PHOENIX — The burden borne by retailers sourcing new products can be hefty given built-in marketing and product development costs and an average failure rate of 80%.
But many supermarkets don't consider that unused inventories of items discontinued to make room for the new can also end up costing them big.
“If I know a retailer is going to take my shelf space, I have to work with them to ensure my product is off the shelf before that happens, because if it's not, game over. It's going to the reclamation center and you just paid 135% of the list price,” said Gene Schachte, senior manager of reverse logistics for Heinz North America, Pittsburgh.
Schachte and Gary Regina, supply chain-replenishment support manager for Winn-Dixie, Jacksonville, Fla., discussed their separate strategies for minimizing these costs during the Grocery Manufacturers Association's Merchandising, Sales and Marketing Conference here earlier this month.
The companies ensure new-product introductions are accompanied by an exit strategy to limit the number of discontinued items on shelf when the new product arrives.
A manufacturer-funded markdown program helps Winn-Dixie liquidate its on-shelf inventory. The retailer begins applying clearance shelf tags that indicate prices have been cut in half, four weeks before the new product is scheduled to hit shelves.
By selling off product this way, its manufacturer partner pays about 50% of the list price of discontinued items rather than the 100% or more that is sometimes charged when out-of-date items are sent to reclamation.
The markdowns have proven effective.
“Our discontinued items are almost nonexistent,” said Regina.
Under its model, Winn-Dixie isn't reimbursed for items that it sends to reclamation when discontinued products remain.
It helps minimize its losses by making the supplier of outgoing product aware of the change well in advance.
“You have to be able to communicate bad news; it's the only thing that works,” Schachte said.
Heinz stops shipping product to its retailer partners six to eight weeks in advance of the reset. While Winn-Dixie puts the brakes on shipments sent from its distribution centers to its stores, and arranges for products to be picked up by their manufacturer or donated, depending on the supplier's instructions.
Heinz has put financial penalties in place to ensure its retail partners hold their end of the bargain.
“If you don't execute this right, we reserve the right to hit your trade funds,” said Schachte.
Recently some steps in Heinz's exit strategy with a retailer were missed and what should've cost the manufacturer $10,000 ended up costing it well over $100,000, Schachte said.
Costs incurred by retailers can also add up, but many times they fly under the radar.
“The shift in [unsaleable] costs, for the most part, have moved to the retailer side, but most haven't reacted to address the issue,” noted Regina.
Compounding the problem are adjustable rate reimbursement policies based solely on damaged products, Regina said. But out-of-date unsaleables have also proven to be problematic due to the growth in the use of open code dating, an increased number of promotional products that don't meet expectations and demographic shifts.
“Today 50% of items returned to damage centers are not damaged but out of date, as compared to 17% seven years ago,” said Regina.
Many times retailers are left with a deficit.
“We're paying you an adjustable rate policy on your damages and it's [down] here, but you're actually [up] here, and here's the gap,” said Schachte. “Why? Because the adjustable rate policy was created with the purpose of handling damage.”