Food Brokers Are Bigger, So Shelves Look Smaller
The New York Times September 2, 2001, Sunday, Late Edition - Final
SECTION: Section 3; Page 4; Column 1; Money and Business/Financial Desk
By KATE MURPHY
EVER tried Restaurant LuLu's mustard? How about Chocolate Chix cookies or Crazy Richard's peanut butter? They are popular products that have won awards for taste. But they are not in most supermarkets because their manufacturers cannot find food brokers to represent them.
Food brokers are responsible for the majority of products, edible or not, that end up on grocers' shelves. They push the products, negotiate purchasing agreements and ensure that everything is in stock, properly displayed and accurately priced. "You're dead in the water without a broker," said Burt P. Flickinger III of Reach Marketing, a consulting firm in Westport, Conn.
The business is consolidating rapidly, though, a trend that may be reducing consumer choice by killing off both new and familiar brands. That consolidation, much of it since 1997, and the failure in June of one of the largest companies, Marketing Specialists Inc. of Dallas, has narrowed the field of national companies to three. All are private: Advantage Sales and Marketing of Irvine, Calif.; Acosta, based in Jacksonville, Fla.; and Crossmark of Plano, Tex.
With so few brokers to choose from, a manufacturer is left in a bind, because it is hard to find an agent who does not already represent a competing brand. "We can't take on direct competitors" because of potential conflicts of interest, said Sonny King, chairman and chief executive of Advantage.
John M. McMillin, a food industry analyst at Prudential Securities, added, "That means big trouble if you're the No. 4-and-beyond brand." Examples might include Libby's canned vegetables, from Seneca Foods, or La Martinique salad dressing, from Reily Foods, which lead in certain markets but lag behind nationwide. These manufacturers did not respond to requests for interviews.
The consolidation also ties the hands of manufacturers of the three top-selling brands in any category because they have nowhere else to go. "It's not like you can drop your broker if you don't like the service," said a manufacturer of a top-selling snack food, who did not want his name used for fear of antagonizing his broker. "The other two are working for your competitor."
Of course, food makers could have their own direct sales forces, but that is considerably more expensive. Most manufacturers use brokers to sell some or all product lines, paying them 2 to 5 percent of each product's wholesale price. Direct selling, by contrast, may cost as much as 10 percent.
THE situation is worse for small manufacturers that want to sell products nationally. "The big brokers won't give the little guy the time of day," said R. Craig Sonkson, owner of the Krema Peanut Butter Company in Dublin, Ohio, maker of the Krema and Crazy Richard's brands.
Mr. Sonkson ran into a brick wall with a national expansion effort three years ago. Without a national broker to negotiate with grocers, he says he has not been able to sell his products beyond cities in the Midwest and mid-Atlantic states, where he makes his own sales calls or uses the remaining independent, single-market brokers. Even if small producers like Krema can demonstrate that their products would not compete directly with any of the large brokers' existing brands, they do not have the sales numbers to make them attractive clients.
"You have to be able to guarantee huge sales and nationwide appeal for them to take you," said Leslie Wilson, director of marketing for Restaurant LuLu Gourmet Products in San Francisco. The company's line of 44 condiments, developed in 1997, is available in many epicurean shops and in a handful of small grocery chains because Ms. Wilson has found a few specialty food brokers scattered across the country.
One former regional broker, who sold his company to a national broker, then went to work for it, said: "Things have really changed. It doesn't matter how good the product may be; we can only take on manufacturers that have a proven national sales record."
Butch Smith, chief executive of Crossmark, said his company takes on smaller manufacturers if they pay a retainer fee.
But Cheryl Surana, president of Chocolate Chix, a four-year-old cookie maker in Dallas, said such charges were prohibitively expensive for a start-up. "It's real discouraging when you've got something people are asking for but you can't get it into the major stores," she said. As yet, her products are available at only a few grocery stores in Texas, through gift catalogs and at a booth in the Dallas World Trade Center.
As recently as five years ago, there were hundreds of regional brokers. Large manufacturers created national broker networks by choosing outfits they thought would best serve them in particular markets. It was not unusual for a single manufacturer to use up to 75 different broker companies to sell products nationwide. "The regional brokers were really in tune with local tastes and preferences," Mr. Flickinger, the consultant, said. They were willing "to use their market knowledge to incubate and nurse promising new products," he added.
Evian spring water and Guiltless Gourmet snack foods are among the products that might never have gained a retail toehold if not for brokers building them up in local markets. But now, Mr. Flickinger said, "Doors are closing on entrepreneurs all over the country."
As manufacturers like Kellogg, H. J. Heinz and Sara Lee acquired more and more brands and as retailers like Kroger, Albertson's and Safeway expanded nationwide, food brokers had to grow larger to serve them. "We just followed the consolidation trend of the entire industry," said Gary R. Chartrand, chairman and chief executive of Acosta, which has 66 offices and 11,000 employees nationwide, including 1,700 Marketing Specialists employees it hired.
Industry analysts say Marketing Specialists, the only publicly traded food broker, foundered after paying too much for the regional brokers it acquired and bidding too low for grocery manufacturers' business. As a result, the company did not have the cash flow out of $384 million in annual revenue to service its debt. The company's former chief executive, Gerald R. Leonard, and chief operating officer, Glenn Gillam, both now at Acosta, declined to comment.
Acosta does not share financial information, but Mr. Chartrand said annual sales to grocers were more than $35 billion. Advantage says it sells close to $30 billion worth of groceries, while Crossmark says its billings are $17 billion. Through mergers and acquisitions, all have at least quadrupled in size -- in work forces, branch offices and billings -- in the last five years.
GROCERS are also lamenting changes in the broker industry. "The complaint is that brokers aren't managing the shelves the way they used to," said David Orgel, editor in chief of Supermarket News, a trade publication.
Some grocers say that old cans of beans and boxes of cereal are not pulled when they should be. Yet the customer is none the wiser because the expiration date is printed in a code decipherable only by the manufacturer or its representative.
New products and price changes may also be delayed. "Now, there may be only one broker working an entire aisle, so there's no fight there, no competition," said Richard T. Frede, vice president of Schnuck Markets, which has 92 stores in Missouri, Illinois and Indiana. "It makes them real lethargic resetting the shelves."
Grocery industry experts predict that manufacturers will band together to finance new brokers, or that small specialty brokers will merge to form larger regional companies that can help introduce products and sell brands that are not top tier.
Mark Baum, president of the Association of Sales and Marketing Companies, said, "I can't help but feel that sheer demand will call for the re-emergence of the regional, independent broker who can give time and attention to smaller manufacturers."
His group changed its name from the National Food Brokers Association four years ago to reflect the more corporate nature of the business and the fact that brokers sell more than food. But manufacturers and grocers tend to persist in calling them brokers, not "sales and marketing representatives." And because of the recent developments in the industry, many say they do it out of spite as much as habit.