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Looking over their shoulders toward Bentonville, Ark., three of the nation's largest food retailers are blowing up their perishables buying and merchandising models, aiming to create central procurement systems that will put them on a more even footing with super-centralizer Wal-Mart.
In search of the kind of efficiencies and clout that are imbedded in the business model of the world's largest retailer, Safeway, Ahold, and Kroger are in varying stages of building new mechanisms that will shift responsibilities for buying perishables from their various operating divisions to central locations.
Many in the industry have been waiting for that shoe to drop since the wave of supermarket consolidation in the late 1990s. While the moves are widely expected to make the big chains more productive and profitable in the long run, there's some speculation that centralized perishables procurement might give the majors' stores a me-too image that nimble independents could exploit. And the industry's previous ventures with centralization have caused some to remain skeptical of these latest ones.
Central procurement is hardly a new concept for veteran retailers and suppliers, who have seen the practice emerge, recede, and reemerge in the past two decades at many of the country's large chains and co-ops. The Great Atlantic & Pacific Tea Co., the former American Stores Co., and Wakefern Food Corp. all were early adopters.
"The current movement toward central procurement is absolutely evolutionary, not revolutionary," says Kathy Means, v.p. of the Wilmington, Del.-based Produce Marketing Association. "Ever since the rampant consolidation started, there have been all these nervous whispers about when central buying would ensue. It's certainly safe to say the waiting's over."
What's happening today is not necessarily the result of consolidation, but of the economy and the competitive business climate that is forcing everyone to look for an edge, Means says, noting the growing use of performance guidelines, category management, and supply contracts. "Large retailers are seeking to operate their perishables departments in much the same way as they do the center store."
Supermarkets are scrambling to build efficiencies that offer the most value for owners, stockholders, and employees, "and central procurement stands out as a way to accomplish this," says Means, adding that she expects other chains to keep close watch on its progress at Safeway, Ahold, and Kroger.
Jon Long, produce buyer/supervisor for North Canton, Ohio-based Fishers Foods, a six-store independent that will open its seventh store in May, is among those who see a golden opportunity for regional independents, which typically excel at high quality perishables. "The market is ripe for aggressive independents to gain ground," says Long. "Certainly there are advantages to being big, but there are equally important advantages to being small and nimble.
"Being small gives us the ability to respond to changes in market that often happen overnight. Setting a produce ad so far out under a central procurement system will greatly diminish the large chains' abilities to respond to the market," he says. "Instead, they will be creating false markets by being forced to plan 30-plus days out when adequate supplies may not be available."
Jack H. Brown, chairman, president, and c.e.o. of privately held Stater Bros., the 155-store chain based in Colton, Calif., is unfazed by the rapid advancement of central procurement initiatives.
Recalling A&P's short-lived entry into California early in his career, the 50-year grocery veteran says, "They came to town with 10-year leases, and they brought truckloads of unknown brands and labels to the West. And from that standpoint, even though they were well-known in the East, Western shoppers weren't going for it."
Brown also recalls American Stores' various stabs at central procurement through the years, "which also didn't work well. And I don't know why they didn't work, but I do know that the closer you are to your customers, and the more your company is a part of the community, the better able you are to listen to your customers and be victorious. The supermarket battle will be won as it's historically been—in the trenches—because that's where customer needs are best served."
The groundswell of interest in centralized buying is being driven by information technology, or the lack of it, according to officials at Torrance, Calif.-based Agribuys, Inc., a leading supply chain integrator for the food industry.
"Wal-Mart has done a tremendous job of positioning itself as a low-price leader, but the reason is because it has made an incredible investment in information technology systems from the very, very beginning," says Minos Athanassiadis, Agribuys' v.p. of produce. "What Ahold, Safeway, Kroger, and various other retailers are trying to accomplish right now with central procurement is a game of catch-up with Wal-Mart's strong technology position."
Adds marketing v.p. Sid Valluri, "Because of its size and scale, Wal-Mart is forcing its suppliers to clean up their acts by demanding a higher quality of information. Essentially, Wal-Mart makes its money buying; it doesn't make its money selling."
Agribuys has been working with Safeway for the past two years on a long-term, large-scale implementation of a perishables trading platform that encompasses every step of the chain's perishables procurement process. "As part of the ongoing pilot, we're developing end-to-end integration to enable Safeway's and their suppliers' systems to 'talk' with each other, which is a huge leap forward with regard to what's happening with this industry," Valluri says.
The chains' need for uniformity among their disparate groups, says Athanassiadis, "is an absolute key, so that product information means the same thing in all divisions. In this post-acquisition digestion phase, these companies realize the obvious benefits of having the technology in place to allow one buyer to procure from one grower/shipper and distribute products accordingly to various divisions."
Kroger, Safeway, and Ahold are each consolidating all buying and merchandising for the chains under their banners. While their goals are similar, their strategies are somewhat different.
The central procurement plan underway at Safeway, which operates 1,700 stores and had $32 billion in sales last year, is apparently on a faster track than the plans at Ahold and Kroger. Safeway, which did not respond to interview requests, reportedly is shifting produce procurement to a central hub in Phoenix, and related merchandising and promotion functions to its Pleasanton, Calif. headquarters.
The moves at the nation's third-largest supermarket company, which sources say could be in effect as early as mid-April, continue Safeway's ongoing strategy to consolidate perishables purchasing power, which formally began last year when the chain assembled a central beef procurement facility in Denver.
No. 1 chain Kroger, which has 10 regional offices running more than 2,000 stores under numerous banners, is consolidating the buying and merchandising functions for each of its subsidiaries in its Cincinnati headquarters. The centralized strategy reportedly will be phased in gradually throughout the summer with completion tentatively set for Sept. 1.
Although a spokesman declined to be interviewed because of the company's reluctance to "share details about our centralized procurement plans with our competitors," he provided information that was released during Kroger's third-quarter conference call with analysts in December.
"The third element of our strategic growth plan is to leverage our size more fully to achieve even greater economies of scale from Kroger's $50 billion annual sales volume. We will accelerate the centralization of merchandising and procurement, which began years ago, by consolidating more functions in the Cincinnati area. We believe this will better align us with vendors that are set up to serve one primary contact point at large retailers," chairman and c.e.o. Joseph Pichler told the analysts.
The changes underway at Kroger and Safeway, which both companies announced in January, have already reduced head counts. Safeway reportedly has completed its first big round of personnel cutbacks at divisions around the country, while Kroger's operational restructuring will include the elimination of approximately 1,500 managerial and clerical jobs, with most of the layoffs coming this year.
For Ahold USA, the move toward centralized perishable buying formally got underway late last fall, roughly six months after the company announced plans to create a standalone perishables procurement organization (PPO) division in Canton, Mass. The operation will serve as the primary hub for all perishables presentations, replenishment issues, promotions, and most new item introductions.
Regional buying to end
Key members of the PPO team—including John Mason, Ahold USA's s.v.p./perishables procurement—have shared details about the framework and scope of the new buying group at regional trade meetings.
Although no firm timeline had been established for final implementation, published reports indicate that all meat, seafood, and produce buying will eventually be discontinued at Ahold's regional headquarters offices. Previously, the Netherlands-based conglomerate had allowed its six U.S. retail groups to do their own buying.
Ahold says it created the PPO not only to increase its purchasing power, but also to enable its operating companies to share ideas and devise best practices. The company says the PPO will improve inventory control, provide guidance for promotional and seasonal planning, and create new business initiatives and opportunities while coordinating activities among the operating divisions.
Once the PPO is up and running, Ahold says the operating companies will be better able to meet the needs of customers, oversee product mix, set retails to achieve department profit margins, and develop product specifications that are inherent to local markets. Ultimately, Ahold says, it wants to evaluate all "best price/best program" opportunities from a central vantage point that will enable it to take new items from presentation to stores within 21 days.
Category managers at the chain's operating companies reportedly will have the final say on how specific items are marketed and merchandised at their divisions.
Gary Giblen, s.v.p. and director of research at CL King & Associates in New York, views the central procurement initiatives as "a legitimate business strategy, and for the three companies we're talking about here, it's pretty easy to see why." Ahold, Safeway, and Kroger, he says, are not only among the best managed, but are also among the most stable of the large retail companies.
Giblen says he expects second-ranked Albertson's, Inc., based in Boise, Idaho, to pursue a similar centralized strategy for perishables procurement in the coming year. "It would kind of be a natural thing, precisely because Albertson's is reexamining the full scope of its business practices with its new c.e.o.," he says. The company declined an interview request.
While Albertson's, which operates more than 2,400 retail stores in 33 states, has not announced any changes in its procurement model, one vendor says the chain already operates, "via a semi-central program that gets its marching orders from the top, but allows for some deviation within its different divisions—provided they can make it work."
'Fear and confusion'
Although there is no shortage of opinions in the trade regarding central procurement, it remains a subject that most suppliers, retailers, and commodity groups are uncomfortable discussing for the record. "Why are so many of us reluctant to speak about it? Two words: fear and confusion," says one supplier who speaks for many when he adds: "I do not want to put my company in a bad position by saying the wrong thing."
"These are huge and significant changes, and people are scared and anxious, not just on the retail front, but also on the grower/shipper front," says Agribuys' Athanassiadis. "Relationships that have been built in the produce business over the last 50 years are changing, and many are left wondering what's going to happen to their businesses. It is important to note," he adds, "that Wal-Mart, Costco, and some of the more forward-thinking procurement companies still have very solid relationships with vendors. They may not speak as often, but when they do, the information that's being exchanged is much more substantive."
Says one retail category manager, speaking on condition of anonymity, "We all want to be like Wal-Mart when we grow up, but we can't, since Wal-Mart already has the advantage of building its stores around a central procurement model rather than the other way around." By migrating toward a central procurement strategy for produce and other perishables, he says, "we'll be able to buy better, particularly where there's been tremendous consolidation on the supply side, which in turn will give us more product to sell on a year-round basis."
Thus far, the category manager endorses his company's unfolding centralized strategy. "It will take the wild highs and lows out of the deals with preferential supply contracts," he says.
Aside from the better buying power provided by central procurement, says a key commodity supplier, eliminating redundant divisional staffers, if done properly, will provide the chains even greater benefits.
"Does a chain really need a dozen or more of one category buyer or could they get by with two?" he asks.
Bruce Axtman, president of the Perishables Group, a perishables category development firm based in Chicago, concurs that the extensive implementation of central procurement models, "has been part of the plan all along, but it's happening very quickly right now," with the onus resting squarely on the vendors.
"Vendors are going to have to take a serious look at how they're approaching their customer base," says Axtman, "not only as it pertains to quality and price, but with their ability to do it 12 months out of the year."
Vendor reactions have been a mixed bag, says Axtman, "with players on one side claiming early victory for being the most capable and best positioned to strengthen their partnerships with these chains. Obviously, for the other side's players that are unprepared, they will have a lot fewer people to sell to."
The big "watch-out" of central procurement, he notes, is the resulting potential for homogenization among the competitors. "If it happens that these stores eventually all look alike, I think it will have a negative impact on performance because, frankly, consumers in Philadelphia want something different than consumers in Seattle. In an attempt to gain economies and efficiencies of scale and consistency, you can inadvertently suffer from not having the ability to properly respond to specific needs and requirements of the chain and the marketplace."
Maintaining the formula for buying in harmony with local market preferences is paramount to the issues that remain a mystery for many, including one West Coast trade observer who declined to be identified. "I'm betting that whatever model turns out to be the most successful will not get there with pricing, but with their abilities to differentiate products," he says.
Declares another source, "There's no going back. They're blowing up their models down to the nub to find out what they really need so they can put them back together in select ways by adding a body or two at a time to enhance what has been lost. Will these programs work? Absolutely. Will they be without pain? No way. Mistakes will be made, but we've got to remain flexible because I don't think we've seen anything yet."
Agribuys' Athanassiadis agrees: "It's going to be a difficult couple of years, but I think as any Wal-Mart supplier will tell you, their businesses will improve under these central mechanisms."
Fresh Food editor Meg Major can be reached at [email protected].