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Stock it like it's hot

The ecosystem behind stocking systems is becoming more and more complex. Jai Breitnauer explores.

By Jai Breitnauer | June 14, 2018 | News

In October 2017, the most recent month data is available for, Statistics New Zealand reported that 143 million electronic transactions were made by Kiwis, amounting to a spend of $6.9 billion. But the only reason we can buy anything at all is because the products are on the shelves in the first place. Jai Breitnauer talks to six New Zealanders involved in the stock ecosystem about how product makes it into stores.

 

The wholesaler

In some sectors, this is where it all begins: buying product from business-to-business traders which will end up in retail markets. Flower markets are perhaps one of the oldest type of wholesalers. We hear from Syd Hansen, who is the owner and general manager of Hansen’s flower market in Auckland:

I left school at 16, started a floristry apprenticeship and worked for six years in retail before moving to Australia. It was while I was overseas I got interested in the wholesale side of things. I’ve worked in wholesale now for 25 years and owned this business for 20 years.

We have two main channels of supply, auction and direct from grower. I’d say that 90 percent of my purchasing is done through the Dutch auction system which happens on Mondays, Wednesdays and Fridays in Auckland – but you can also buy from the auction online.

The way it works is pretty interesting. Unlike an art or house auction, it’s a descending clock – it starts at a high price and you bid when it reaches a price you are prepared to pay. You have to go into it knowing what the flowers can be sold for so my 34 years of experience in the business are invaluable! The auction starts at 5.30am. I go in with a list of products I know I need, sometimes specific orders from florists for weddings or special events. I will also buy some product on spec if the price is good.

The other channel of procurement is grower direct where we negotiate with the grower, usually for a special product or a seasonal flush. This is a different and more specific arrangement. The bulk of our product is New Zealand grown, although there are some international products through auction, like Colombian roses and Malaysian orchids, to keep up with customer demand.

Once we have received our stock it’s then split between product that’s already sold via orders from retail florists, and product for the market. We have two markets – our main wholesale market and a smaller retail market and we are open six days a week, Monday to Saturday. Although our regular retailers will tell us in advance what they want us to buy for them, (and we deliver), lots of retailers come to the market just to see what they can get. Retailers will often buy from the market according to seasonal flushes which offer high volumes of product at a lower price. Retailers are also very quality driven, they like to inspect the product.

Our retail side started because we were getting a lot of general public coming in to purchase flowers. People are becoming a lot more aware of the chain of custody and want to get closer to the growing source. We are the only retailer inside the auction house so our product is fresh, on sale within 48 hours of receipt. This puts the public as close to the original selling source as they can get.

Yealands market manager, Ralf Kleinsorge.

The manufacturer

Yealands began making wine almost 10 years ago, and has had its product stocked nationally in supermarkets for eight years. We talked to its market manager, Ralf Kleinsorge, about the company’s journey.

We’re a large winery, and supermarkets were always part of our business plan. We knew we would produce quite a bit of wine and it would have to be sold through supermarkets, whereas some smaller wineries might sell 30 percent of production just through cellar door.

We used a distributer in the first instance. They take on smaller wineries especially and place their products in the right market. They have expertise that you don’t have so it can be a really good route in. It didn’t work for us, but only because we were so large right from the start. We had to move a lot of product, the growth curve was quite steep and that was hard to achieve with a distributor, as they have other brands to look after too. So, we put together a sales team and did our own sales and distribution.

It can be quite challenging to sell direct. The notion is that there are plenty of wines and brands, and it was just after the GFC as well. The attitude of the retailer was a bit “So what?” A product manufacturer needs to decide what it is about their product and story that gives it a point of difference - have this in place before you take that step. Our vision is to be the most sustainable winery in the world - that’s pretty distinct. But it could be lots of things, a unique area of production, for example. Research your competitors as well and visit stores so you can see what retailers are favouring by shelf positon and pricing.

For smaller businesses you could just select stores, rather than go for chains. You might want to just pick New World in your local city and start there. In that case you can talk to the store direct. If, like us, you’re going for a larger scale, you will need to speak to the person in the head office who makes the decision for the group. That’s where it gets complicated. Pricing strategy here has to be spot on. Your product has to get on the shelf at a desirable price that reflects the product quality but also covers all your costs - tasting, marketing, promotional support etc. Don’t put your best price forward without making a full calculation.

You do have to provide the store with guarantees. What they request from you might be different depending on the size of your business, but they do have an expectation in terms of logistics - your product should always arrive on time and in full. The quality also has to be maintained without dramatic price fluctuations. Chains like Progressive go through their wines every quarter and remove products that aren’t working for them. The punishment for non-supply and a change in quality is lesser sales and eventually not being ranged. You also need to demonstrate that you can support them with marketing and promotion as time goes on.

A lot of the work can be outsourced. Logistics, for example - we don’t run our own trucks, we use a third party. There’s nothing wrong with outsourcing the things you aren’t a specialist in, be that delivery, sales, marketing etc. You don’t need to do everything yourself.

The answers for your business can be very different depending on the product and scale of production, but there’s always opportunity for new suppliers to do something different, break into stores and make some noise.

Product development and procurement manager for Direct Imports.

The distributor

Direct Imports in Hastings has been going since 1946 - over 70 years. It imports consumer electronics, musical instruments and pro audio, distributing to retailers nationwide. Damian Riches is the product development and procurement manager.

My role involves staying up to date with current and future trends in the consumer electronics industry; determining what is relevant and what will sell in the New Zealand market; and identifying the manufacturers of said products throughout the world, primarily in China. There is a lot of research within the role, including understanding the home market’s needs and wants; finding appropriate and reliable factories to work with; establishing relationships with key partners in New Zealand and internationally and finally, sourcing products for a sensible price.

We have just returned from a trip to the famous Consumer Electronics Show in Las Vegas where the big international brands launch new products and where we can meet current brand partners and scout new opportunities. There were more than 3,900 exhibitors which we covered in four days. Being based in New Zealand means travel is required a few time a year to keep the face-to-face relationships maintained, and to ensure factories are quality controlled.

At this stage, the procurement of products is mostly a result of us being proactive. We may be 72 years in the business but this field is very competitive internationally. Deals can be entered into that lock up New Zealand within Australia – and then New Zealand gets shelved. So, we try to leverage our locally based, on the ground personal knowledge and go beyond the simple distribution model. We find this is very attractive to emerging brands especially.

Sourcing a product from a factory can be quite complex. You need to find the product that has the right design and features for the market, which also meets the price needed for sale. Once you have identified the product you then need to ensure the factory is capable of production and meeting the deadline. Additionally, it is important to ensure the supplier is socially responsible and the product meets the New Zealand safety standards. Having correct product compliance is very important. We need to ensure the items are safe for use and follow the guidelines set by Energy Safety NZ. We also need to be sure any applicable licences to developers have been met. During that process we also request production samples for evaluation by our in-house technicians.

When discussing the price with brands we distribute or factories on products we source we need to ensure that the end price to the consumer is competitive and other than exchange differences is not too dissimilar to global pricing.

Graeme Laurence, managing partner of Grocery Growth Group.

The retail investor

Graeme Laurence, managing partner of the Grocery Growth Group, has had a distinguished career on both sides of the retail fence, including as a buyer for Woolworths. He talks about how fresh produce gets from the farm to the store.

Supermarkets can be complex to build a relationship with. The gatekeeper is the category manager or business manager. They run their category as a business, and are looking to drive sales, generating stock turn and margin. They want product that will grow their top line and deliver the required margin for the category. Different categories have different margin expectations. Commodities like flour and other dry goods have lower expectations than fresh food like vegetables and meat. Those expectations were set way back, when supermarkets first started, and they persist today.

Overseas, it’s known that some supermarket chains sell desirable products like alcohol at a lower margin to attract customers. These are called loss leaders. In New Zealand, you aren’t allowed to sell alcohol at a loss, and very rarely will a supermarket here sell a product at a loss although they may sell at cost to stop a competitor having an advantage. I wouldn’t advocate manufacturers getting involved in this pricing strategy with retailers. The consumer will just wait for your product to be on special. But there are promotional strategies, like the ‘coke and chips’ pairing, that work and the retailer and the manufacturer have to run that promotion jointly, sharing the hit on the unit margin to increase yield and attract new long term customers. This promotional programme might run over a six-month period and be agreed with the category manager.

If a manufacturer finds they have excess stock, they may sometimes offer it to the supermarket at a discount to shift it, but that’s an exception.

In general, category managers prefer to deal with the manufacturer direct rather than a distributor. They don’t like the mark up going to a third party. Most retailers have their own distribution system anyway, you just need to supply direct to the DC. There are expectations. If you’re an importer with a reasonably small volume product, a supermarket like Countdown probably won’t want to range that product at their DC. You’d be asked to deliver that yourself and that’s when a distributor comes in.

If you manufacture a specialist product then getting your customers to contact their supermarket to try and get you ranged is a great strategy. Take Lewis Road Creamery, now a famous New Zealand brand. They had so much customer demand, supermarkets were going crazy to get the product on the shelves. Customers were emailing local stores to get them to range the product.

New World is a cooperative, so the stores have more independence. They might have local businesses supplying their bacon for instance. Countdown have a national buying strategy, so you can’t just supply one store. But they have A, B and C stores, so if you couldn’t supply all 177 stores but you can supply 20 – you could just work with their A stores.

You do need to provide guarantees. The retailer needs to know you are able to supply the product in full, on time, at the right price, with the correct New Zealand compliant packaging. They need to know the product is safe to use, that you’re following food safety guidelines, labelling is correct, that the barcode will scan. You have to support them in store as well, not just dump the product. You’re got to be advertising, driving consumer demand, perhaps have a coupon programme running with it. The most important thing is that you can deliver.

A question of ethics

These days consumers don’t just want affordable and available, they want to know their products haven’t harmed other people or the environment during their manufacture. We talk to Samantha Jones, CEO of ethical uniform retailer Little Yellow Bird.

I have a background in supply chain, and I could see there was a need for good ethical retailers. I wanted to work closely with our manufacturers in India so I could be confident about their business ethics. I worked at the factory for a month, helping them to optimise their processes meeting a lot of people and making connections, such as with organic cotton farms.

We’ve now got five manufacturers, each specialises in different product. They all have accreditation such as Fair Trade. On top of that we do our own quality control and I visit every factory before I start working with them and then twice a year. We do social audits where we ask workers about the factory anonymously, and we check their books to make sure they’re not outsourcing elsewhere. We can even provide customers with photos of the products being made. It really doesn’t take that much time and effort, even for a small business, and it’s important.

Our customers like this approach. Around 90 percent of our stuff is made to order, so we do have longer lead times but less wastage – we don’t have stock sitting on the shelves. Our costs are higher, but our customers are willing to pay a little more, and we are willing to take a smaller margin. We can tell all our customers about the chain of custody and ethics of our product.

There was a DOT report recently that said you would only have to charge customers an extra 50c per unit to pay workers in Bangladesh a minimum wage. Most consumers in New Zealand wouldn’t notice an extra 50c, and if it’s going direct to the worker their standard of living would be much higher. Many companies say their workers are paid the legal minimum wage, but it is never enough. Kmart just moved to Indonesia because they have a lower legal wage. That’s not ethics, that’s just a loop hole.

It’s not hard for big companies to switch to more ethical manufacturers. Companies can use a ladder system where they go to the most ethical factory first. This would encourage manufacturers to take positive steps. But these companies with big order sizes have a hold over the manufacturers, who don’t want to lay people off because they’ve lost business. The buying company pressures the price down and the manufacturer doesn’t make a profit, they just pay their bills. Ironically, they make the profit off the little companies like us. The big companies should work out how many hours it actually takes to make the products and what they should be paying per unit to ensure workers get a living wage.


This story originally appeared in NZ Retail magazine issue 755 April/May 2018

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