SAN ANTONIO -- Putting Efficient Consumer Response into practice is liable to give supermarket operators withdrawal pains as they give up forward buying, said Ron Lunde, a former retailer and now senior vice president of trade relations at Leo Burnett, Chicago.
"You must be willing to eliminate forward-buying practices, which drive inventory through the system," said Lunde, whose career includes 25 years of supermarket industry experience at Supervalu and Grand Union Co. "Boy, is that going to be fun to do," he said with irony, "because most of the folks think that they are earning half of their profits from the forward-buying and diverting process."
Lunde spoke about ECR at last month's Association of Coupon Processors Spring Conference and Industry Forum here.
He described ECR as "a grocery industry strategy in which distributors and suppliers are committing to work closely together to bring better value to the grocery consumer by reducing total system costs, inventories and physical assets while improving the consumer's choice of high-quality fresh grocery products."
However, as the theory trickles down to the field, "this is going to be a sea change, because many people, retailers and wholesalers alike, make up to one-half their profits from forward buys and diverting. When that goes away it is going to be a significant problem," Lunde said.
But whether that aspect of ECR represents a bitter pill or not, the industry will have to change its ways due to outside pressure from companies that don't play the old way, he said.
"What is making all of this happen is that Wal-Mart does not know the old way. To many of you, Wal-Mart is a retailer," he said to the coupon conference audience. "But to someone like myself, who has had 25 years of retail experience, it is a logistical operation that happens to have stores at the end of the string.
"Wal-Mart will sell anything that will turn in a week. Wal-Mart is the type of retailer that will go back to a manufacturer and say, 'I will give you 4 feet or 8 feet and I don't particularly care what you sell in that space as long as I get a greater return,' " Lunde said.
He cautioned that not all supermarkets should adopt Wal-Mart's approach of everyday low pricing. "If everyone were to go to EDLP, then all of the retailers would go out of business tomorrow, because deflation is far worse than inflation. Lower retail prices result in lower sales revenues, while operating expenses remain fixed, resulting in a significant drop in income before taxes. "Few supermarkets can reduce their operating expenses quickly because they have labor contracts, store design and broader merchandise offerings. What the supermarkets need to do is to increase sales, reduce operating expenses, optimize pricing and profit, decrease inventory investments, enhance systems and maximize return on investment. If you can do all that, you'll be in good shape," Lunde said.
Lunde also noted that, in the bargain, ECR should bring manufacturers and supermarket retailers into a closer working relationship.
"With ECR, for the first time, retailers and manufacturers, who have historically hated each other, are starting to come to this realization that they better start liking each other. One of the things a traditional retailer knows is that he can learn to like the manufacturer a lot better than he can learn to like Wal-Mart or Kmart," Lunde said.
