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This spring, as several leading wholesalers began carrying out plans to overhaul their pricing structure on expensive-to-distribute packaged beverages, Convenience Store News conducted a survey asking retailers how they expected this change would affect them.
Rather than taking standardized markups, wholesalers felt it was fairer for them to base pricing on the actual distribution costs incurred -- particularly on fast-moving, heavy case loads of beverages like Gatorade and bottled water. Predictably, retailers railed against the new cost-to-serve pricing model proposed by the wholesalers. Operators in our survey anticipated price increases and a shift to alternative distribution methods, including direct-store delivery (DSD), for these products.
In May, nearly one in seven retailers who responded to the CSNews survey -- published as part of a much larger special report on the situation -- said they planned to pass any cost increases along to the consumer by raising retail prices, while less than one in 10 intended to absorb any increases by taking a cut in margin.
Now, six months later, that's exactly what's transpired, although retailers are quick to note that the fallout has not been as damaging as they initially feared. A few retailers, citing fierce competition in their markets, absorbed the increases. Others raised their retails on single purchases, but cut prices with twofer promotions -- making up for the margin loss with increased sales.
"There have been some minor adjustments in our costs that were agreed upon between us and our wholesaler, and were mutually beneficial," said Wayne Wills, merchandising director for Columbus, Ohio-based Certified Oil Co., a customer of Naperville, Ill.-based wholesaler Eby-Brown. "But, it hasn't resulted in a plus or minus to our bottom line."
Faced with stiff competition in his area, single-store owner Ronson Shamoun said he's followed the lead of his competitors and absorbed about a 10-cent hit per unit. "With certain high-selling items, like Gatorade, somebody buying that daily will notice," he noted.
On the other hand, Geo. H. Green Oil Co., a c-store chain based in Fairburn, Ga., reflected the new cost of Gatorade in the products' selling price, according to marketing director Jim Callahan. Gatorade wholesale prices saw an increase, effective March 19.
"While we have kept sailing right along, I have noticed that Coke's Powerade sales continue tomake increased inroads into that category," Callahan said, noting that Coca-Cola's "more attractive pricing and share gains" have been ongoing over the past few years.
Like Green Oil, Certified Oil also boosted its retail prices on Gatorade, along with bottled water. Yet, the company took a step further, turning what could have been a negative into a positive, Wills said. As he explained it, the chain actually anticipated price increases even before any wholesaler announcement, so the first of this year, it raised the retails on most of its packaged beverages by a dime, and focused on quantity discounts.
"We just had that feeling. It's been a while since some people have raised prices and after a long time, everybody knows something has to give," he explained.
"Our 20-ounce Gatorade was sitting at $1.19. We moved it to $1.29, and at the same time, went two for $2. Our 20-ounce Pepsi moved from $1.29 to $1.39, and we went two for $2.22. So, our really good quantity purchasers are now getting a good deal, and that person coming in and buying just one is making up the margins for us."
Wills added, "We can always lower prices later, but it's harder to do it mid-season. We said, let's capture the margin as you go and get the extra built up in the budget."
Quick Chek Corp., of Whitehouse Station, N.J., implemented a similar pricing strategy. Senior category manager Bill Tencza said for years, its "magic number" on a 32-ounce Gatorade was $1.99. Recently, it upped the single retail to $2.19, but began offering a two for $4 deal. "It's the best of both worlds," Tencza said. "We're making more money and the customer is getting the best deal. We didn't lose anything in the situation."
The chain, though, can't say the same for its private-label bottled water brand, which is supplied through McLane Co., its wholesaler. Quick Chek bumped up the retails on its Nestle Waters brands and its singles of private-label water by about 10 cents, but had to discontinue its special 3-gallon box of private-label water because the increased distribution fee from McLane was too much to pass along to the consumer.
"When it's a private-label package that has a high case count -- 24, 18, 12 -- that price increase is absorbed over several units. However, when we divided [McLane's] new flat fee by those few units, it would have taken the retail [on each box] up 20 to 30 cents," Tencza explained. "That would have been insulting to our customers."
An Alternative Route
Other retailers, as predicted, have pursued alternative distribution methods to offset the wholesaler pricing increase. Single-store and smaller operators, like Shamoun, said they are bypassing wholesalers more frequently these days in favor of getting their beverages at warehouse clubs and big-box stores.
Shamoun, owner of OB Quik Stop in Ocean Beach, Calif., noted that his current split for product is 90 percent wholesale and 10 percent Costco, but he is actively trying to increase the latter. "Anytime Costco has an item available, we take advantage of it. They're usually between 10 and 20 percent cheaper," he said.
Also in search of a better deal, c-store chains, such as Quick Chek, are finding themselves leaning more toward DSD for packaged beverages, since one of the major effects of the new wholesaler pricing model is that it has closed the cost gap between warehouse and DSD distribution.
Tencza said he's always tried to strike a balance between DSD and warehouse-delivered -- and used to push to get product through the warehouse because it often was at a better price. Now, the gap between the two is very small, and it's better for the chain to favor DSD because there are more store-level benefits vs. warehouse, he explained.
Packaged beverage suppliers, too, are relying more on DSD. Gatorade's Propel has always been a warehouse item, but Tencza said that starting next month, PepsiCo is changing Propel from a 700-milliliter bottle to a 20-ounce, and putting it on its DSD trucks. Pepsi's new Gatorade G2 brand also will be distributed on its DSD trucks, he added.
"We used to get 50 percent of our [packaged] beverages through warehouse, but that has since come down," he said. "I'd say it's closer to 35 percent warehouse now."