The diversion of product from one region to another is a trade-relations headache that is getting no relief.
That's the case despite the efforts of Efficient Consumer Response, which has provided a soothing effect to many other such woes.
For a while, it looked like continuous replenishment and supplier-induced incentives might have cured diverting.
But to the contrary, SN interviews with numerous industry experts suggest that the practice of diverting is on the increase.
And the situation doesn't appear likely to change in the foreseeable future -- apparently because few people in the industry are willing to give much ground either way.
While other issues dividing buyers and sellers have been resolved through mutual discussions, diverting -- the practice of buying goods offered at a lower price in one marketplace for sale in another -- seems to be a more elusive subject.
According to one vendor, "There are more partnerships today in which companies work together for mutual profitability, but they aren't addressing the diverting issue. It's not that people avoid it; it's simply that no one has answers to solve it."
Each side has its own entrenched point-of-view:
Suppliers want to sell as much product as they can, and they feel that they are offering a range of incentives wide enough to encompass the needs of most distributors without having them resort to diverting.
Retailers and wholesalers are looking for the lowest cost and the highest profit possible, and they want the freedom to buy from diverters if those prices are cheaper.
"There's no middle position," Dave Herriman, senior vice president of grocery, pharmacy and bakery operations for Giant Food, Landover, Md., told SN. "Manufacturers say they want diverting to stop. But they are the ones causing it -- and they know it -- by maintaining deal price structures at the same time they're doing continuous replenishment. But they can't have one without eliminating the other."
According to Dick Alt, vice president of national accounts and customer development for Dial Corp., Phoenix, "We saw a clear decline in diverting in 1994 and 1995 because things were changing quickly as companies focused on Efficient Consumer Response. Several large manufacturers made radical changes in the promotional environment that temporarily took a lot of volume off the [diverting] wire.
"But as the trade digested those changes, opportunities to divert reappeared. And over the last six months, there seems to be an increase in tonnage on the diverting wire, as vendor promotional levels increase as they seek to get their revenue numbers up by doing unnecessary spending across various marketplaces."
Another vendor agreed that the practice has surged lately. "Diverting is more rampant now than ever before, and technology helps because there are no secrets anymore," the vendor told SN. "Diverters are on-line with everybody, so you can simply dial up, get information and make a decision. It's just like one-stop shopping."
Bob Schwarze, president of the National Food Brokers Association, said it's up to suppliers to end diverting. "They are the only ones who can stop it, and until they design promotions that do not make it advantageous for products to be diverted, companies will continue to do it."
To discourage diverting, manufacturers have developed a host of incentives. They include everyday low-cost pricing, national deals that eliminate regional differences, performance payments based on what sells rather than what moves through a warehouse, "menu pricing" that charges customers fees based on their specific needs, and short-term allowances that counterbalance diverting savings. Most of these incentives are offered under the umbrella of continuous replenishment.
Some in the industry thought the move by some large suppliers to a net-cost program would signal the beginning of the end of diverting. But many vendors continue to price by region, "and [the amount of] diverting still hasn't seemed to dwindle," said Don Fitzgerald, senior vice president of nonperishable merchandising and logistics for Dominick's Finer Foods, Northlake, Ill. "And as long as manufacturers are trying to make a number and generate share, I don't see how diverting will ever go away."
Even CRP -- an ECR initiative designed to help retailers and wholesalers reduce inventories while maintaining profitability -- has not been the end-all to diverting some thought it might be. "And the level of diverting has still gone up," said Terry Poyner, senior vice president of merchandising for Randalls Food Stores, Houston.
According to one vendor, "Diverting remains a black hole that's costing us $30 million a year. And even with the incentives we're offering, distributors will always find a way to finagle around whatever we do and continue to divert."
Roger Friou, president of Jitney Jungle Stores of America, Jackson, Miss., told SN, "We view diverting as a continuing portion of our business that will wax and wane with future economic cycles, and we feel it will continue to exist because very few manufacturers have the capability of offering everyone a national deal with unlimited cases during the same time period."
Most distributors and vendors contacted by SN said they see diverting as an ongoing challenge that's not likely to end soon.
Dominick's initially moved away from diverting two years ago when it went to continuous replenishment "because we felt entering an everyday low-cost program with a manufacturer would result in greater efficiencies that would offset any diverting opportunities," Fitzgerald said.
"But over time, as we looked at the average case costs vs. the various diverting offers we saw, we realized there are clearly diverting opportunities that we can't afford to pass up if we want to maintain a competitive advantage. So now we take advantage of diverting if it makes economic sense after giving our CRP vendors the opportunity to match the diverter prices."
According to a southern California retailer, "We're interested in CRP, but we don't do CRP with vendors that aren't interested in allowing us to continue to maintain the profitability levels we had before CRP.
"Some retailers are so enamored with inventory reduction that they lose sight of the profitability aspect of replenishment. But our focus is to analyze the profitability of CRP vs. the historic benefits we were getting from diverting before CRP. And when we've done that, we've found that CRP is not always the best decision."
The southern California retailer compared his company's CRP vendor partnerships to a marriage. "It's for better or worse," he said, "and there are things you can't do once you're married that you could do when you were single. So you've got to consider the options in advance of going into partnership. Because once you commit to CRP, you're off the diverter calling lists and out of the loop."
Giant is willing to maintain CRP relationships only with vendors that provide specific incentives for eliminating diverting -- "either by matching the diverters' prices, eliminating from our CRP orders whatever quantities we buy through diverters or structuring deals nationally so there's no incentive to divert," Herriman said.
But if vendors won't provide alternative incentives, he noted, "I won't give up the profit edge I can get buying certain products from diverters."
Fleming Cos., Oklahoma City, evaluates each item individually to determine whether it will benefit customers most to buy from vendors or diverters.
"Diverting is still a competitive tool, and we continue to approach it in an aggressive mode because it helps our customers compete better," Cindy Clark, Fleming's director of category marketing for grocery, told SN.
"It's the manufacturer's approach to CRP that determines whether diverting comes into play, and it varies by manufacturer. We sign agreements with some manufacturers not to divert, based on their marketing strategies, while with others we continue to divert. It depends on each company's go-to-market strategy and how they are willing to revise it." Dead-net pricing is the vendor incentive that appeals most to Randalls as a diverting alternative, Poyner said. "There are a lot of ways to compensate retailers who choose not to divert, but the easiest for us is dead-net pricing that rolls everything into the cost of goods."
Randalls has made commitments not to divert with certain manufacturers in return for some form of compensation. "But we still look at the diverting wire, and if some better deals are available, we go back to the manufacturer and ask him to explain why there's a better price out there," Poyner explained.
"The answer is usually that some customers are not on CRP so the vendor has different deal structures. And very often the manufacturer will meet the diverter price for us." Although no vendor strategy has completely eliminated diverting so far, some companies are reporting some progress. One retailer said he sees light at the end of the diverting tunnel. "With many manufacturers going to everyday low pricing and fewer deals throughout the United States, you really have to work extraordinarily hard to get an advantage from diverting," he said.
"And while there are still some advantages to diverting, I think they are continuing to dwindle, and it's becoming tougher and tougher to realize much of an advantage from diverting."
One manufacturer said his company's national pricing approach has been accepted by 85% of his firm's customers, "and diverting has really dried up."
Another vendor, who called diverting "a dysfunctional practice," said he expects the amount of diverting to decline over time "because of information-based technology that allows for more consumption-based programs, where we pay customers for what moves through their cash registers, rather than shipment-based programs, where we pay for what moves through their warehouses."
Despite such optimism by some suppliers that diverting's days are numbered, vendors continue to take a dim view of the practice. According to one vendor, "Anytime trade development money is involved in any deal, people will find ways to abuse those dollars and beat the system."
He said ECR hasn't changed the lure of diverting. "Diverting has been a disabler when it comes to ECR. It's a major hindrance to ECR that makes it hard to do just-in-time deliveries and reduces the savings when customers buy from outside the system. But money talks." For diverting to disappear, another manufacturer said, "it will require a whole mentality shift for every retailer and every manufacturer doing local marketing, and I don't see that anytime in the near future."
"Most distributors would prefer not to divert," another vendor noted. "They would prefer to get the best price possible directly from the manufacturer. But realistically they have to do what they must to run a competitive business."
