RETAILERS: ALLIANCES ADD VALUE
STORE EXECUTIVES AGREE THAT PARTNERING WITH KEY VENDORS IS A REALITY.
Byline: Valerie Seckler / David Moin
NEW YORK — What’s driving strategic alliances between retailers and vendors? And how are the bonds formed?
Brian Kendrick, Saks Fifth Avenue’s vice chairman and chief operating officer, said, “It’s a natural outcome of consolidation in our industry. Fewer and fewer players are representing more of the business. By that nature, you have to reach out and strike partnerships.”
Similarly, Lee Scott, Wal-Mart’s executive vice president of merchandising, said, “The bottom line is that we will be doing more business with fewer companies — quality people,” open-minded to partnering.
Scott, Kendrick and other retailers said they are forming closer working relationships and communicating more effectively with key vendors to boost sales, gain a competitive edge and save money in the long run for both parties. Customers benefit as well, by getting stronger assortments better suited to their needs, they added.
“Trust is the overall foundation” in strategic alliances, contends Bob House, divisional vice president of vendor administrations at Kmart Corp.
“That’s a fundamental change from how we’ve done things.”
In addition to consolidation, the shift from an adversarial dynamic to one of cooperation is being driven by the retailers’ growing need to bring value to shoppers. That includes offering a broader range of products, quality goods, fair prices, convenient locations and service, as well as creating stores that are easy to shop.
“In the past, we focused more on individual products,” House noted. “Today, it’s more a question of how to best bring value to the customer. Shoppers want a variety of brands, colors and sizes, but we aim to present a set of choices across a value spectrum rather than buying as much as possible of any particular item.”
“Partnerships are really not that complex,” said Scott.
However, the tough part of building a true partnership is convincing vendors to reduce stockkeeping units so that assortments are more focused, he said. A more focused assortment with fewer sku’s will actually drive sales, he said.
A well-executed alliance between vendor and merchant often results in product improvements, according to Wal-Mart officials, who said the chain has been able to boost the quality of specific items to better match consumers’ demands, especially in Latin America, where Wal-Mart has met with local manufacturers to develop items.
Scott gave his views on partnerships at a Feb. 12 forum here on “The Future of Manufacturer-Retailer Relationships,” sponsored by the Toys Manufacturers of America, Children’s Manufacturers Association and Juvenile Products Manufacturers Association.
It’s a hot topic, but, according to one retail source, “You’re not going to find a lot of concrete examples of real partnerships.
The May Co., Federated Department Stores and some buying offices such as the Associated Merchandising Corp., and megabrands such as Liz Claiborne, Tommy Hilfiger and Ralph Lauren, have some up and running. But the core question is whether all this talk about partnerships is just a lot of smoke, or at the end of the day, does the strategic alliance really help turn the goods quicker?”
Saks has been building real strategic alliances with many vendors. For several years, the store has been holding intensive strategic planning meetings with its top 50 vendors, among them St. John, Ferragamo and Gucci, noted Kendrick.
On a principal-to-principal basis, the meetings are held at least once a year. On a senior merchant level, meetings are often monthly.
“We treat them like a constituency that’s just as important as shareholders, our own associates or customers,” said Kendrick. “It’s literally getting together for half a day and explaining the goals and strategic plan for us, listening to their goals and trying to craft the right level of partnership.”
Such issues as price points, what customers are looking for, fashion trends, filling voids in the market, new directions, sell-through goals, total volume goals, vendor premarked goods, deliveries, basic replenishment, quality, sharing risks, ad budgets, direct marketing and in-store promotions are discussed.
“But we’re not exchanging information about competing product lines,” Kendrick noted. “We are always looking for new opportunities to put products in the stores. We need to keep updating our offerings.”
According to Scott, some key elements of partnerships involve:
Forecasting sales — a growing responsibility for major vendors.
Reducing sku’s so that merchandise presentations are more readily understood and brands project clearer images to customers.
Tailoring the size of individual shipments and merchandise packs to meet the needs of stores that do large volumes and those that don’t.
According to Scott, Wal-Mart stores vary greatly in volume. He said some units do $6 million or $7 million in annual sales, while others post as much as $60 to $70 million. However, vendors generally don’t tailor the size of the merchandise packs shipped to the company to accommodate different store volumes. With more appropriately sized packs, more sku’s can be shipped and volume can grow.
Scott also spoke of “sku rationalization,” explaining: “When you add a new flavor to the assortment, you drop an old one.”
Last year, Wal-Mart cut about $1.4 billion in inventory without loss in sales.
“We didn’t even have to be scientific about it,” Scott said.
With stepped up partnering efforts, entailing sharing more sales data and forecasting, the inventory reduction process can be taken to further heights, he suggested.
Not surprisingly, satisfying shoppers is the linchpin of productive partnerships at Ames Department Stores — and is the discounter’s primary purpose in striking such accords, said Denis Lemire, executive vice president of merchandising. Ames, based in Rocky Hill, Conn., generates sales of more than $2 billion annually in 303 stores in 14 Northeast and Mid-Atlantic states.
“We partner with vendors mostly to give our customers the best price-value equation — to take the ‘non-value’ costs out of the production equation by working more closely with the vendor, so we can both make some money from the product,” Lemire explained.
According to a Wal-Mart spokesman, the 2,944-store, Bentonville, Ark.-based chain’s alliances with resources reflects its philosophy of raising efficiencies, slashing costs and passing along the benefits to consumers.
Indeed, the glue that makes relations with vendors stick is an agreement that the consumer is all-important, as well as sharing information to meet mutual goals aimed at that consumer, said Joe Ettore, Ames’s president and chief executive officer.
“The retail business has become so competitive, that’s the edge that can make us different,” he added. “Partnership is almost a used-up word. Today, it really means commitment. Our vendors know we’re loyal, despite our negotiations over price, and we expect the same from them.”
When alliances break down, a lack of communication and trust is the usual culprit, retailers related.
“There should be a conscious effort to avoid and defuse tension,” advised Ettore. “As close as we are to some suppliers, a competitor might come in with more competitive pricing or ad allowances. Before taking away our business, we’d try to sit down and work it out. It’s usually one of the three Cs that’s the root of a problem: communication, cooperation or common sense.”
At Kmart, House said, “The biggest adjustment has been to be able to build enough trust for each party to share information. Each side needs to remember that, as we work to bring more value to shoppers, it helps us both. We have difficulty when we lose focus on the consumer.”
When mutual objectives are forgotten or overlooked, it often starts to strain a retail/vendor partnership, he said.
One of the biggest challenges facing these alliances is how to handle chargebacks, said retailers.
“It’s hard to weigh the frustration caused by these problems,” said Ettore. “Vendors’ number one complaint is getting a chargeback from a merchant and having no idea what product it’s for.”
Ames works with checklists of topics that its buyers need to talk about with vendors — from f.o.b. points to delivery dates — to reduce the chances of the application of the fees, Ettore explained.
For Kmart, said House, there are certain expectations of a partner that extend to chargebacks.
“Those expectations aren’t a problem if they’re spelled out clearly on both the vendor’s and Kmart’s side,” he said. “It helps to have a scorecard for both sides to look at, to make sure the expectations are consistent.”
Although discounters cited a need for an infrastructure to manage partnerships with vendors, they emphasized the need to stay flexible — to be able to quickly add or drop planning and progress meetings, for instance.
General merchandise managers at Kmart set strategies to fuel its strategic alliances, as well as making the top-to-top management commitments for those deals, House said. Teams at lower operating levels put those policies in place. The operating teams typically meet weekly with vendors when a partnership is being planned, and monthly when the partnership is in high gear.
At Ames, buyers and merchandise managers meet monthly with major suppliers such as Fruit of the Loom or Hanes, Lemire said. The discounter also conducts quarterly overviews of its pacts.
“Forecasting is very important,” Lemire noted. “We do a lot of EDI and some VMI. You can have the best products and prices in the world, but if you can’t get it to your shelves when the customer needs it, it does you no good.
Noting that systems vary from company to company, Lemire said, “Whenever we go on EDI with a vendor, we absolutely have to get our MIS people together with their technical people. We have to do some tests. Once we get the right people together, we can work out those differences. It usually takes about a month.”
“The buying job has changed a lot,” Lemire added. “Now we try to keep in-stock on fewer key products while bringing in a lot more fresh goods.”