packaged beverage dilemma

A CSD Staff Report

The consumption of bottled water is steadily increasing and it benefits convenience retailers to meet that demand. Not a bad problem to have as bottled water often retails between $1.19 and $1.39, and has a high gross margin. But because packaged beverage consumption is on the rise, the issue of moving these heavy, bulky packages is becoming a focal point for retailer, supplier and wholesaler participants in the supply chain.

“The bottled water segment is growingdramatically,” said Roger Grogman, vicepresident of marketing for McLane Co.Inc. “Handling and transporting the product becomes costly and more difficult dueto the category’s weight and volume.”

With this segment showing an annualgrowth rate of 50%, McLane and all distributors are faced with the dilemmaof how to properly accommodate theincreased weight and space needed ontheir distribution trucks.

“Because of the increased consumer demand for bottled water, retailers have increased their order sizes and SKU count on the category,” said Grogman. “The increased weight and cube are very costly to handle within the supply chain and a change is necessary in the costing structure to absorb this added cost.”

IDENTIFYING THE PROBLEM
At the American Wholesale Marketers Association (AWMA) Real Deal Expo in Las Vegas, retailers and suppliers gathered to discuss the industry implications of the new bottled water demands, and put forward possible solutions to lower the cost of distribution activities. AWMA recognized the problem and McLane and other wholesalers have taken steps to work with retailers to create a better, more efficient supply chain.

In short, increased orders are taking up a considerable amount of weight on wholesalers’ delivery vehicles, putting a monetary strain on the delivery process. Many staple c-store items that have less weight and are less costly to transport have declined in volume.

As market baskets have shifted away from more costly, lighter-weight products, the gradual shift to mass bottled water consumption has created an imbalance in the overall wholesaler “cost plus” pricing structure. The deceleration of popular, higher profitability c-store items has paved the way for the acceleration of the heaviest products on the trucks, which happen to be packaged beverages.

McLane and the wholesale communityare seeking to resolve this unbalancedcosting issue without impacting the category’s growth. But higher weight andtransportation costs of packaged beverages has created a need for suppliers tolook at new ways to reduce costs whilestill meeting consumption demands forthe product.

“We have a sincere hope that retailersexperience profitable growth in this category,” said Grogman. “We want them toget an excellent return on their productinvestment and are seeking a resolution toa significant cost of delivery increase thatcan only be overcome with their support.”

But the distribution and transportationservice provided for the packaged beverage category carries activity costs thatexceed the profits generated. A changeis needed to correct packaged beverageeconomics.

“We need to change the basic formula connected with moving packagedbeverages,” saidGrogman.

Transportation weight associated with packaged beverages has increased by 1.4 billion pounds annually for McLane alone.

“As we work together to find a solution, everyone in the channel will benefit from the change,” said Grogman.

A SOLUTION ON THE HORIZON
The future of bottled water is bright as more consumers are turning to flavored water and sports drinks for the products’ perceived health benefits over other beverages. While changes are needed on both ends, retailers can take comfort in working with their suppliers and distributors to solve the problem.

“Our abilities to resolve the issues athand are beyond the scope of current business practices,” said Grogman. “We needto change the pricing model to reflect thereal economics associated with the categories handling requirements.”

According to Grogman, the businessdialogue between wholesalers, retailersand suppliers recently has provided abasis for improving the economics of thecategory. Working together and providingclarity on the cost factors associated withthe category has resulted in significant resolution of the economic issues.

“This is not an adversarial process,” said Grogman. “We’re working together to achieve a positive outcome for all participants in the packaged beverage supply chain.”

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