Alternative Distribution for Prestin Protein, Inc. (PPI)

Judith M. Whipple

Prestin Protein, Inc. (PPI) was considering alternatives to increase market coverage and sales volume on its snack products. Historically, the majority of PPI products were sold to consumers through various grocery and convenience stores. Vending machines and institutional sales, such as airports, represent the remaining consumer market segments. The selling environment for snack foods was becoming increasingly competitive and traditional channels of distribution were being distorted, especially in the grocery and convenience trade.

Grocery and convenience stores were traditionally serviced through distributors known as snack and tobacco jobbers. These distributors purchased PPI products in large quantities and then sold them to retail stores for sale to consumers. The number of snack and tobacco jobbers was decreasing, which was distorting the traditional distribution channel. Two factors were causing this distortion. First, the wholesaler and distributor industry in general was going through consolidation as large distributors continued to get larger and more profitable, while smaller and less profitable distributors either were bought up or closed. Second, the popularity of warehouse club stores threatened snack and tobacco jobbers. Small mom-and-pop grocery or convenience stores were able to purchase many products they needed at these warehouse clubs at the same price or less than what the distributors offered. Furthermore, the warehouse clubs provided a one-stop shopping experience so that the grocery stores could purchase a wider range of products at the club store than was sold by any one snack and tobacco distributor. For example, a club store may offer a narrow selection of the most popular PPI products as well as its competitors products, while an individual distributor may handle PPI products exclusively. While PPI encouraged grocery and convenience stores to carry its products, regardless of whether these stores purchase products from distributors or club stores, there was a concern about how the products were serviced. Distributors provide a significant benefit in that they carry a broader line of PPI products than most club stores. Also, some snack and tobacco jobbers visit their retail customers regularly to ensure the stores remain stocked with a large variety of fresh products. In this sense, snack and tobacco jobbers provided a marketing service for PPI that is not achieved with club stores.

As such, PPI began looking for an alternative channel system that would not only increase market coverage in light of the new competitive environment but also provide an important marketing service to ensure a large variety of fresh products available for consumers. To accomplish this, PPI questioned the reliance on its traditional marketing channel, as well as the typical outlets through which its products were sold. Andy Joslin, the vice president of integrated logistics, had an idea. Andy began to focus on new retail outlets where PPI products could be sold and how these sales could be uniquely managed via a new channel arrangement. It was determined that direct store delivery of PPI products could be handled by using telemarketing for order processing and small package delivery. The notation was that any retail outlet that had sufficient counter space and high customer traffic was likely to sell high-impulse snack items such as PPI products. Examples of potential retail outlets that traditionally did not carry snack items included dry cleaners, barbers and beauty shops, hardware stores, and drinking establishments. The concept is summarized in Table 1.

Table 1 Alternative Distribution Concept

What is it?

A unique new concept for distribution and selling PPI snack foods through new retail outlets to broaden market coverage.

How does it work?

Display units of popular snack foods are provided to retail outlets for direct purchase by consumers. Fast-selling items are easily restocked by telephone order with an 800 number and rapid small package delivery service.

What are the special features?

Minimal effort is required on the retailers part since the popularity of well-known PPI brands makes selling easy. Freshness is guaranteed by direct shipment from PPIs warehouses through rapid delivery service. Incremental money is made by selling high-profit impulse snack foods to customers at no risk since PPI will remove slow-moving products at no cost to the retail outlet.

The alternative distribution plan offers various benefits. First, it is a unique selling concept in that it provides retailers a way to increase their business through incremental sales of snack products with little risk of cannibalization by other retail outlets due to the impulse nature of the product. Furthermore, retailers are not required to make a significant capital investment to try the concept and there is little risk to the retailer if the plan fails. PPI will provide countertop units or shelving to display the products for sale and will suggest pricing for maximum sales volume and profit. The alternative distribution concept benefits PPI as well by providing market growth and exposing its products to a wider range of customers. Also, PPI will have direct contact with retailers, providing a great opportunity for testing and tracking new products while ensuring timely delivery.

One potential drawback is that the retailers may feel the incremental revenue received is insufficient, which will dissuade product reordering. Also, retailers may have pilferage problems that would discourage their participation. Finally, the arrangements could threaten cand and tobacco jobbers that rely on similar retail accounts. Resentment from candy and tobacco jobbers could potentially result in decreased service to grocery and convenience stores.

From initial interviews with target retailers, PPI became convinced the alternative distribution concept had merit. The next step was to evaluate whether the idea was a viable business decision in terms o retail interest versus actual participation. An internal operating plan for managing the alternative distribution program would also need to be devised to identify and determine the internal costs and potential profit.

Retail Interest

The research summarized in Table 2 illustrates important considerations for retail sales. Fifteen types of retail stores were targeted for participation, and 30 product lines were considered for distribution. Estimates concerning expected retail participation and sales were a critical part of business viability. To start, PPI estimated it could contact only 20 percent of all target retailers. The remaining retailers would be approached after a 1-year test period if the alternative distribution program was successful.

Table 2 Retail Characteristics

Sales Regions	Total Number of Target Retailers
Eastern	320,000
Midwestern	290,000
Western	210,000
Percent of retailers for initial contact: 20%
Projected retailers who will participate after initial contact: 30%
Retailers who will continue after 6-month trial period: 55%
Expected average retail sales transactions: $1.40 per customer purchase
Expected average unit sale: $1.12 units per customer purchase
Expected average customer traffic/retail store: 100/day
Expected average number of customers who will purchase product: 10%

Two types of display units were designed as well as two reorder packages. An initial order would include two boxes shrink-wrapped together. One box would hold the product and the other would hold the display unit. Table 3 provides display and product package characteristics. Reorder packs would contain the same product weight and units as shown for the initial order.

Table 3 Initial Display and Product Package Characteristics

	Large	Small
Weight	25 lbs.	14 lbs.
Cubic Feet	2.75	2.00
Product Included	24 lbs.	12 lbs.
Cost of Display Unit	$35	$18
Units of Product	180	92
Production Costs	$190	$98

Operating Procedures

Two logistics networks are under consideration for the new channel. Both networks facilitate direct retail customer contact: no distributors are included in the channel. One network uses three distribution centers while the other uses four. Service for the first network is estimated at two to four days, with some outlying areas serviced in five days. Service through the second network is estimated at one to three days and outlying areas in four days. The number of outlying areas is reduced under the second network. Table 4 compares the costs of both networks.

Table 4 Operating Costs per Order

Costs	Three Distribution Centers	Four Distribution Centers
Handling	$3.00	$3.00
Storage	.11	.21
Transportation of average package	6.25	5.90
Ordering costs/order	.75	.75
Total logistics costs/order	$10.11	$9.86

The information flow would start with order entry at the telemarketing department. Retail orders would be transmitted to the appropriate distribution center and compiled each night. Orders would be picked and packed, then delivery would be arranged based on the aforementioned service levels.

Summary

Before PPI can determine whether the alternative distribution concept should be initiated, it must analyze the information gathered and project the potential sales and profits. Profits must be determined for PPI as well as for retail customers. If retailers do not make a sufficient incremental profit, it is unlikely they will continue participating in the plan. A team has been assigned to perform the data analysis. Andy Joslin has identified questions he feels are critical for the team to analyze. These questions are provided below: 1. PPI would like to determine its potential sales for the first year based on the information in question 3. However, there is some concern that the estimate of average retail sales is too high. This assumes only 40 percent of the participating retailers will achieve the average sales and reorders (this group is designated as high performers). Twenty percent of the retailers are expected to have medium performance success and will only sell/reorder 75 percent of the average suggested order. Low-performing retailers represent the remaining 40 percent and will achieve half the sales/reorder expected on average. Calculate the orders (separate initial and reorder quantities) for the 6-month trial period if 45 percent of retailers exclusively order/reorder large packs and the remaining retailers exclusively order/reorder small packs. Calculate the second 6 months accounting for the dropout. (Round if necessary.) Assume the performer ratios remain the same after the trial period (i.e. 40 percent are average performers, 20 percent sell 75 percent of the average, and 40 percent sell 50 percent of the average).

2. Assume retailers pay $205 for a large pack (initial or reorder) and $115 for a small pack. On the basis of the first years sales calculated in question 4, determine the profit to PPI if three distribution centers are used. Repeat for the four-distribution center network. Which network, if either, should be used? What factor(s) aside from cost/profit might influence the network decision?