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STERN WARNINGS

A few trailblazing retailers are pushing to surmount what may be the greatest obstacle to continuous replenishment's growth -- inefficient vendor promotions.Retailers including Schnuck Markets, St. Louis; Wegmans Food Markets, Rochester, N.Y., and Giant Food, Landover, Md., are urging manufacturer partners to improve promotional costing and deal structures so practices like forward buying and diverting

A few trailblazing retailers are pushing to surmount what may be the greatest obstacle to continuous replenishment's growth -- inefficient vendor promotions.

Retailers including Schnuck Markets, St. Louis; Wegmans Food Markets, Rochester, N.Y., and Giant Food, Landover, Md., are urging manufacturer partners to improve promotional costing and deal structures so practices like forward buying and diverting are not so appealing.

Vendor promotions inadequately monitored or forecasted can create excess inventories at the warehouse and store level, thus gumming up the works of CRP, retailers said.

"The two basic obstacles to CRP are the issues of forward buying and diverting," said Dave Herriman, vice president of grocery operations for Giant Food. "We have some major [vendor] players who are still on the outside looking in, wanting to do CRP with us very much, but who have not successfully addressed those two issues."

Such hurdles are driving some retailers away from CRP. Shaw's Supermarkets, East Bridgewater, Mass., said it pulled out of CRP because of conflicts with its weekly computer-based forecasting initiatives, while Hannaford Bros., Scarborough, Maine, is reportedly moving away from CRP in favor of its successful order consolidation program.

Manufacturers maintain that because CRP is far from reaching critical mass, they need to continue traditional promotions with non-CRP retailers.

"As long as manufacturers continue to price their goods in a way where they encourage forward buying and diverting, a retailer cannot afford to pass on those opportunities," said Craig Schnuck, chairman and chief executive officer at Schnuck Markets.

"Manufacturers really have to rework their systems of developing the cost of product to eliminate those opportunities if they don't want retailers to take advantage of them," he added.

Giant Food said perhaps its most successful CRP partnership to date is with Procter & Gamble, Cincinnati, in large part because the manufacturer altered its deal structure to be more price-competitive with discounted products offered through diverters.

"Until manufacturers [start] matching diverter prices or having some alternate form of compensation to the retailers, they're not going to get retailers who are active diverter participants to come on board with continuous replenishment," Herriman said.

Giant Food now conducts CRP with 20 vendors, representing about 25% of its grocery volume, and has achieved a 10% decrease in its warehouse inventories in the last year.

Vendors acknowledged the need to make changes in their traditional promotional deals. "We try to offer alternatives to forward buying," said Don Mowery, director of customer response and Efficient Consumer Response at the Ralston Purina Co., St. Louis.

"We try to design our marketing and merchandising programs with the customer so that there certainly is no forward-buy advantage," he said.

Ralston Purina, which currently has about 60% of its volume on CRP partnerships, is discouraging diverting by offering more competitive deal prices. Having retail partners sign an agreement that they will not divert promotional product, as some vendors do, is usually futile, he said.

"If somebody's got our product on the diverter wire at a much lower price than we can sell it to the retailer, it would be foolish for a retail customer not to take advantage of that," Mowery said.

Any changes in vendor promotional strategies may encounter some resistance from retailers currently not involved with CRP initiatives.

"A lot of chains are still budgeting for forward buy income because it is bottom-line, tangible money," said Tom Compernolle, partner for food distribution and retailing for Ernst and Young, Chicago. As a result, vendors may wind up being torn between the requests of its CRP and non-CRP retailers.

"We're looking to replenish our products at the lowest price possible," said Andy Knoblauch, head buyer and director of marketing at Coborn's, St. Cloud, Minn. "I've got to compete with Wal-Mart and PetsMart and I've got to buy at the lowest price available."

Retailers acknowledged the need for manufacturers to make concessions to non-CRP retailers. "I don't believe anyone has enough critical mass to eliminate the dual systems currently used," said Tom Schaumburg, director of merchandising analysis at Harris Teeter, Matthews, N.C.

"Further, I do not know if any manufacturer is learning enough about their demand pattern to do a better job of controlling costs in the manufacturing process," he said.

"In general, we're on the fence," agreed one major manufacturer, who wished to remain anonymous. "We have not gotten to a point where we can reach critical mass and we're not even sure what that is."

"So in terms of a real hardcore statistical internal benefit [from CRP] for us: zero," the manufacturer said, adding it has made a substantial investment in systems and labor to handle CRP partner inventories.

Promotions, which cause a surge in customer demand and increase retailer warehouse orders, go against the basic goal of CRP partnerships, which try to level out inventories and create predictable, regular orders.

"We have various promotions throughout the year and there's spikes: peaks and valleys in the [product] movement" afterward, said Sidney Sakowitz, executive vice president and director of purchasing for Grocers Supply Co., Indianapolis. Trying to determine product orders based on average product movement history is thus often inaccurate, he added.

"One thing that complicates CRP is categories where there's a high degree of promotion," said Schnuck. A typical promotion "blows the movement for the week of the promotion and the weeks following."

Because of these factors, Schnuck said its most successful CRP partnership has been with Golden Cat Corp., a division of Ralston Purina, which manufactures cat litter merchandise in a limited number of stockkeeping units and rarely conducts promotions. The vendor's nearby location also helps smooth out logistics issues.

"What manufacturers can bring to the table is promotional history, in terms of what's happened with this product when it's been promoted in other markets," Schnuck added. "They've got a broader database on their individual items than any retailer would have."