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    McLane Comes to Terms with PepsiCo Division

    Weight-based distribution fee was negotiated between the two parties.

    TEMPLE, Texas -- McLane has come to an agreement with PepsiCo's Chicago-based Quaker Tropicana Gatorade division on the weight based fee the distribution company wished to assess on packaged beverage shipments.

    Roger Grogman, vice president of marketing for McLane, declined to express the details of the transaction to CSNews Online, but did acknowledge that the solution was "mutually developed and provides a favorable agreement that supports the continued availability of QTG Products."

    Earlier this month, McLane announced a new weight-based fee, effective April 1, for its packaged beverage manufacturers at a cost of .095 cents per pound, with a minimum of $2.50 per case. Other requirements included a minimum standard to ensure that products, as well as packing materials, would withstand the distribution processes without breakage, leakage or other failures.

    The company assessed the fee based on the additional costs paid by McLane for the distribution of the beverages as the category grows and becomes more popular.

    "As the category has grown, however, convenience wholesalers' traditional pricing model of a 'market basket' approach has proven ineffective in compensating wholesalers fairly for the ever-increasing distribution costs of these relatively large-volume, heavy-weight items," wrote merchandising vice president Tony Frankenberger in a letter to vendors announcing the new pricing model. "McLane Company and others have undertaken extensive activity-based costing models to determine the costs of ordering, receiving, warehousing, selecting, loading and delivering this category, and have concluded that a new pricing model is necessary and appropriate."

    McLane is not the only beverage supplier that is considering such changes. Published reports confirm that Naperville, Ill.-based Eby-Brown, the third largest wholesaler, and GSC Enterprises also plan to change their pricing models for packaged beverages due to the high costs of distributing these heavy products.

    Retailers believe that these changes will cause a price increase in packaged beverage segments such as bottled water, isotonics, energy drinks and carbonated beverages for both retailers and consumers.

    "Let's say a case of gallon water weighs 52 pounds," said Kristen Schmitt, category manager for CEFCO, which operates 70 convenience stores in central Texas. "At 9.5 cents per pound, the delivery fee will be $4.94 or roughly 82 cents per gallon on a 6 gallon case," Schmitt explained. "Manufacturers will have to adjust their costs and in turn, retailers will go up to remain profitable. This new beverage logistics model equates to more than the current up-charge system."

    Schmitt believes this new system will ultimately increase the company's retail pricing.

    Schmitt's opinion is that several beverage manufacturers are going to be looking for different methods of distribution. "Some may go to Direct-Store-Delivery (DSD) through existing DSD distributors such as soda or beer companies," she said. "Some manufacturers, and even some retailers, will be looking at self-distribution as a method to offset this cost."

    "The total impact of our costs has not been determined at this point," said Schmitt. "Manufacturers are working that out internally now and we're being told that we will be notified as soon as they make a decision. It's our understanding that this new fee should not be added to our current cost plus up-charge because the letter from McLane states that they will remove the up-charge on these items."

    John Miller, president of the Champaign, Ill.-based Colonial Pantry, an 11-store chain and McLane customer, was not sure of the impact it would have on his chain.

    "At this point, there is no way for us to know because the manufacturers are still discussing and negotiating with McLane," he said. "I understand what McLane is doing. They need to make money just like anybody else does. If it costs them more to distribute it to us, it's up to the manufacturers to see if they want to use them or deliver directly. Either one is okay with us."

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