on one item. This is pure, net bottom-line profit—money that they never would have seen, that no one would have offered," he notes.

    Zlotnikoff stresses that this is aggregation with "no strings attached." In other words, companies can maintain their market autonomy and market identity, and they don't have to buy shares or pay a fee to join.

    EcMarkets also manages two other procurement groups—the Masters Group, which includes several of the largest U.S. dairy companies, and the Swander Pace Buying Group. As part of the NGA group, ecMarkets' team of sourcing professionals is available to consult with members in writing effective requests for proposals, qualifying suppliers, and managing complex specifications requirements.

    At this point the auctions don't include consumer products, but private label goods are an opportunity, Zlotnikoff says. "Everyone in the industry has been focusing on how we can buy Tide cheaper against Wal-Mart. But the answer is you're never going to be able to because of the way of the supply chain. We're trying to cut costs on expense items and also in private label, which kind of crosses that border.

    "There's nothing stopping us from using this for services," Zlotnikoff adds. "It would be my dream someday to see how we could do this in terms of health care."

    Of course, U.S. retailers aren't the only ones turning to alliances to combat Wal-Mart's strength. Mexico's three largest domestic food retailers, Gigante, Soriana, and Comercial Mexicana (CCM), have announced a joint buying and operational alliance in which they'll seek alliances with suppliers, work to improve technology and logistics, and reach greater economies of scale.

    This type of alliance is quite different from what NGA is doing, but it's based on the same philosophy of finding strength in numbers. Another approach is being taken in Ireland, where Superquinn, a retailer with 19 stores, and Stonehouse, the country's biggest independent wholesaler group, have formed a joint buying venture called Aontas Grocery & Food Services, Ltd.

    "This will transform Superquinn's buying power by bringing us into a new, bigger league," said executive chairman Feargal Quinn in a press release announcing the new venture. "As a group with only 19 shops, we compete with multinationals who buy for several hundred outlets. Strategically we want to combine the responsiveness of a small, customer-driven company with the buying power of a larger player."

    Superquinn is already a member of AMS, but the company sees this move as a further step in extending its buying power. Specifically the venture can increase its purchasing volume of leading brands, notes James Burke, purchasing manager at Superquinn and director of Aontas.

    "The combination of Superquinn as a retailer and Stonehouse as a wholesaler leaves room for many synergies going forward," Burke says. "The obvious benefit is increased buying power, but there are others. For example, Superquinn is strong in fresh foods, and this is an area that Stonehouse views as an opportunity for the 500 shops its wholesalers service." A pilot project in which Superquinn's central meat-packing facility supplies meat to Costcutter stores is currently underway, he adds.

    Likewise, Stonehouse brings Superquinn a strong expertise in areas like private label, Burke notes.

    Since the group is made up of a retailer and a wholesaler, conflicts aren't as likely as in a pure retail venture, according to Burke. "Both companies share many similar values and aims in business, both are Irish companies, both are made up of family-run businesses, and, most importantly, there's a strong respect within the group for the other's position."

    By Jenny McTaggart
    • About Jenny McTaggart

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