Closing In On Snack Gaps

With new industry data showing potential for a $500 million annual increase in warehouse-delivered c-store snack sales, retailers weigh opportunities

Almost two years ago, candy category opportunities in the convenience channel were put forth from an industry study spotlight and now it's the snack category's turn.

Early-released research from a new study sponsored by the American Wholesale Marketers Association (AWMA), conducted by Kit Dietz of Huron, Ohio-based Dietz Consulting LLC, shows as much as a $500 million annual increase in convenience channel snack sales could be achieved if the distribution of warehouse-delivered snacks is maximized — largely by identifying the top core SKUs and closing their distribution gap.

The new snack study, expected to be fully released soon after press time, identifies large gaps in the major warehouse-delivered snack SKUs. The average ACV (All Commodity Volume) level of the top 50 snack SKUs is “only 50 percent,” according to Dietz. Looking at it from a sub-category perspective, salty snacks average an ACV of only 51.6 percent, packaged sweet snacks average 39.5 percent and alternative snacks, 48.2 percent.

“This tells me there's a huge opportunity to greatly improve the distribution level of the top-performing SKUs and drive significant sales at retail,” Dietz said. Unlike in the confectionery category, snacks do not flow solely through a warehouse system.

”Warehouse-delivered snacks have never had the type of position they should because they compete for DSD snacks, which tend to get more space than they should,” he noted. “DSD tends to pay for their space in-store through rack placements."

With DSD, Dietz sees less of a category management approach for the good of the category. Instead, “DSD suppliers will come in and want to carry their entire line of sunflower seeds or nuts, for instance, and then, of course, there are duplications,” he said.

He noted this “significant duplication” is negatively impacting profit in the category and also; eating up too much space by providing too much choice. “We may be missing some very good SKUs from the warehouse side — and they come with higher margins.”

Bottom Line

• A new study reveals the average ACV level of the top 50 snack SKUs is currently only 50 percent.
• A remedy is less duplication at the DSD level replaced by a more holistic “core” approach.
• Retailers are advised to evaluate snack SKU movement once a quarter.

The snack category needs to be looked at deeply, Dietz suggested. “What we're really talking about in the new study is measuring the true profitability of individual items and category performance — using Activity Based Costing.” Also, there are some new tools being developed by the AWMA and others that are really going to help, he added.

Danna Huskey, category manager for E-Z Mart, operating in Texarkana, Texas, agrees with Dietz about the higher margins, but noted, “the negative part of it is rotation of the product, checking for out-of-dates and/or short-dated items, becomes the burden of the store personnel, adding yet another task to their already-busy days. With DSD folks doing it, our store personnel can spot-check WWW.CSNEWS.COM can spot-check and work with the DSD person to ensure fresh, stocked and in-date product.”

It is the quality of the people that Jim Hachtel, senior category manager for La Palma, Calif.-based ampm, said makes or breaks a program, be it warehouse-delivered or DSD.

The category performance on both sides “is only as good as the person doing the work,” he stated. “If you have a bad driver and the quality of the [DSD] work is not up-to-par, then you're more in control with warehouse. But if the person doing the ordering in-store does a bad job, it's the reverse, and you're better off with DSD.”

Ultimately, he believes it's the category being in-stock with the right planogram, the right mix and properly rotated products that will grow the category and said there is a place for both models.

Years ago, when ampm still had company-operated stores, it employed DSD exclusively to the snack categories at some stores and saw good growth — 7-8 percent, according to Hachtel — because it “unloaded a burden and improved in-stocks, merchandising and rotation.” He praised DSD programs for typically being more reliable to get new items in and old ones out, so stores can take advantage of growth curve more timely fashion.

The DSD-exclusive option is still available to ampm franchisees “and some do use it,” he said. Of course, other franchisees in the chain “understand that the warehouse way is how you get the absolute lowest cost of goods and they prefer to manage the nuts and bolts of it themselves. They do the ordering, stock rotation, and accept the reason for any spoilage."

At ampm, both models coexist in harmony because the company stays true to category management. “Our planograms are the same whether items are warehouse-delivered or DSDdelivered,” said Hachtel. The planograms are set up on a “core and flex” basis where 80 percent is core and required, and the other 20 percent has “recommended” flex items. “If a franchisee chooses to change something out, that's where they can make educated customer-based decisions,” he explained.

The biggest category focus at Louiseville, Ky.-based Thorntons, which utilizes both warehouse and DSD programs in snacks, is reducing out-of-stocks, according to Mike Santiago, senior category manager. “That's where I think you can make more money, gross-profit wise,” he said, explaining he views DSD as having the edge in that area because of more frequent weekly replenishment, “even though we pay for it in margin.”

Santiago recognizes, however, that “snacks are so big and broad with so many different areas, you almost have to break it down and look at each sub-category separately. “

Packaged sweet snacks, for instance, have dating/freshness issues and do better with DSD, while meat snacks are warehouse distributed at Thorntons “and our sales growth was up over 30 percent last year,” Santiago reported. He also mentioned the multitude of “regional players” in the salty snacks arena, which have to be maximized, sometimes down to the store level.

Like Hachtel, Santiago praised DSD programs for expediting the implementation of new items.

SELF-DISTRIBUTED PERSPECTIVE

Jacksons Food Stores in Meridian, Idaho, has a unique warehouse perspective in that its sister company is Capitol Distributing — making Jacksons, for the most part, self-distributed in snacks. “Our goal is to bring in as much as we can through Capitol Distributors,” Richard Levin, vice president of marketing told CSNews.

However, DSD does have its place at Jacksons through a few major suppliers like Hostess and FritoLay. “The real benefit of DSD is that they take product back. It's not impossible through a warehouse system, but it's more complicated. A warehouse-delivered system is not designed to flow product back to the manufacturer,” Levin said, adding that the other benefits of DSD are “their writing of the product order and stocking the shelves — which saves us labor.”

The way Dietz sees it, the snack study is bringing new light to supply chain improvement for the good of the convenience channel, and he is expecting it to gradually catch on across the board.

“I think we're going to see core SKUs and efficient assortment a big multi-year focus on this channel,” he said. “We will take category management to a much higher level than in the past.”

Dietz advised retailers to reach out to snack manufacturers and their distribution partners to start the conversation and address new core and category management opportunities. He also recommended retailers constantly look at movement and sales at the SKU level — “at least once a quarter” — to find items that aren't moving, ask their distributors to look for replacement items and to recognize gaps and overlaps.

“We all need to be engaged in this,” he said.

For comments, please contact Renee M. Covino, Contributing Editor, at [email protected].