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We had a piece yesterday that addressed Safeway’s desire to move to a net cost way of buying, but not everyone agreed that this was a good idea.

MNB user Ron Lunde wrote:

Retail history's dustbin is full of those who have tried a net/buy and EDLP approach ... failures.

Safeway collects and spends around $2.5 billion in vendor allowances. Going to net pricing is not without risks to the retailer. 75% of that number is allowances. The other 25% is essentially performance funds. Safeway management must have an extraordinarily clear understanding of what those risks are to both the revenue and cost of goods sold line are.

There are new accounting issues which Safeway adopted in 2003 ... as well as all other retailers whose impact on reporting lines and market strategies is still not clear and the overall impact is not yet felt. Although these Issues do not affect the bottom line ... they can affect the revenue and margin lines.

Actually, the issues do provide a better way for both Safeway and their suppliers to manage promotions.

Unintended consequences: If Safeway does go net/net ... then what will CPG's do about trade promotion funds? These funds, historically, are used to 'manage the brand'. Virtually all trade promotion funds are now classified as a reduction of revenue to the brand. If they do not produce a yield of increased movement to the brand ... then it is better not to spend the money. Funds that are not ‘spent’ on trade promotion actually increase a CPG's reported top line revenue.

What happens to the industry if CPG's drop the marketing spend from a reported 20 to 25% to 10% and that is all on consumer advertising?

Of course, such a move would change the fundamentals of brand marketing thinking and strategies ... so the impact could be huge on both sides.

Look at Safeway's P&L and it is not hard to figure out what the impact will be.

Assuming that you have a level procurement playing field ... how you receive the $2.5 billion is not the issue. Whether from net pricing or promotion allowances is basically irrelevant under Burd's current thinking. However, there are potentially beneficial options ... but they require vendor and retailer cooperation.

Safeway's real target needs to be the ability to attract and hold customers. Customer satisfaction with the shopping experience is the key. Price is only one element and diminishes in importance if you are close to your competition.

We had a story yesterday about the US Food and Drug Administration (FDA) saying that health claims can be made for foods that contain omega-3 fatty acids, though manufacturers cannot add omega-3 acids to unhealthy foods and then make health claims.

Which struck one MNB user as a shame:

Darn. What a health claim that would be: "NEW! Krispy Kreme Donuts with omega-3! Reduce your risk to heart disease!"

Talk about opportunity squandered…
KC's View: