WHITE SULPHUR SPRINGS, W. Va. -- Simplifying business practices will boost profits for manufacturers and retailers, said Durk Jager, who will become president and chief operating officer of Procter & Gamble, Cincinnati, July 1.
"The increasing complexity of the grocery industry hurts us all. Complexity leads to consumer confusion. Confusion leads to distrust and disloyalty for stores and brands. Disloyalty reduces our operating profits," he said. Jager spoke here last week at the annual executive conference of the Grocery Manufacturers of America, Washington. His appointment from executive vice president in charge of P&G's U.S. business coincides with the retirement of Edwin Artzt as chairman of the board and chief executive officer. John Pepper, currently president, will succeed Artzt in those positions July 1.
In his talk at GMA, Jager said category management can help reduce the complexity of doing business. "Developing planograms based on category segmentation can simplify consumers' purchase decisions," he said. "By examining product segments and the offerings within those segments, retailers can present the consumer with a simplified offering from which to buy. By producing business plans that focus on the entire system, we can eliminate problems such as out-of-stocks and out-of-date products by integrating tactics such as continuous replenishment and cross-docking into the business plan."
Jager said he's challenged his own organization to apply category management to its daily work. He envisions a "transparent" supply chain where "decision-making is easy because the best choice is obvious. The best choice is readily understood. Transparency is a condition free from pretense or deceit." Jager said the grocery industry must simplify decision-making at three points in the supply chain:
· When the distributor decides which products will best achieve corporate objectives. · When the consumer decides where to shop.
· When the consumer decides what to buy.
"At each of these decision points, creating a condition where decision-making is easy because the best choice is obvious and readily understood has enormous benefits for manufacturers, distributors and consumers. Achieving transparency at these decision points is difficult. But category management provides a process that can help," he said. At the first decision point, category managers constantly decide what products to put on the shelf, and what products to display and to promote. But these decisions are more difficult than they have to be, according to Jager. "Complex trade practices and promotions on the part of manufacturers create confusion and a lack of trust. An unwillingness by distributors to share category objectives and strategies leaves manufacturers unable to tailor sales plans to meet the distributors' needs. "As the buying and selling of products becomes more complex, manufacturers increase consumer costs by directing resources to impact the distributor's purchase decision. This undermines the manufacturer's ability to develop and market brands," he said. He used the example of P&G with its "core competency" of developing consumer-preferred, technologically superior products. "Every dollar that I invest in slotting fees or coupons is a dollar that would better serve my shareholders and my consumers if it were invested in product development, or in lower prices on our existing brands," he said.
According to Jager, the system's complexity has forced distributors
to focus on buying products instead of selling products to consumers. "This is insane," he said. "Manufacturers, wholesalers, retailers -- we've all lost our focus. By simplifying these decisions, each of us can redirect our energies and our resources back to our core competencies -- those things that we do best."
Jager envisioned a working relationship where manufacturers and distributors share data so that data sources will not be debated when conducting analysis. "The distributors can make data-based decisions. Manufacturers and distributors will share common measurements to gauge the success of category business plans," he said.
At the second decision point -- "Where will I shop?" -- consumers are not very store-loyal, he said. "Most retailers have failed to establish what they stand for. They have not made the shopping decision easy. They have not achieved transparency," he said. Exceptions are prominent retail success stories, he said, such as Wal-Mart (known for low prices), Toys 'R' Us (biggest assortment) and Publix (best service and convenience).
The third decision point -- "What to buy?" -- is also too complex, according to Jager. "Consumers are drowning in too many products. We also price and promote these products in a way that undermines brand loyalty. We force the consumer to switch brands to get the best value. Wide price variations, buy-one-get-one-free promotions and bonus packs cause confusion and decrease consumer value by increasing system costs."
