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Winners And Winners
With Some Megastores Buying Up To 80% Of Their Merchandise Locally, Wholesale Distributors Are Growing While Cash & Carries Are Expanding Into Retailing
By TAINA ROSA
March 25, 2004
Wholesale transformation: Local cash-and-carries feel the pinch while wholesale distributors and other businesses cash in on the expansion of megastores
The rise of the megaretailer in the 1990s has certainly changed the way food & beverage distributors and cash-and-carries do business in Puerto Rico. Both players have had to adapt to surmount the challenges presented by their new and larger competitors.
There is one major distinction between distributors and cash-and-carries in Puerto Rico. Distributors, particularly larger ones, actually benefit from the opening and expansion of megaretailers. Cash-and-carries generally feel threatened by the Wal-Marts, Sams Clubs, and Costcos entering the local market.
This was evident by the way local cash-and-carries (alongside supermarkets and other retailers) emphatically opposed Wal-Marts acquisition of supermarket chain Amigo in 2002. Most local distributors, however, kept quiet during the intense debate that erupted before the Federal Trade Commission approved the sale.
Distributors have increased their business by taking on megaretailers as important clients, supplying them with merchandise and logistics services. Distributors havent necessarily forsaken supermarket chains or cash-and-carries; many say they are as devoted to supermarkets as they are to megaretailers. Many cash-and-carries, meanwhile, have seen business decline as small clients such as cafeterias, restaurants, smaller grocers, and other small businesses, have turned to megaretailers for their supplies and merchandise.
That food & beverage distributors are generally doing better than cash-and-carries is borne out by the 2003 CARIBBEAN BUSINESS list of the Top 400 locally owned companies, which includes 20 distributors and nine cash-and-carries. They each reported revenue of more than $14 million in 2002. As a group, they pump about $4.7 billion into the Puerto Rico economy each year. Together, they generated revenue of more than $3 billion. Two of the group, V. Suarez & Co. and J.F. Montalvo Cash & Carry Inc., are among the Top 10 locally owned companies.
Of the 20 distributors in the Top 400, 13 reported revenue in 2002 exceeded that of 2001; five saw revenue decrease; and two saw revenue remain flat. Of the nine cash-and-carries, three reported an increase in revenue; five said revenue decreased; and one said revenue was unchanged.
The situation may look grim for local cash-and-carries, but they arent giving up their customers without a fight. Most have integrated retail (supermarkets) into their formerly all-wholesale operations. Some are seeking to expand by adding locations or consolidating with competitors. All cash-and-carries, like distributors, are also working to improve their customer service.
Distributors love megaretailers at least for now
One thing is certain: Local distributors really want to do business with Wal-Mart, Costco, and Sams Club (and with any other megaretailer that sets up shop on the island). Most already do, and they arent eager to lose such big clients. They emphasize, however, that they also hold supermarkets and other retailers close to their hearts.
"Its going to be very difficult for a distributor to stay in business if it doesnt start doing business with megaretailers. Nevertheless, it is true that not every single distributor will be able to provide the volume of products megaretailers will ask for," said Jose Colon, president of Colon Brothers.
When megaretailers announced they intended to buy a good part of their merchandise or supplies from local distributors and manufacturers, many people were skeptical. However, many local distributors told CARIBBEAN BUSINESS that megaretailers have not only fulfilled their commitments but are also boosting their local purchases. In some cases, megaretailers choose to purchase locally because of the added value local distributors can offer in terms of logistics and follow-up service.
"Megaretailers dont compete with distributors," said Elpidio Nuñez III, Northwestern Selectas vice president of marketing. "Megaretailers know they benefit from doing business with local distributors. It is very important for distributors wanting to deal with megaretailers to offer a benefit, and that benefit lies in excellent service."
He said distributors that only sell products and dont offer quality service will have a hard time surviving. "Business doesnt end when a sale is made. You need to follow up on that client to ensure satisfaction," he said.
"For example, Wal-Mart used to purchase Smithfield food items on the U.S. mainland for sale here. It wasnt breaking the law by doing so because the purchases werent made by Wal-Mart of Puerto Rico but by its parent company, which buys for all the stores," said Nuñez. "However, the megaretailer later realized that if it bought Smithfield from us [Northwestern Selecta is the brands exclusive distributor in Puerto Rico] this would provide an added benefit to Wal-Mart. We can deliver products three or four times a week if necessary, and this is something its supplier in the States cant do," said Nuñez.
Another benefit Northwestern Selecta offers megaretailers is a sales force that will make sure products are on the shelves and havent expired, he added. The companys sales force is constantly looking for ways to maximize sales.
Mendez & Co. President Jose Arturo Alvarez agrees that local distributors provide added value, making them indispensable business partners for megaretailers. "The challenge here is to accommodate megaretailers needs and to add value and efficiency to the services offered," said Alvarez.
To that end, Mendez & Co. has focused on applying high technology to its sales efforts. "Our sales force is equipped with handheld devices that allow it to take orders electronically. In fact, we are using electronic funds transfer [EFT] with some of our clients. With EFT, we send them the bill and they pay us through direct deposit," said Alvarez. Of course, all these technological upgrades require heavy investments, but they are sure to reduce errors, speed up deliveries, and improve customer satisfaction.
Cecilio Massanet, president of Empacadora Hill Brothers, also believes local distributors can offer megaretailers better service than they could expect from stateside suppliers. "My companys advantage is that we sell fruit and vegetablesperishable items. It is very difficult to bring such items from the U.S. because by the time they get to the stores, they are no good," he said.
"Since we are here on the island, we can offer megaretailers fresh fruit and vegetables and can deliver them at any time they ask. We begin distributing before 5:00 a.m.," said Massanet. "Its just logical to do business with us."
Megaretailers buying more locally
All of the distribution company executives interviewed by CARIBBEAN BUSINESS confirmed that megaretailers have been doing more purchasing locally, and they expect the trend to continue.
"The percentage of products we purchase locally could remain at more than 80% of our total purchases," said Ignacio Perez, president of Wal-Marts local operations. "The volume of products we purchase, however, will increase as the number of our stores increases." Wal-Mart has announced it will open an Amigo supermarket in Hatillo and a Supercenter in Caguas. CARIBBEAN BUSINESS also learned the company plans to open an Amigo in Montehiedra.
"Another possibility is that as sales per store increase, so will the amount of products we must buy, resulting in more sales for the distributor," said Perez.
Perez noted that Wal-Mart held a special meeting at which about 30 local companies not doing business with the megaretailer at the time presented their products to Wal-Mart buyers. Those companies who win supplier contracts will see their merchandise on Wal-Mart and Sams Club shelves. Perez emphasized that this was only for manufacturers, not distributors.
The distributor that came from the north
Local distributors shouldnt focus blindly on megaretailers. They must be aware of stateside competition such as that from New Jersey-based White Rose. Although White Rose doesnt supply merchandise to megaretailers, it has been selling to many locally owned supermarkets and cash-and-carries for years and enjoys a good relationship with the local United Retailers Association (CUD by its Spanish acronym).
White Rose set up a distribution center in Cataño in 2003 and has promised to help local supermarket chains fight megaretailers that take away their business. As a result, the distributor has seen its local sales jump 35% from January to February, said Import & Export Marketing Director Anthony Toto.
White Rose delivers every 72 hours, provides merchandising service, takes inventory and orders every 15 days, and offers various support programs to supermarkets that become business partners, according to CUD. Also, White Rose has been contacting all local manufacturers that would like to export their products to the mainland U.S., said Toto.
The battle of the cash-and-carries
Many local cash-and-carries have lost customersprimarily small retailers such as cafeterias, grocery stores (colmados), and individualsto megaretailers.
Customers visiting many of these smaller establishments can notice this shift in suppliers. For instance, where some kiosks in Luquillo used to sell water from cash-and-carries in the area, now they sell bottled water bearing Sams Clubs private label, Members Mark. This label is widely available at Sams Clubs here and on the U.S. mainland.
A cafeteria owner in Cayey explained why he decided to buy at Sams Club instead of from a local cash-and-carry: "The cash-and-carries I know are slightly more expensive than Sams, and they make you wait longer. Many small businesses here have begun buying at Sams," he said.
Ponce Cash & Carry President Johnny Luna expects things to get tougher for cash-and-carries. "Wholesalers [cash-and-carries] days are numbered," he said. "This is why youll notice that most cash-and-carries have evolved into mixed stores, combining wholesale and retail."
"Cash-and-carry owners are highly responsible people who will do everything in their power to battle megaretailers, but the truth is our sales are decreasing," said Jose Santiago, president of Hermanos Santiago Cash & Carry. He said part of the reason is that megaretailers can afford to sell a product at a loss to draw customers (known as a loss leader) for up to a year.
Wal-Marts Perez denied Wal-Mart and Sams Club do this. "We never sell items below cost," he said. "However, we have observed cash-and-carries selling items cheaper than what it would cost us to purchase them. It could be theyre getting a good deal on those items, but we believe this practice should be investigated."
Some cash-and-carry executives brushed off the allegation as a blatant lie. Others said that although the practice might not exist in Puerto Rico, it is a trend in the States.
Some small companies that have taken their business to megaretailers also complained that cash-and-carries usually dont have air-conditioning, making them hot and uncomfortable for customers. In addition, they said, it is more convenient to shop at a megaretailer because it usually has everything they needfrom a big-screen TV to foodunder one roof.
Smart cash-and-carry owners have been working hard to improve the look and comfort of their stores, and have tried to excel in areas where they feel megaretailers do a poor job.
"If you want to compete, you have to improve the quality of your stores," said an executive from Ralphs Food Warehouse. He stressed that his companys stores are equipped with many cash registers and are well-lit and clean. "Our stores are majestic, and this has allowed us to grow even though we have megaretailers surrounding our operations," he said Ralphs Food Warehouses revenue grew 121.3% from 2001 to 2002.
Raul Belen, marketing & buying director of Hatillo Cash & Carry, said, "We observed Sams Clubs business practices and noticed, for example, that it would sell Chef Boyardee products in six-packs, prohibiting customers from buying only one unit. Now, we offer our clients the same item in six-packs or by the piece."
Belen also pointed out that while Sams Clubs real target is families and not small retailers, cash-and-carries are in a better position to cater to both types of customer. "For instance, at Sams you will find Clorox only in the 128-ounce size. Thats convenient for a big family, but its not what small retailers are looking for. They are looking for smaller sizes to sell to their own customers. Thats why we have that product in 32- and 64-ounce sizes," he said.
Belen advises cash-and-carries to develop a complete marketing program to attract new customers and retain old ones. "When we learned that megaretailers would be opening near us, we prepared a whole marketing & educational campaign in which we stressed our competitive advantages," he said.
Hatillo Cash & Carry put up billboards in the region saying that it offers customers savings without forcing them to pay a membership fee; has a wide variety of products and packages; and has a 25-year history. "We even came up with a brand-new slogan that emphasizes the fact that we are like family," said Belen.
Hatillo Cash & Carry already has a Sams Club nearby, and now Wal-Mart is opening an Amigo supermarket across the street. "We gladly welcome the challenge," said a defiant Belen.
Some cash-and-carry executives believe owning a distribution center is a good way of competing.
"We purchase 60% to 70% of our merchandise directly from manufacturers in the U.S. and then place it in our distribution center. Then all we have to do is send the merchandise to the store that needs it," said Johnny Luna, president of Ponce Cash & Carry. The distribution center, said Luna, allows him to skip the middle people, improve logistical efficiency, and save money.
Jose "Pepito" Perez, president of Empresas Perez Hermanos, also has a distribution center, which he runs from his warehouse, and his cash-and-carry is integrated with a supermarket. "We import fruit, vegetables, and meat and dairy products. This allows us to save a lot of money and act as a wholesaler to smaller businesses in the region," he said.
Consolidation and expansion
Some distributors and cash-and-carries plan to grow by purchasing other players in the market, by adding more locations, or both. They may also grow by exporting products to other markets or by adding more products to their rosters.
Consolidation has been the name of the game among larger distributors for some time now. Mendez & Co. acquired Carlos Malave & Co. in November 2002, and V. Suarez & Co. is in the process of acquiring Packers Provision Co.
"The distribution industry in Puerto Rico has reached a level of sophistication that leads distributors to buy other companies to achieve more efficiency and increase their purchasing power," said Mendez & Co.s Alvarez. In his case, acquiring Carlos Malave & Co. allowed Mendez & Co. to enter the refrigerated products business, which was Malaves forte. Alvarez added that Mendez & Co. believes consolidation is important and will consider offers from other companies.
Northwestern Selecta is hearing offers too. "We will listen to companies that offer us the chance to buy them out. There are no negotiations going on right now, but if an opportunity should arise, we would certainly consider it," said Nuñez.
James Finn, president of Plaza Provision, said he is open to the possibility of purchasing other distribution companies, though there are no negotiations underway.
One cash-and-carry actively seeking other stores to purchase is Hatillo Cash & Carry. "We dont reject the possibility of buying other cash-and-carries or supermarkets; in fact, we are actually evaluating some stores around the island," said Belen. He noted that when the company buys another store, it names it Hatillo Cash & Carry to capitalize on the high level of name recognition in the area.
Meanwhile, executives at Ralphs Food Warehouse said they prefer to expand by building their own stores from scratch. "We are opening a store in Caguas in August that will combine wholesale and supermarket operations under one roof. We are also opening stores in Humacao, Naguabo, and Fajardo, and we expect more to come," they said.
Empresas Perez Hermanos president recently expanded his cash-and-carry operation in Cayey. "We have added 30,000 square feet to our 100,000-square-foot store. The new area is entirely devoted to retail sales [supermarket]," said Perez.
Ponce Cash & Carry is also expanding. Instead of opening cash-and-carries or mixed stores, however, the company is concentrating on the supermarket business. "We are investing up to $4 million in a 35,000-square-foot supermarket in Coto Laurel, close to a Wal-Mart Supercenter," said Luna.
Alternative growth strategies among distributors include exporting and diversifying their product offerings. Colon Brothers, for example, has been exporting its Coloso brand to other Caribbean islands for about a decade. Recently, it began selling Coloso products, including adobo (seasoning), octopus, and pigeon peas, to stateside supermarket chains such as Pioneer and Publix.
Mendez & Co. recently introduced a series of alcoholic beverages aimed at young adults and has been able to increase the market share of some of its most popular brands, including Heineken, Johnnie Walker, Veuve Clicquot, General Mills, and Bumble Bee. In fact, Alvarez said sales this year should be even better than in 2003, which saw a double-digit sales gain over the previous year.
Puerto Ricos distributors and cash-and-carries prove that in a globalized economy, the only way to stay in the ring is to adapt to change. Most havent thrown in the towel and have been able to grow despite fierce competition from megaretailers.
Caguas mayor welcomes Wal-Mart
Not many mayors in Puerto Rico would have the courage to welcome megaretailer Wal-Mart to their municipalities despite the criticism from local small businesses. Caguas Mayor William Miranda Marin, however, is a courageous man, known for his vision when it comes to economic development. He attended the groundbreaking for Wal-Marts forthcoming Supercenter in his municipality.
"[The Supercenter] represents an investment of more than $25 million and will create more than 300 jobs. Youve got to be crazy to oppose this," said Miranda Marin.
"The land where Wal-Mart is building this Supercenter has been empty," he added. "Now that the store is going to be built, Wal-Mart will be building an access road, adding gardens, and more. This will give the previously barren land a fresh look and will increase its value tremendously." He noted that infrastructure improvements to be made by Wal-Mart would also benefit Caguas.
"In this globalized economy," he added, "We must search for ways to adapt to change. Cities must evolve in tune with socioeconomic changes in order to be livable."
Businesses big and small must also adapt. "They must realize the way of doing business has changed dramatically," said Miranda Marin. "If they intend to do business the way it was done 20 years ago, they are bound to disappear. Change is the only constant."
Miranda Marin said he isnt afraid of opposition from other retailers in Caguas because he believes he has given them all the tools they need to adapt to economic changes. Among these are tax incentives, export missions, and alliances with the Small Business Development Center.
This Caribbean Business article appears courtesy of Casiano Communications.