In today's retail environment it's always easier to identify the industry challenges rather than trying to find solutions. But while issues like increasing trading costs, retail price erosion and labour shortages seem hard to overcome, more and more FMCG companies have 'seen the light', as it were, and are enjoying great success by outsourcing their sales and merchandising functions to SMAs.
So what do these forward-thinking companies know, that many others have yet to discover? SMAs in detail – what they do, how they do it and how you can benefit you and your business.
Let's give you some background on the value and growth of SMAs as well as global and local trends, by presenting some of the findings from recent US research.
This research provides detailed assessment of the value of the contribution of SMAs to FMCG manufacturers and retailers, with considerable implications for the New Zealand market.
Conducted by the Institute for Customer Relationship Management and the Center for Business and Industrial Marketing of Georgia State University, the study found SMAs currently represent about 54% of all FMCG company retail sale revenues in the United States – equivalent to US$116 billion in actual cash values of commodity revenues for FMCG companies.
Market representation by SMAs grew by a healthy 15% per annum over the past three years and was estimated to increase by 10% per annum thereafter. Therefore, by 2010, SMAs would represent an impressive US$213 billion in FMCG sales to retail.
Based on this growth, New Zealand's ability to follow this trend is significant. Nationally, SMAs currently represent NZ$850 million in retail sales, or 10.2% of FMCG companies' retail sales.
According to the US research, at current levels of outsourcing to SMAs, FMCG companies derive US$4.2 billion of savings annually, compared to the use of a direct sales team. Most FMCG companies believed SMAs perform sales and merchandising services at an almost 30% lower cost than their own direct sales team.
In general, SMAs delivered on the two areas FMCG companies found most important – effectiveness and efficiency – and proved to have superior skills and expertise in: lowering costs via scale advantages; generating greater share of voice; market knowledge; customer relationships; retailing sales, support and merchandising promotions; administration; and overall management.
These valuable findings are only a sampler, but will hopefully provide you with a taste of things to come via the growing trend in SMAs, both nationally and internationally.
Many manufacturers currently employ their own sales and/or merchandising teams but is this really economical? To find out, SMA member Chris Haling says it's important to know what the true cost of this resource is, and to weigh this against an economical alternative such as outsourcing to an SMA, where costs are often shared across a number of brands.
He explains than when employing a full-time sales representative there are a number of direct costs to absorb, such as salary, vehicle and operational costs.
"In addition to salaries there are other add-ons like holiday pay, sick leave, ACC, bonuses and now KiwiSaver to consider. A motor vehicle will incur charges for fuel, insurance, repairs, maintenance, FBT and lease costs or, if purchased, finance and depreciation costs. And don't forget those other operational costs like mobile phones, parking, mail, and of course travel to regional territories."
"Then there are often the indirect or intangible expenses that are not fully considered when analysing the true costs of running a sales force", he says.
"Consider the costs of recruitment, such as recruitment fees, the time spent finding a suitable candidate in a tight labour market, as well as the 'down time' before they become an effective sales person" he says. "There are also retention costs to keep valuable employees."
"Once hired, an effective sales team usually requires a sales manager or supervisor as well as administration and communication resources. Then at some stage, staff will require training, which will help maximise sales performance, but can be expensive. There are also 'down time' costs when sales people undergo training or attend conferences."
On the down side, if a sales person's performance is below par, they need to be given the opportunity to improve, which can be a lengthy and stressful process that will shift the focus away from their daily selling objectives.
When weighing up the options of running a sales team versus outsourcing, cost is likely to be the first consideration. However, there are many other ways outsourcing can offer additional value to an organisation.
"Generally, an outsourced sales team will operate on a straight percentage of sales commission, or a partnership of shared costs and benefits. This extremely simple model makes the profitability of the brand easy to forecast and manage", says Chris.
Another advantage is improved coverage, where the cost of selling and merchandising is spread far more economically across several brands, which allows for a wider national coverage and higher call frequency.
SMAs can provide an established sales force infrastructure for companies with small to medium-scale brands. The cost of employing their own sales team would otherwise be cost prohibitive.
"There is also the advantage of consolidation with SMAs, which represent a number of brands. Store buyers and grocery managers need only meet one sales representative, often making better use of time," says Haling.
Many SMAs also offer flexibility of resources to cover requirements that may otherwise stretch a sales team such as planograms, in-store demonstrations and selling-in new and seasonal lines, he says. This can be achieved while maintaining a core sales-call function and contracting specialist services as required.
"All this means the manufacturer can focus on their core business capabilities, and leave the sales function to the experts", says Haling, who has had experience working for both a manufacturer that outsourced and now with an SMA.
It can be a very difficult and emotional decision to outsource a sales team. Most manufacturers will make their decision based purely on cost savings. However they should also consider the additional value that SMAs can offer and ensure they will be a good fit with the SMA in order to make the most of the outsourcing option.
"You've read the articles and done the figures about taking on an SMA, but you are still a little unsure of the details. Well, a great way for manufacturers and importers to make a decision before the transition to outsourcing is threefold", says SMA member Chris Haling.
"First, establish what the critical points are that you are looking for when engaging an SMA. Then consider each of the services provided by using the SMA Services matrix on the website, and finally, answer the following questions."
SMAs provide the flexibility and allocation of resources to help clients achieve their business goals.
"They have an absolute focus on retail and the nuances of the FMCG market with their core competency managing the sales channel, whether grocery, route, pharmacy, mass merchants or food service," says Haling
"Focusing on this single aspect of supply to the market, enables SMAs to develop a level of expertise that a manufacturer or importer would find costly to replicate," he says.
Many SMAs also offer a large pool of specialised resource, from which various experts can be pulled for such things as product releases or category reviews. They also provide a level of expertise in market due diligence for new entrants to New Zealand, and can assist with such elements as brand and packaging development.
SMAs carry out a wide range of services nationally and regionally – from full sales and merchandising, such as field sales team and key account management, space management and head office presentations, to marketing and business planning, demonstrations, end-user work in foodservice and new product launches.
Many SMAs can also handle project work such as surveys, telesales, compliance audits, stickering and relief staff, as well as administration and accounting, logistics management for importation, warehousing, deliveries and third party distributor management. Other services include educationals, public relations, sponsorship and mystery shopping.
SMAs offer the flexibility to work across different markets and channels from a large corporate like Progressive and three independent Foodstuffs' co-operatives in the grocery channel, to pharmacy groups, department stores, convenience chains, foodservice and hardware chains to highlight the main ones.
Each comes with its own unique set of management systems, as well as different levels of representation, expectation, complexity and negotiation, he says.
International trends are always a great indicator for how the local retail landscape will react. So when market representation by SMAs in the US experiences a 15% per annum increase for the last three years to 54% of retail sales, it's a pretty sure sign New Zealand will follow suit. Sure enough, SMAs representing scanned sales in New Zealand have almost doubled since 2006 to over 10%.
The figure may seem small potatoes, but it's reassuring to know that there is growing appreciation of the benefits of outsourcing from a wide range of forward-thinking companies, as both retailers and manufacturers are rapidly becoming aware that employing an SMA is a smart choice.
Eve Dhar, Category Manager for Progressive Enterprises, has been on both sides of the SMA fence. She has worked with SMAs for almost a decade, mostly as a retailer, but also within an SMA.
"Many SMAs have more than one client, which allows for a more efficient use of time when meetings are held, in some cases we can discuss more than one brand in any one meeting. If a new brand coming into the market is going to be part of an SMA company, we don't have to start from square one with the education process of how to do business within Progressive and the New Zealand grocery market."
"This is especially relevant for those looking to break into the local market, such as overseas manufacturers", Dhar says.
"You cannot put a price on established relationships with the supermarket head office personnel, not to mention market expertise. SMAs have an established network of sales support – from head office contacts to sales and merchandising support."
Established networks and market knowledge were important considerations for AB Food and Beverages Australia Pty Ltd (ABF). ABF has been with its SMA since the company's inception back in 2003, when it purchased the Jarrah and Ovaltine brands from Novartis.
"Taking over an established business, it was important to keep continuity", says Deane Hubball Sales Director/General Manager – New Zealand.
"We essentially had to hit the ground running and did not have the luxury of time to develop new structures in New Zealand, so we decided to continue with our SMA, which Novartis had been using for a number of years prior to our acquisition."
Since then ABF has benefited from "best in class infrastructure" in New Zealand that the company would otherwise not have been able to achieve on its own.
"Due to our size we would not have been able to justify such a large structure and field coverage if we were to bring these resources in-house", he says.
Hubball says the key to ABF's success with its SMA is that it isn't treated like a third party.
"They are regarded as part of ABF. They have the same responsibility, accountability and authority as the ABF sales team in Australia. Our New Zealand Business Manager is required to perform exactly the same tasks as their Australian counterpart and is recognised in the same ways for their performance."
"Our partnership with our SMA is extremely close, to the point that we sometimes forget that they are not actually ABF employees."
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