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Food and beverage direct store delivery companies will face their toughest challenges in the remainder of this decade. More new regional products, exclusive own-label items and migrating consumer and retail channel dynamics present almost dangerous long-term challenges for DSD manufacturers and distributors.Key companies ranging from regional manufacturers/marketers to most retail chains will move

Food and beverage direct store delivery companies will face their toughest challenges in the remainder of this decade. More new regional products, exclusive own-label items and migrating consumer and retail channel dynamics present almost dangerous long-term challenges for DSD manufacturers and distributors.

Key companies ranging from regional manufacturers/marketers to most retail chains will move aggressively to usurp high-contribution profits typically associated with nationally branded DSD products. For example, snacks, carbonated soft drinks and cookies/crackers programs are driving profitable category growth at powerful mass volume retailers from Wal-Mart and Wegmans to Whole Foods. Companies like Wegmans and Wal-Mart are re-engineering the notion that nationally branded DSD items are the most profitable players. With some of consultant Don Watt's help and ideas, Sam's Choice and "W" are quickly gaining sales and delivering improved profitability in the store wars. With great packaging and taste driving exclusive label share, retail chains are winning the war by assuming more of the marketing function.

Even though chains have enjoyed recent success taking on branded DSD items, the chains have an Achilles heel. They singularly fail to drive exclusive label sales with superior broadcast/print advertising, consumer promotion and other brand franchise building activities. Rather, the retail chain too often "cheats" the 3% exclusive label brokerage from an ongoing marketing investment expense to an additional line on the income statement.

Other fast-growing, best-of-breed retailers like Whole Foods Inc. and Fresh Fields often pass entirely on distribution of nationally branded DSD items because of issues ranging from superior taste, health, quality, value and nutrition. While we find it difficult to find popular nationally branded DSD products in these stores, they successfully sell beverages from J.W. Knudsen natural drinks to exclusive own label very high-quality cookies and salted snacks.

Part of the next generation of potential customers may be bypassing supermarkets from Safeway to Super Fresh altogether to shop at high-volume, high-service stores like Trader Joe's in California that sell almost exclusively top quality tasting products while having almost no DSD nationally branded products "within arm's length of desire."

As the DSD brands face these challenges, retailers from Yakado Ito's 7-11, Japan, to Liquor Barn, California, work successfully to self-distribute products that had been unique to DSD. The distribution of Pabst, Falstaff and Lone Star beer segue to retail chain warehouse (from DSD routes) represents a salient example of possibly severe challenges branded DSD companies like Miller and Anheuser-Busch will face as we close out this century.

The enhanced efficiencies of distribution centers operated by retail chains, membership clubs and wholesalers represent a real challenge to "high touch" labor DSD products typically delivered four to five times a week.

Burt Flickinger 3rd is a management consultant in consumer goods practice at A.T. Kearney.