AN INVESTIGATION OF THE WHOLESALE FROZEN FOOD OPERAHON OF A RETAiLiR QWNED CQGAFERATEVE GRQUP 3208:: 5% the Daqma 95 M. A. MICEEGAN STATE ‘UNWEFLSITY Richard M. Healy 1962 IIHIWHIWIllHllllllHllllHIHINHIIHllllllWlllIlHll 31293 01031 6101 r LIBRARY Michigan State . University PLACE It RETURN BOX to man this Mention your record. TO AVOID FINES Mum on or baton dd. duo. DATE DUE DATE DUE DATE DUE MSU I. An Afflnnltlvo ActtoNEqud Oppoflunlty Imam m1 ABSTRACT AN INVESTIGATION OF THE WHOLESALE FROZEN FOOL OPERATION OF A RETAILER OWNED COOPERATIVE GROUP by Richard M. Healy The dynamic growth of three areas of food marketing have been primarily responsible for prompting the writer to attempt a study of this nature. 1. Frozen Foods The sales volume of frozen foods is continuing its climb. While estimates vary as to where the leveling off point will be, the histOry of the industry shows that annual increases in dollar sales of from one hundred million to three hundred million dollars have come to be eXpected as regular occurrences. These increases have been responsible for and caused by many changes at all levels of distribution. 2. The Retailer-Owned Cooperative Group Since the original retailer-owned cooperative group was formed in 1888 in Baltimore, Maryland, this type of organization has shown steady growth in both membership and total volume. The 1954 census stated that retailer- owner cooperative organizations accounted for 1.3 billion dollars, or seventeen per cent of the total sales volume Richard M. Healy of all general line grocery wholesalers. The census further indicated that this figure represented an increase of seven per cent over 1948 sales. More recent reports show that retailer-owned cooperative groups were responsible for 2.35 billion dollars in sales in 1957. This apparently is another area where the leveling off point is still speculative. 3. New Products and Labels While the sale of private label merchandise, partic- ularly in the large corporate chain, is not new in the food industry, the introduction of frozen foods under private or control labels is comparatively recent. How- ever, the increase in private label distribution, in both chains and cooperative groups, has more than kept pace with the general growth of the industry during the past few years. In addition to private label products, the total number of different frozen food items being marketed has increased tremendously and is now estimated to about 1900. Purpose of the Study Because of the breadth of the areas mentioned, it is the writer's purpose to devote individual attention to the growth of the frozen food industry, the increasing impor- tance of the c00perative, and the introduction of new items and labels only in a broad and brief way. The more Specific Richard M. Healy intention is to examine the three areas by means of a single study of the Operation of the frozen food department of a retailer-owned COOperative group. As a result of the study, the writer hOpes that some insight into the mechanics and procedures involved in a frozen food Operation will have been gained. In addition, an analysis of the sales and profits that are returned by individual products and product groups may shed some light on the over-all profit- ability of the operation as well as indicating the contri- bution Of each group toward a successful Operation. In an attempt to gain the desired insight into the over-all frozen food warehouse Operation, the writer selected an Eastern retailer-owned cooperative group for this study, with the specific intention of Obtaining infor- mation on the following areas: I. Background of the Organization R) General Mechanics of the Frozen Food Operation Sales Markup Gross Dollar Profit Turnover Rate \Immf—‘UO Investment and Profit Per Dollar Invested In order to obtain specific and current information, the writer spent a full week at the headquarters of the cooperative group, during which time OOpies were made of the organization's weekly records Of frozen food trans— actions covering a period of six months. These records Richard M. Healy show——by item--weekly purchases from packers, costs, sales to members, Opening and closing inventories, and retail selling prices. From this information, calculations for the entire six-month period were made to determine markup, dollar profit, turnover, investment, and profit per dollar invested. In addition, information on procedures and, where possible, on costs of ordering, warehousing, delivery, and advertising, were made available by the headquarter's personel of the COOperative group. Considerable time was also spent with the advertising managers of two of the leading groups within the cooper— ative in an attempt to segregate the costs of advertising frozen foods from the total advertising expenditures of the groups. The contribution of COOperative advertising funds to the over-all Operation of the organizations, as well as to the total advertising expenditure, was, to a great extent, determined during the course of these interviews. Conclusion Although a major portion of the study was directed at the physical Operation of the frozen food department Of the retailer-owned cooperative group, an analysis of the figures compiled during the course of study gives indications of the degree of profit contribution of specific commodity groups, brands, and items. Further, despite the fact that the over-all Operation was shown to Richard M. Healy be profitable, areas are pointed out where the Operation might be improved from a profit standpoint by increased promotional emphasis on some product groups and a de— emphasis or complete elimination of others because of a poor rate of sale and/or a low turnover rate. More Specific information on individual products, not dwelt upon in the body of the text, can be obtained from an analysis of the figures presented in the Appendix of the study. AN INVESTIGATION OF THE WHOLESALE FROZEN FOOD OPERATION OF A RETAILER OWNED COOPERATIVE GROUP By Richard M. Healy A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF ARTS Department of Marketing and Transportation Administration Curriculum in Food Distribution 1962 TABLE OF CONTENTS CHAPTER I. INTRODUCTION. . . . . . . . . . . . . . . . . Purpose of the study Limitations of the study II. METHODOLOGY . . . . . . . . . . . . . III. THE CHANGES AND GROWTH OF THE FROZEN FOOD INDUSTRY. Education. Introduction of new products Low pricing. IV. REASONS SURROUNDING THE DEVELOPMENT AND GROWTH OF THE COOPERATIVE GROUP. Market share increases of cOOperative group. V. THE GROWTH OF NEW LABELS. Private labels Private and control labels in the OOOperative group . VI. THE FROZEN FOOD OPERATION OF THE COOPERATIVE GROUP . Background of the COOperative group. General mechanics of the frozen food operation . PAGE Ul-P’UU 12 14 2O 2O 23 26 26 27 CHAPTER Buying. . . . . . . . . . . . . . . . Ordering by the retailer member Warehousing and delivery. Pricing and delivery of merchandise to retail stores. Advertising VII. RESULTS OF THE STUDY COMPUTATIONS. Sales Category comparisons Brand comparisons. Item comparisons Markup and dollar profit. Category comparisons Brand comparisons. Item comparisons Turnover rate and return on investment in inventory. Category comparisons Brand comparisons. VIII. SUMMARY AND CONCLUSIONS. Summary Customer education New products Low pricing. Warehouse costs. PAGE 27 29 29 32 35 no no no 41 42 1+3 44 an 46 47 48 SO 50 50 51 51 53 iii CHAPTER Advertising costs. Miscellaneous costs. Conclusions BIBLIOGRAPHY APPENDIX . TABLE II. III. IV. LIST OF TABLES Per Cent of Total United States Grocery Store Sales. Group Wholesaler Sales. 1957 Estimated Dollar Volume Frozen Foods Application Of Delivery Rates to Specific Items. Maximum COOperative Advertising Earnings for Six—Month Period PAGE 18 19 22 3A 37 CHAPTER I INTRODUCTION The term dynamic is Often applied to the field of marketing and a casual review of the marketing of food products during the past decade would seem to Justify the use of the term, at least in this Specific area Of the broad marketing field. The changes that have occurred in a relatively short period of time range from the number and types of manufacturers--through the number and types of products sold--to the number and types of outlets through which products pass before they reach the hands Of the consumer. The dynamic growth of three areas of food marketing have been primarily responsible for prompting the writer to attempt a study of this nature. These areas are: 1. Frozen Foods. The sales volume of frozen foods is continuing its climb. While estimates vary as to where the leveling Off point will be, the history of the industry shows that annual increases in dollar sales Of from one hundred million to three hundred million dollars have come 1 to be expected as regular occurrences. These increases l"1958 Almanac of the Frozen Foods Industry," Quick Frozen Foods, March, 1958, p. 166. have been responsible for and caused by many changes at all levels of distribution. 2. The Retailer-Owned Cooperative Group. Since the original retailer-owned COOperative group was formed in 1888 in Baltimore, Maryland, this type of organization has shown steady growth in both membership and total volume. The 1954 census stated that retailer-owned cooperative organizations accounted for 1.3 billion dollars, or seven- teen per cent of the total sales volume of all general line grocery wholesalers. The census further indicated that this figure represented an increase of seven per cent over 1948 sales.3 More recent reports Show that retailer- owned cooperative groups were responsible for 2.35 billion dollars in sales in 1957.11L This apparently is another area where the leveling off point is still Speculative. 3. New Products and Labels. While the sale of private label merchandise, particularly in the large cor- porate chain, is not new in the foOd industry, the intro- duction of frozen foods under private or control labels is 2Theodore N. Beckman and Nathaniel H. Engle, Wholesaling (New York: The Ronald Press Company, 1951), p. 270. 3United States Bureau of Census, Eighteenth Census of the United States: 1954. Wholesale Trade, Vol.3 (Washington, D. C.: U. S. Government Printing Office, 1956), Table 1A. “Robert W. Mueller, ”1957 Grocery Store Sales," Progressive Grocer, April, 1958, p. 72. comparatively recent. However, the increase in private label distribution, in both chains and COOperative groups, has more than kept pace with the general growth Of the industry during the past few years. In addition to private label products, the total number of different frozen food items being marketed has increased tremendously and is now C; estimated to be about 1900.“ Purpose Of the Study Because of the breadth of the areas mentioned, it is the writer's purpose to devote individual attention to the growth of the frozen food industry, the increasing impor- tance of the COOperative, and the introduction of new items and labels only in a broad and brief way. The more Specific intention is to examine the three areas by means of a single study of the wholesale Operation of the frozen food depart- ment of a retailer-owned COOperative group. As a result of the study, the writer hOpes that some insight into the mechanics and procedures involved in a frozen food Operation will have been gained. In addition, an analysis Of the sales and profits that are returned by individual products and product groups may shed some light on the over-all profitability of the Operation as well as indicating the contribution of each group toward a successful Operation. 5E. w. Williams,”What Are the Immediate Trends in the Frozen Food Industry?," Quick Frozen Foods, March, 1958, p. 77. Limitations of the Study The writer is fully aware that an examination of the Operation of one COOperative organization will not permit universal conclusions to be drawn on any Of the points coming under consideration. It must be recognized that only the immediate Operation is being considered with little thought being given to the philOSOphy Of the cooper- ative group or its long range plans. Thus, any conclusions that might be indicated by a sales analysis will be based only on the short run considerations that are to be pre- sented in this paper. A deeper and longer range evaluation might strengthen or weaken these conclusions. CHAPTER II METHODOLOGY In an attempt to gain the desired insight into the over—all frozen food warehouse Operation, the writer selected an Eastern retailer-owned COOperative group for this study, with the specific intention of Obtaining infor- mation on the following areas: 1. 2. Background of the Organization General Mechanics of the Frozen Food Operation a) Buying procedures b) Ordering procedures ( ( (c) Warehousing procedures and costs ( ) Delivery and pricing procedures and costs ( e) Advertising procedures and costs By product, product group, and brand Markup By product, product group, and brand Gross Dollar Profit By product, product group, and brand Turnover Rate By product, product group, and brand Investment and Profit per Dollar Invested By product group and brand In order to obtain Specific and current information, the writer Spent a full week at the headquarters of the COOperative group, during which time COpieS were made Of the organization's weekly records of frozen food trans- actions covering a period of six months. These records show--by item--weekly purchases from packers, costs, sales to members, Opening and closing inventories, and retail selling prices. From this information, calculations for the entire six-month period were made to determine markup, dollar profit, turnover, investment, and profit per dollar invested. In attition, information on procedures and, where possible, on costs of ordering, warehousing, delivery, and advertising, were made available by the headquarters personnel of the cooperative group. Considerable time was also Spent with the advertising managers of two of the leading advertising groups within the cooperative in an attempt to segregate the costs of advertising frozen foods from the total advertising expen- ditures of the groups. The contribution of COOperative advertising funds to the over-all Operation of the organi— zation, as well as to the total advertising expenditure, was, to a great extent, determined during the course of these interviews. CHAPTER III THE CHANGES AND GROWTH OF THE FROZEN FOOD INDUSTRY From their inception by Clarency Birdseye, and their initial sale in Springfield, Massachusetts twenty—eight years ago by the Birds Eye Division Of General Foods Corp- oration, frozen food products have enjoyed a unique and almost unparalled growth in the food industry. From a modest beginning with a token number of products being marketed by one packer, frozen foods have grown to a point where they now embrace practically every edible commodity group and are packed and processed by 1880 different firms.1 The original twelve retailers in Springfield that sold the first products have been joined by virtually every signifi- cant chain and independent store across the country during the past quarter of a century. In the ten-year period from 1948 to 1957, the retail dollar sales represented by frozen products rose from 2 $292,000,000 to an estimated $2,362,000,000. During the lWilliams, Op. cit., p. 77. 2”1958 Almanac of the Frozen Food Industry," op. Cit-, p. 166. past four years alone, sales have increased by more than $1,000,000,000, and while the leveling off point is being debated, industry sales figures give no indication that the point has been reached. Although many factors could be mentioned as contri- buting to the growth of the industry, three primary areas would probably include the majOrity of these factors. Education One of the most difficult obstacles that had to be overcome by the industry before it could reach heights of any great prOportions was that of informing both the con- suming public and prOSpective retail dealers of the worth of frozen products. The public was initially skeptical of frozen foods because of past experiences with cold storage products, and the natural association of frozen foods with this type of food preservation. The intital relatively high price per ounce of frozen foods compared with their fresh counterparts, required an explanation of the advan- tages of purchasing products which were free of waste material, and of the consequent savings to the consumer. lflfljswas a momentous undertaking, and with only a few packers to share the cost of educating the consumer orig- inally, it is somewhat amazing that initial success was attained in the period of a few years. In order to sell the ultimate consumer on the value offered by frozen foods, the packer, naturally, had to first establish his products in the retail store and the educational effort that had to be exerted here was, again, one which required considerable dollar expenditures. In the midst of a national depression, the retail grocer had justifiably little interest in Speculating on an untried form of food preservation and distribution. It, therefore, remained for the packer to finance the installation of frozen food cabinets in the retail store, and to educate the dealer on the prOper care and merchandising of the products. Although industry sales figures indicate that the edu— cational task has been successfully completed, a considerable portion of the $63,000,000 Spent on the advertising of frozen foods in 1957 was directed at the consumer and retailer with an educational intent, indicating the packers' philOSOphy of continued education through advertising for continued industry growth.3 Introduction Of New Products There has been wide debate within the frozen food industry as to the merits of the multitude of diversified products that have been introduced to the market during the past decade. Unquestionably, many products have been, and are being marketed that could be seriously questioned by 3"Frozed Food Advertising Surges 57% Over Prior Record Total," Quick Frozen Foods, March, 1958, p. 250. 10 the retailer from a profit standpoint, and some of these products will be discussed in later chapters. Nevertheless, a review Of product and product group sales over the past ten years indicates that new product develOpment, and the improvement of older staple items have played a vital role in the general growth of the industry. The marketing of frozen citrus concentrates, partic— ularly orange juice, has been reSponsible for about twenty— five per cent of the dollar growth of the entire industry.21L The selling points afforded by this product category of generally lower prices, and better quality in the finished product, have resulted in frozen orange concentrates capturing fifty-seven per cent of the total orange market, thereby reducing the consumption Of fresh oranges to thirty- four per cent, with canned juices declining to an all time low of nine per cent of the total orange pack. The introduction and acceptance of prepared and con- venience items have been equally responsible for the growth of the industry. The lines of prepared foods are becoming increasingly broad and include a range of products from hor d'oeuvres to desserts. While this is a product category that is Often accused of overloading the market with items not capable of high volume, its over-all contribution to LLEditor's Report, "A New Look at Frozen Foods," Progressive Grocer, June, 1958, p. 153. 5"1958 Almanac of the Frozen Food Industry," op. cit., p. 175. 11 the industry's growth is unquestionable. The recent pub— lication of the "Super Value Study" stated that prepared foods represented 24.5 per cent of the total frozen food sales of the supermarkets considered in the study. -This represented an increase for the product category of 167 per cent over a Span of three years.6 In considering the areas of growth within the indus- try, the contribution of staple fruit and vegetable items cannot-be~overloekeds~~Whileethewimportance of—neprroducts is indiSputable, the fact that the output of frozen fruits and vegetables rose from 800,000,000 pounds in 1948 to over 2,000,000,000 pounds in 1957, indicates that these product categories have kept pace with the over—all increases of the industry.7 That consumer preference continues to turn away from fresh produce in favor of frozen products has been pointed out by recent reports of the studies made by the Bureau of Labor Statistics, the United States Depart— ment of Agriculture, and Life Magazine.8 These studies Show that: a. In 1950, 6.3% of the dollars Spent on fruits and vegetables were represented by frozen foods. 6Editor's Report, "A New Look at Frozen Foods," Op. cit., p. 153. 67"1958 Almanac of the Frozen Food Industry," Op. Cit.) P. 17 8"Packers Urged to Stress Frozen Food Idea in Ads," Frosted Food Field, March, 1958, p. 15. 12 b. In 1955, 10.2% Of fruit and vegetable purchases were represented by frozen foods. c. By 1956, this percentage had risen to 11.6. Low Pricing In 1950, the retail price of a six ounce can of orange concentrate ranged from twenty—three cents to thirty—five cents. For several years prior to the recent Florida freeze, which raised the price of raw materials, the retail price varied from ten cents to twenty cents per can. While the low retail price has been reflection of lower pricing by the packers--sometimes resulting in unprofitable packer Operations——the effect on consumption has, nevertheless, been favorable.9 Lower pricing policies have not been restricted to the concentrate category exclusively, but have applied generally to the entire industry. For the five year period from March, 1953, to March of 1958, retail costs of food——exc1usive of frozen products——rose fifteen per- cent while the average retail price Of frozen foods declined eighteen per cent.10 The darkening profit picture with which the packer has been faced as a result of lower pricing, forced by increasing competitive conditions, may possibly 9”Unprofitable Operations are Shelved by Minute Maid," Frosted Food Field, February, 1958, p. 21. 10"Frozen Food Prices Slide as Cost of Living and Other Foods Hit New Highs," Quick Frozen Foods, May, 1958, p. 41. 13 result in retarding the growth Of the industry. Certainly this is the Opinion of the majority of the packers, and their position is not difficult to defend. Nevertheless, the low retail prices that the consumer has paid for frozen products during the past few years, has gained new customers for the industry, and has contributed heavily towards increasing sales. Admittedly, other factors that have contributed to the growth of the industry are worthy of consideration. These include the many changes that have taken place in equipment and facilities for handling frozen products at all levels of distribution, the improved merchandising techniques employed by the retailer, and the advanced tech- nical skills that have been applied by the packer with a resulting general improvement in quality. However, a dis- cussion of these areas falls outside of the scOpe of this paper, and would add little to the fact that the industry has enjoyed a tremendous growth during the past decade and that there is little factual evidence to indicate that its potential has been reached at the date Of this writing. CHAPTER IV REASONS S'URROIFI‘JDIF‘JG ’I‘T‘E DEWELDi‘T'lel‘xlT M1 D GROWTH OF THE COOPRRA'II‘JE GROUP The tremendous growth of grocery chain stores during the 1920's was the cause Of frustration and near panic in the independent grocery trade of the era. The reasons for this growth are many, but can probably be narrowed down to one basic factor, namely, that the chain, because of its Size, buying power, and method of Operation, was able to sell mercahndise at a cheaper price than was the independent grocer. The chain had demonstrated that while it could not eliminate the wholesaling function as such, it was possible to eliminate the middleman, perform the wholesaling function at a lower cost, and reflect this differential in lower retail pricing. On the other hand, the independent was forced to pur- chase merchandise through a wholesaler, which made the delivered store price of merchandise higher than that of the chain. In addition, the independent was accustomed to a higher margin Of profit than was being taken by the chain. In 1930, the gross margin of the chain ranged from eighteen to nineteen per cent, while the independents' margin varied 15 from twenty-three to twenty-seven per cent.1 The five to nine per cent Spread between the retail prices of the chain and the independent made the latter's position untenable and left elimination from business or a sharp reduction in the differential, as alternatives between which the independent had to choose. In addition to being outpriced during this era, the independent grocer had little to offer the consumer in any other way. Merchandising techniques consisted of an occa- sional window sign or a sidewalk display. The consumer was forced to visit at least three stores to obtain all of the food items that were considered necessities. Stores, in general, were dirty, poorly lighted, and very seldom heated. The independent grocer knew nothing of a sliding or variable pricing system and less about bookkeeping. He worked on a definite markup, knowing little about his actual cost of doing business. It was unusual for an independent store to have other than family employees. If a prospective grocer did not have a large family, he did not go into the grocery business because he could not afford to hire out— side help.2 1M. M. Zimmerman, The Super Market (New York: McGraw— Hill Book Company, Inc., 1955), p. 14. 2Ibid., p. 9. 16 The campaigns and pressures exerted against the chains are evidenced by the chain store tax laws passed by twenty- 3 The financial penalties directed at the large nine states. food chains caused many of them to close down their marginal stores, which possibly made them stronger from an efficiency standpoint, and thus better able to sell merchandise at a low price. Many independent grocers contented themselves with self-pity and hatred for the chains, but did little more than make speeches against them, and urge more legislation to restrict their Operations. Others realized that the chain could not be hated, pressured, taxed, or legislated out of business and that this competitor was here to stay. If the independent was going to continue in business, the chain store method of Operation would have to be employed. Clean stores, effective advertising, and new methods Of dis- play and promotion would have to be develOped. Above all, the cost of goods and the cost of Operation had to be reduced in order to effect lower retail pricing and the natural consequent of increased volume. Out of this thinking came the develOpment, on a large scale, of the wholesale food COOperative group. 3Theodore N. Beckman, Harold H. Maynard, and William R. Davidson, Principles of Marketing (New York: The Ronald Press Company, 1957), p. 206. 17 Market Share Increases of COOperative Groups While grocery COOperatives were not completely new to the industry in the 1920's, it was during this period and the years immediately following that, because of a con- tinuing loss of business by the independent to chain com- petition, the cooperative grocery wholesaler organization began its climb to the position it represents in the industry today. By 1947, the affiliated independents or COOperative groups, had captured twenty-nine per cent of grocery store sales and the continuing growth Of the groups during the next decade can be recognized by reference to Table I. There are two significant types of cooperative organ- izations in Operation today; namely, the voluntary or whole- saler-Sponsored group, and the retailer-owned COOperative group. Although the main objective of both types of organ— izations might be considered the same, i. e., efficient low—cost Operation, they differ widely in methods of Oper— ation and structure. The retailer-owned COOperative is formed, owned, and Operated by the stockholding retailer members, while the voluntary group is formed by the whole— saler and the wholesale Operation is completely owned and run by the Sponsoring wholesaler. The figures listed in Table II point out that while the sales of both groups are increasing at a faster rate than are national retail sales, retailer-owned COOperative TABLE I PER CENT OF TOTAL UNITED STATES GROCERY STORE SALESl 1947 1950 1953 1956 1957 Chains 37% 36% 36% 37% 38% Unaffiliated 34% 31% 25% 19% 1g% Independents Affiliated 29% 33% 39% 44% uu% Independents lSource: "Trends in Distribution to Food Stores," Progressive Grocer, April, 1958, p. F15. 19 TABLE II GROUP WHOLESALER SALESl A . Number % Gain Aniigfie Group of Firms Sales '57 VS '56 Sales Voluntary 555 $3,550,000,000 11.9% $ 6,400,000 Group Wholesalers Retailer- 192 $2,350,000,000 16.6% $12,240,000 Owned Coopera- tive Groups lSource: "Trends in Distribution to Food Stores," Progressive Grocer, April, 1958, p. F16. sales increased 16.6 per cent during the same period that voluntary group sales increased 11.9 per cent. With the share of market of the unaffiliated independents continuing to decrease, and with the chain Just maintaining its market share over a ten—year period, it is apparent that the inde- pendent business is being picked up by the retailer-owned COOperative group at a faster rate than it is by any other group. Furthermore, there is no evidence that this trend is slowing down or about to change direction. CHAPTER V THE GROWTH OF NEW LABELS Private Labels A recent editorial in Quick Frozen Foods magazine stated that ”Chain vs. National brands-has become the industry's number one problem”l' The editor suggests that the solution to the problem lies in legislation, which would limit chain sales of private label to twenty per cent of the total volume of any one product and would further limit the manufacturing facilities which large retailers would be permitted to own and Operate. While the editor might be accused of hysterical thinking—-and he himself states that the idea might seem radical——the suggestion at least indicates the concern in some quarters of the industry, which has been brought about by the growth of private and control label sales. Various estimates have been made as the result of surveys and studies, as to the volume and/or percentage of total business represented by private or control labels in the frozen food industry. The estimates vary to extremes lEditorial, "It isn't Quite Fare, Is It?,” Quick Frozen Foods, June, 1958, p. 178. 21 with the section of the country surveyed, and the types Of stores used in the samples. The estimates of the percentage of cabinet space occupied by private or control labels has varied from the extremes of twenty-five to seventy-five per cent of total cabinet Space. Assuming that the figures shown in Table III are reasonably accurate, and that the percentage of cabinet space devoted to private label is in prOportion to the actual sales of private label merchandise, it is then possible to estimate the range of private label volume and its significance to the volume of the seven leading frozen food packers mentioned in Table III. If the low estimate of twenty-five per cent of total cabinet Space is used, then the leading chains do about one-third of the volume in their respective private label merchandise that is done by the leading frozen food packers under their own labels. If the high extreme of seventy-five per cent is used, then it is conceivable that the seven leading chains do more business with their own private label products than the leading packers do with their advertised labels. While the latter calculation is probably not realistic, the projection makes the impact of private or control label growth, at least on the national packer, become somewhat clearer. AS a result of the growth of private label merchandise, many frozen food packers have turned away from the promotion of their own labels in favor of packing merchandise directly TABLE III 1957 ESTIMATED DOLLAR VOLUMEl FROZEN FOODS 22 Chain Stores Packers A & P Tea CO. Birds Eye $290,000,000 $l6o—l70,000,000 Safeway Stores Minute Maid $106,000,000 $120,000,000 Droger Company Campbell—Swanson $ 82,000,000 $65—70,000,000 American Stores Stokely-Pict Sweet $ 59,000,000 $45—50,000,000 National Tea CO. Booth Fisheries $ 48,000,000 $40—44,000,000 First National Libby, McNeil & Libby $ 36,000,000 $35-40,000,000 Food Fair Seabrook Farms $ 35,000,000 $ 26,000,000 Totals $656,000,000 $473-502,000,000 lSource: E. w. Williams, "What Are the Immediate Trends In the Frozen Food Industry,” Quick Frozen Foods, March, 1958, pp. 81-82. for chain store sale under the private label of a particular chain. While it is possible that the packing Of private label has been the salvation of the small processor, his position is becoming less secure with the continued growth of the chain label. With the national packer receiving more and more competition from private label products and facing 23 more difficulty in maintaining his accustomed share of cabinet Space in the chain store, some of the large processors of advertised brands have also turned to the packing of merchandise under the chain label.2 By offering a chain customer the Opportunity to purchase an advertised label and the chain‘s private label product from the same source--shipped in the same truck or car—-the national packer hOpes to maintain his share of cabinet Space and, con- sequently, sales and at the same time to relieve excess plant and warehouse capacity by the sale of heavy inventory items under a chain label. If this new policy Of the national packer meets with any degree of success, other changes in the industry must immediately follow. The private label business gained by the national packer has to be subtracted from the business formerly done by some of the 1500 small processors. Therefore, unless the industry as a whole grows at an unexpected rate, the number Of packers will gradually be reduced. Private and Control Labels in the COOperative Group The growth of private label frozen foods'has not been restricted to the corporate chain, but has also been steadily increasing in both types of cooperative groups. Because of the necessary investment and commitments in establishing a 2Williams, op. cit., p. 78. 24 private or control label, the retailer—owned cooperative in the past has probably been slightly more cautious than its counterpart in taking on the reSponsibility of an additional label. However, this cautious attitude has apparently been overcome by a desire to compete with the corporate chain in every possible phase and department Of the business. The reasoning of the COOperative group in its decision to take on its own label is no different from the purposes expounded by the chains for their own brands of merchandise. 3 These reasons might be summarized as follows: 1. Private label may be retailed at a lower price because of its usually lower cost price. 2. A greater margin is possible on private label. 3. There is no direct competition on private label. 4. It affords new store traffic and secures regular customer trade because of the exclusiveness of the brand. Unlike the chain, however, which is able to exercise complete authority over its retail Outlets, the cooperative group must depend on the loyalty of its members to act in accordance with decisions which are theoretically made for the common good. In the case of private label, this loyalty can, at times, be seriously questioned and there is little that the cooperative headquarters can do to correct the situation. For this reason, and because of the lower in- vestment needed, control labels are handled by some 3Beckman, at al., 0p. cit., pp. 613—614. 25 COOperative groups in preference to a strict private label.L'L By handling a control lable, the group is better able to experiment and if it Si determined that the new line Shows unsatisfactory sales or profit potential, and will not be supported by the members, there is little difficulty or expense involved in reverting to advertised brands. 4A control label may be defined as one which is handled by a chain, cooperative, or independent on an exclusive or semi-exclusive basis in a Specified geographical area. There is usually no ivestment, other than in merchandise, and the brand may be therefore discontinued with more facility than could a private label, in which capital, is, by necessity, heavily invested in labels and inventory. CHAPTER VI THE FROZEN FOOD OPERATION OF THE COOPERATIVE GROUP Background of the Cooperative Group The retailer-owned cooperative group that was selected for the study has been formally Operating for over a decade. Starting with approximately twenty-five members Shortly after World War II, it has grown to a point where it now embraces 108 retail stores Spread throughout six counties of two eastern states. Within this group there are eight local chain organizations with a total of approximately forty retail stores. In addition, twenty-eight independent stores have combined under one name and function as an advertising group. The remainder of the stores Operate independently. The member stores of the COOperative are all geograph- ically located within a fifty—mile radius of the warehouse, but the majority of the stores serve suburban communities closer than twenty-five miles. As is the case with many COOperatives, only grocery, frozen foods, and some non-food items are handled by the organization's headquarters. Being located close to a large metrOpolitan area, the memebers can purchase meat, produce, 27 dairy, and other essential products from various sources, which permits the stores a certain amount of individuality in regard to the brands, types, and quality of merchandise handled. In addition, this procedure keeps the Operating expenses Of the COOperative warehouse at a minimum. The warehouse operation is controlled by a hired general manager who reports to an elected board of directors, which, in turn, is headed up by an elected chairman. The members of the board, as well as the chairman and other elected officers, are retailer members. The very modern general Offices of the organization are located in one wing of the grocery warehouse and house the buying, billing, and advertising Operations of the group. Frozen foods are warehoused in a rented room of a public warehouse about twenty-five miles distant from the COOperative warehouse point. Personnel Of the public ware— house are utilized for the receiving, handling, break-up, and loading Operations. A service trucking company is em- ployed for the actual delivery of products to the retail stores. The costs involved in this phase of the Operation will be discussed at a later point. General Mechanics of the Frozen Food Operation Buying. All merchandise is purchased through the frozen food buying Office which houses the frozen food buyer and his assistant or secretary. New frozen food 28 items are authorized for purchase by an appointed buying committee, which is composed of the buyer and Six retailer members or their representatives. This committee meets weekly to discuss, in addition to new items, pricing, move— ment of currently authorized items, competitive conditions, tactics, general long-range planning, and any other business of a pertinent nature. Once a new item has been authorized, retailer members of the COOperative are advised of its availability by means of a Special notice in the regular price list or by a Special store bulletin. Its regular purchase by the buyer then becomes routine. Orders for merchandise are placed by the buyer with a packer's representative or a broker, for delivery to the COOperative's room in the public warehouse. While the size of each order naturally is dependent upon the history of the past sales of the particular item or, in the case of a new item, on estimated potential sales, the majority of the products ordered are in truck load or carload quantities and are Shipped directly from the packer's production point or~ "in—transit" warehouse. 0n low volume items, less than truck load orders are placed. Since most major packers maintain stocks in the public warehouse used by the COOper- ative, smaller orders are merely transferred from the packer's stock in the warehouse to the COOperative's rented space. Because of the quantity discounts offered by most packers, which average about two per cent of the base price 29 of the product, it is Obviously advantageous to purchase in truck load or carload quantities and the COOperative orders in this fashion whenever possible. Ordering by the retailer member. Orders for merchan- dise are usually placed weekly by the individual retail stores. A telephone sales girl calls each store at an appointed time to take the order, which has been previously made up by the frozen food clerk in the store. Larger volume stores may place additional orders which are trans- mitted by phone to the buying Office or the warehouse. Organization policy dictates that merchandise is paid for on a weekly basis by the retailer members and a strenuous effort is made to avoid deviating from this policy. Although an estimate of the costs of ordering, billing, buying, and other administrative functions performed at headquarters can probably be made, no actual records were available during the course of this study and, therefore, these costs, while certainly recognized as a part of the whole operational picture, will not be considered in this paper. Warehousing and delivery. AS previously stated, the COOperative organization has no facilities of its own for the warehousing of frozen foods. However, this is not an unusual condition in the market in which the organization Operates. There are two primary reasons why the COOperative, 30 as well as other retail groups, utilize the facilities of a public warehouse. 1. The investment that is required for the con- struction and outfitting—-from equipment to personnel-—of a frozen food warehouse that is capable of handling the volume of business done by the retail members of the group, would be substantial. In light Of the uncertainty of where the leveling off point for the industry will be, there is some difficulty in the planning stage of warehouse con- struction in estimating the correct capacity for future as well as present volume. Thus, there has been hesitation on the part of many organizations to invest in their own physical facilities. 2. This hesitation is further encouraged by the com- paratively low cost package plans that are offered by the public warehouses as an inducement to draw potential cus— tomers into renting rather than constructing their own storage facilities. Although there are probably many reasons for the competitive conditions that exist in the warehousing area of the frozen food field, not the least important is the increasing practice by the packer of selling and Shipping his products directly from his pro- duction points to the customer's warehouse, thereby, in many instances, circumventing the public warehouse com- pletely. Receiving less storage business from the packer has tended to create excess capacity in many public 31 warehouses and to Offset this condition the warehouses have been forced to offer attractive rates to customers who otherwise might construct their own facilities. At the time of this study, the COOperative was utilizing a screened Off area Of 8,500 square feet in one of the three available public warehouses in its marketing area. In addition to this leased Space, the warehouse also supplies the personnel necessary for efficiently handling the various functions of the Operations. These functions include receiving the products ordered by the buyer in carload, truckload, or smaller quantities and placing it in the leased Space; making up and loading of the orders for delivery to the retail stores; and the clerical work involved in informing the cooperative headquarters of the orders for each individual retailer member. The rates charged by the warehouse for these services are as follows: Room Rent (8,500 square feet) $1,333.00 per month Inhandling charges .215 per hundred weight Handling ] Loading ] .41 per hundred Clerical services] weight Additional storage charges $1,390.80 (monthly average) The additional storage charges shown above were calculated by using one—Sixth of the total bills paid by the COOperative for storage during a six-month period-- excluding the regular monthly rental fee. This additional 32 space is necessitated by (l) the handling of 274 frozen food items, and (2) the attempt to purchase products in suffici- ent quantities to take advantage of all possible discounts. While the organization has periodically considered the leasing of additional Space on a regular basis, no action has been taken at the time of this writing. Pricing and delivery' of merchandise to retail stores. Again, to reap the benefits afforded by not having to invest in physical facilities, the COOperative employs a service trucking company, for the delivery of orders from the ware- house to individual retail stores. The trucking company is a subsidiary of the public warehouse and is also utilized by The Great Atlantic and Pacific Tea Company (A a P) and other important retailers in the area. Because of the large total volume handled by the trucker, the rates charged are comparatively low. Thus, the COOperative, as well as the other retailers who avail themselves of this trucking ser- vice, are discouraged from investing in their own trucking facilities. All retailer members of the COOperative have regularly assigned delivery days. The number Of deliveries received by each store depends upon its volume and geographical location, but most stores receive two to three deliver- ies per week. In addition, emergency orders can usually be efficiently handled by the trucker when the need arises. The fixed delivery rate charged by the trucking com— pany is seventy-four cents per hundred weight. The store billed price is based on the f.O.b. warehouse price charged by the packer, which is the price shown in the published price list sent to the retailer members by headquarters on a monthly basis. All quantity and trade discounts are already incorporated in the published price so that the lowest possible price of a product is shown. The total f.O.b. store price is calculated by adding a straight five per cent to the published price. This five per cent charge supposedly covers all delivery, warehousing, billing, and administrative costs. Table IV demonstrates how this charge applies to each of fifteen different cases of products. The net difference column Shows the amount--after the delivery charge is covered—-that is theoretically left to cover the costs of warehousing, handling, and administration. Referring to the warehouse Service rates that were presented on the previous pages, the total rate—-excluding rent-—is calculated to be Sixty—two and one-half cents per hundred weight. The average ten cents per case that is shown in the net differ- ence column in Table IV exactly covers the warehouse charge-- excluding rental fees. If only the items shown in Table IV are considered, it is apparent that the costs of storage and headquarters administration must be subsidized by other areas of the over—all Operation. TABLE IV APPLICATION OF DELIVERY RATES TO SPECIFIC ITEMS 34 Trucker's 5% Approx. Case Del. CO-Op Net Item Brand Case Wt. Cost Charge Charge Dif- Peas PL 17 $2.62 $.l25 $.l3l $.006 Peas A 17 3.14 .125 .157 .032 Orange Juice PL 27 5.50 .199 .275 .076 Orange Juice B 27 7.32 .199 .366 .167 Meat Pies A 14 4.88 .103 .244 .141 Dinners B 11 6.52 .080 .326 .246 Buttered Beef Steaks PL 15 3.45 .111 .173 .062 Buttered Beef Steaks F 15 4.17 .111 .209 .098 Fish Sticks A 15 3.14 .111 .157 .046 Fruit Pies B 11 2.57 .080 129 .049 Coffee Cake D 13 7.10 .096 .355 .259 Chow Mein E 11 3.50 .080 .175 095 Clam Chowder 18 5.70 .133 .285 .152 Blintzes 15 3.51 .111 .175 .064 Cod 19 2.91 .141 145 004 Average 16 $4.40 $.l20 $.220 $.loo In practice, the fifteen items listed do not sell in the same prOportion and, therefore, the exact amount of sub- sidization needed will vary from period to period, depending on the prOportionS in which the total 274 items carried by the COOperative move to the retail stores. Advertising. Except for the setting Of minimum retail prices on some private label items, there iS usually no direction from the COOperative headquarters in regard to advertising. Each chain, the twenty—eight store advertising group, and the other independent stores of the cooperative, sets up its own advertising program and the only mention of the retailer being connected with the COOperative is by means of a small decal, usually placed in an inconspicuous part of the retailer ad. Each retailer member pays his own advertising expenses and receives no direct aid or reimburse- ment from the COOperative for advertising. The retailer is requested, however, to submit tear sheets of newspaper and handbill advertising to headquarters in order that COOperative advertising funds may be collected from packers by the cooperative group headquarters. The majority of large frozen food packers doing business with the COOperative have advertising contracts directly with headquarters rather than with individual retail members. These contracts call for payments based on the amount of merchandise purchased from the packer and on the amount of 0 36 advertising that is run by the retailer members. Maximum payment is based on the units purchased--in dozens or cases—- multiplied by a specific amount per unit. The amount ranges from five to fifteen cents per unit. During the course of collecting data at the head— quarters of the COOperative, the writer obtained a list of the per unit payments that are Offered by the various packers doing business with the organization. Table V lists, by category, the monies that were available through COOperative advertising contracts for the six—month period being considered. In order to collect the maximum $15,373,65, sufficient newspaper lineage, at national line rate, had to be devoted to the packers' products to cover this amount. Since the local newspaper rate paid by the retailer is only sixty to sixty-five per cent of the published national line rate, the difference of thirty-five to forty per cent may be applied, at least theoretically, to cover other costs of the frozen food Operation. To illustrate the above point, all of the frozen food advertising that was run by a twelve-store member chain for a Six-month period was collected and the resulting infor— mation may be summarized as follows: 1. Thirteen neWSpapers were used by the chain during the Six—month period. 2. Combined local rate for the thirteen newspapers was calculated to be $1.127 per line. 3. Combined national line rate for the thirteen news- papers was calculated to be $1.788 per line. TABLE V MAXIMUM COOPERATIVE ADVERTISING EARNINGS FOR SIX-MONTH PERIOD Vegetables $ 7,194.45 Fruits 499-35 Meat Pies I 1,088.10 Meat Dinners 1,424.40 Prepared Meats 1,209.17 Prepared Fish 1,879.40 Desserts 569-95 Nationality Dishes 658.00 Other Prepared Dishes 534.23 Poultry 29.70 Uncooked Fish 155.20 Pet Foods 31.70 Total $15,373.65 4. During the Six-month period, thirteen issues of handbills were used to supplement newSpaper advertising and were distributed to consumers by mail. U7 The cost of the handbills, including mailing, was calculated to be $2.38 per square inch. 6. Total frozen food newspaper lineage during period-~1835 lines. 38 a. Total lineage on "contract" products—- 1293 lines b. Total cost at local rate of $1.127——$l,457.2l c. Total charge to national packers at $1.788-— $2,311.88 d. Profit on Cooperative NeWSpaper advertising-- $ 854.67 e. Total lineage on P. L. or non— contract products-- .542 lines f. Total costs on P. L. or non-contract products at $1,127-- $ 610.83 g. Net profit on total neWSpaper advertising—- $ 243.84 h. Total Frozen Foods advertising cost—handbills-- $ 641.41 1. Total handbill charges reimbursed by national packer-— $ 461.72 j. Total Frozen Foods advertising costs (newspaper and handbills) $2,709.45 k. Total reimbursed by national packerS-- $2,773.60 1. New profit on total Frozen Food . advertising-- $. 64.15 The above calculations Show that the differential between national line rate and local rate is more than suf- ficient to cover the advertising Of private label and any other products on which there is no advertising allowance offered. However, since the advertising allowance is col— lected by the cooperative headquarters and no direct reimbursement is made to the retailer actually doing the advertising, the entire sum collected can be applied to subsidize any part of the frozen food Operation desired. 39 It is naturally the intention of the group headquarters to collect as much COOperative advertising money as possible and it was stated during the writer’s visit to the head— quarters point, that only in rare instances is less than the maximum amount collected. Referring again to Table V, it can be assumed, there- fore, that the $15, 373.65 maximum was actually collected. This amount represents 1.4 per cent of the total frozen. food dollar sales of the COOperative during the Six—month period that was considered. CHAPTER VII RESULTS OF THE STUDY COMPUTATIONS From the account figures that were made available to the writer at the COOperative‘s headquarters, it was possible to compute total volume in cases and dollars; per cent markup and dollar profit at retail, and average inven— tory, from which stock turn and profit per dollar invested was, in turn, calculated. The total figures for the six- month period considered in the study may be found in the Appendix, broken down by product category, brand, and item. Rather than attempt a discussion of the full list of the 274 items that are stocked by the COOperative warehouse, the writer intends only to highlight those areas which he feels are of particular interest and importance. 3:11—9:53. Total frozen food dollar sales for the period were found to be $1,112,618.23, which the COOperative estimated was approximately eleven per cent of the total warehouse volume. Category comparisons. The prepared foods category, with 135 items, or half of the total number of items handled, was responsible for $408,000.00 in sales, or about thirty- seven per cent of total dollar sales. Vegetables, 41 represented by 69 items, returned $334,000.00 in sales, repre— senting thirty per cent of total frozen food sales. All concentrates, with 27 items, were reSponsible for twenty- three per cent of the business, with sales of $261,000.00 Brand comparisons. In the vegetable category, it was found that one national brand with 30 items, did $244,000.00 in sales, which represented approximately seventy-three per cent of the total vegetable business. The control or private label vegetable line represented twenty per cent Of the vegetable category sales with $66,000.00. The second national brand with $18,000.00 in sales, was reSponsible for only five per cent of total vegetable sales, although 22 items of the brand were carried by the warehouse. The private label orange juice handled by the COOper- ative was found to represent forty-three per cent of orange juice sales and thirty per cent of total concentrate sales with $80,000.00. The only full line national brand carried did thirty per cent of the orange juice business, and thirty— six per cent of the total concentrate volume with sales of $95,000.00. It is interesting to note in the prepared foods cate- gory that Brand "A" meat pies represented fifty per cent of total meat pie sales while Brand ”B” did only twenty—eight per cent, but in dinner sales, Brand ”A” was outsold by a four-tO-one ratio by Brand ”B." 42 In the dessert category of 22 items, Brand ”D" was responsible for sixty—five per cent of the sales with six items and $28,000.00. Brand "0" with five items did $2,700.00 for six per cent of the total category sales. Private label fish fillets, with five items, repre- sented twenty—eight per cent of the category sales with $16,000.00, while the national brand ”A” with four items represented eighteen per cent of the category with $10,000.00 in sales. Item comparisons. Despite the tremendous increase in the number Of frozen food items that have come into the market during the past few years, it is interesting to note that the two historically largest single sellers in the industry have not lost their tOp position. Combining the sales of orange juice and peas, it was found that the two products represented twenty—one per cent of the total frozen food business with combined sales of $230,000.00. Adding French fried potatoes to these items showed that the com— bination represented almost twenty-five per cent of the frozen food business done by the COOperative group. In the concentrate field, the cooperative warehouse handles 16 different items where as 10 years ago, only one was available on a national level. While orange juice has been joined by 15 new concentrate items, it was found that it still represents more than seventy per cent of the total concentrate business. 43 The introduction of fish sticks a few years ago ap— parently started an avalanche of new products in the pre- cooked fish field. The COOperative listed 27 precooked items in the category, the majority of which were intro- duced after the successful establishment of fish sticks. Despite its recent competition, fish sticks still repre- sented twenty-four per cent of the precooked fish business with $15,000.00 in sales. Markup and Dollar Profit Per cent markup and dollar profit were calculated, based on the warehouse cost price, and the suggested retail price, issued in the official COOperative price list. Periodic special pricing for promotional purposes, by retailer members, was not considered. In addition, it should be emphasized that the five per cent charge to the stores for delivery, warehousing, and administrative ser- vices was not considered in the calculation. It has been the practice of the trade, in both chains and cOOperative groups, to use warehouse cost figures in arriving at a retail selling price, rather than attempting to assign definite costs for all the tangible and intangible services that are performed between the warehouse and the retail cabinet. Thus, the figures shown in the Appendix represent gross profit and no attempt was made to allocate costs to arrive at a net profit figure. 44 Based on total dollar sales to the stores, at the warehouse cost of $1,112,618.23, a markup of 24.4 per cent was calculated which resulted in a gross profit of $358,232.66 for the Six-month period. Category comparisons. The vegetable category was found to be the most profitable of the major groups from a percentage standpoint, showing a markup of 24.5 per cent. The prepared foods group was second with 24.4 per cent. Concentrates, an historically low markup group, but a high volume and dollar profit group, showed a 22.6 per cent markup, and a dollar profit of $76,000.00. Uncooked fish, a comparatively low volume category, was responsible for almost seven per cent of total dollar profit with $24,000.00 while representing only 4.5 per cent of total sales. Brand comparisons. In the vegetable category, the control label line Showed a markup of twenty—seven per cent, as did national Brand "B." However, national Brand "A", with a twenty-four per cent markup, returned $75,000.00 in profit which represented sixty—nine per cent of total vegetable profit and twenty-one per cent of the total frozen food profit of the organization. Concentrate calculations showed that the private label six ounce can averaged a 20.3 per cent markup, which was lower than any of the national brands handled. However, the private label juice still returned about forty per cent 45 of the total category dollar profit. The full line national brand accounted for thirty-two per cent of the orange con- centrate profit and thirty-nine per cent of the total con— centrate category with a profit of $29,000.00. The profit returned by national Brand "A" with five items in the precooked fish category was found to be $8,400.00 which represented forty per cent of the profit returned by the total category of 22 items. National Brand ”B," with ten items returned $4,500.00 in profit which represented twenty-one per cent of the total category profit. It should be pointed out that in the case of Brand "B,” most items were handled for only a three—month period and it can, therefore, be assumed that the ten items will represent a much higher dollar profit if projected for the full six—month period. In the uncooked fishfield, it was found that private label fillets, with five items returned $9,000.00 in profit, which represented thirty—eight per cent of the total cate- gory profit. National Brand ”A,” with four items, returned $3,600.00 in profit, representing 15 per cent of the profit of the 20—item category. Item comparison. It is again interesting to note that the combination of orange juice, peas, and French fried potatoes returned $80,000.00 in profit which repre- sented 22.3 per cent of the total profit returned by the 274 items carried by the warehouse. 46 Orange juice was found tobe reSponsible for sixty—seven per cent of the total profit of $76,000.00 that was returned by the entire concentrate category of 16 different products. Meat pies, with a total of nine items in all brands, returned a profit of $16,000.00. This represented more than twelve per cent of the profit returned by the 135-item pre- pared foods category. Meat dinners, with 15 items in all brands, returned $27,000.00 for twenty-one per cent of the total category profit. The combination of the 24 items represented one-third of the profit on prepared foods and twelve per cent of the profit returned by the total 274 items carried. The profit returned by the two brands of fish sticks handled was $5,000.00 representing twenty—four per cent of the 27—item precooked fish category. Turnover Rate and Return on Investment in Inventory Stock turn, or the rate of turnover, was calculated on an annual basis. Since the figures used in the study represented a Six—month period, turnover was arrived at for each item, category and total sales by dividing total sales-- at cost——by the average weekly inventory. The resulting figure was multiplied by two in order to Obtain the annual turn for the product or category. Since approximately eighteen per cent of the 274 items stocked by the warehouse were not in stock for the full six—month period, the sales of these items were projected to six months, based on their 47 reSpective rates of sale for the period they were in stock. By employing these projections, it was possible to present accurate annual stock turns in each category. The items denoted by an asterisk (*) in the Appendix tables were not carried in stock for the full six—month period, but actual sales for the period they were in stock are shown. The first figure shown in the total sales of any category represents actual total sales. The second figure, denoted by an (*), represents tOtal projected sales taking into consideration those items which were not stocked for the full period. Annual return on investment in inventory was calculated by multiplying the six-month profit by two and dividing the resulting figure by the average inventory for each item, brand, or category that was considered. The average annual stock turn for all items handled was calculated to be 14.6. The return on investment per dollar of inventory was determined to be $4.43. Category comparisons. It was found that vegetables turned over at an annual rate of 13.9 and turned $4.40 per dollar of inventory investment. Concentrates Showed an annual turn of 12.6 with $3.34 returned on each dollar invested. It should be noted, how— ever, that concentrates are usually purchased in large quantities, particularly during the packing season, in order to take advantage of the unusually low wholesale 48 pricing during this period. While this practice unfavorably effects turnover rate and investment profit, it is necessary for an individual chain or COOperative to follow the prac- tice in order to be able to price competitively at retail. Prepared foods averaged an annual stock turn of 17.2 with an investment return of $5.26 for the best showing of the major categories. Soups led the minor categories with a stock turn of 31.3 and a $7.80 return on investment, followed by meat dinners with a turnover rate of 30.5 but with a high return of $8.78 in profit for each dollar in- vested in inventory. Brand comparisons. While the total vegetable cate- gory showed stock turn and return on investment to be only slightly less than the average for all frozen food items, a break down of the category by brands is particularly revealing. Control label vegetables had a stock turn of 5.8 with a return of $2.07. Brand ”A” vegetables showed a turnover rate of 25.5 and a return on investment of $7.84, both Of which are well above the category and total averages. Brand "B” had a stock turn of 8.8 and a return on invest— ment of $3.22, both of which are far below average. In the concentrate area, private label orange juice had the highest turnover rate with 25.5 on the-high volume six ounce can, and an investment return of $6.50 while the total orange juice category showed only a 13.5 stock turn and $3.41 return on investment. 49 H Calculations of the meat pie group showed Brand "A with a 10.6 stock turn and a return on investment of $3.18 while Brand "B" showed a 7.2 stock turn and a $2.18 return on investment. Brand "C" Showed a stock turn of 8.9 and a return on investment of $2.98. Control label uncooked fish had a turnover rate of 9.8 and returned $5.66 profit per dollar invested in inven- tory. National Brand ”A” had a stock turn rate of 12.0 and returned $4.31 profit per dollar invested. CHAPTER VIII SUMMARY AND CONCLUSIONS Summary The growth of the frozen food industry during the past decade has paralled that of large cooperative buying groups-~both voluntaries and retailer-owned groups. During the same period many new products and new labels have captured sizeable Shares of the food dollar. All three facets of the food industry--frozen foods, COOperative buying groups, and new labels--are continuing to expand and at what level they will eventually find their plateaus is uncertain at this point in time. There are three primary factors that have influenced the growth Of the frozen food industry: 1. Consumer Education. The education program supported by frozen food packers through advertising media has played a vital part in initially influencing the consumer toward purchasing frozen foods in lieu of canned or fresh products. This influence is exemplified in the marketing of orange products. Where a decade ago the sale and consumption of oranges was restricted to the fresh and canned forms, almost 60 per cent of the annual orange pack is now marketed in frozen concentrated form. During the course of the past ten years, the frozen food processor, through advertising, has informed the consumer Of each quality improvement that has been put into the frozen product. This educational program has gradually built a hard core of frozen food consumers which has been steadily supplemented by first time and occasional users of frozen products. 2. New Products. Since Birds Eyeis original intro- duction of a limited frozen food line in 1930, 1800 new processors have entered the frozen food field, marketing products ranging from hors d‘oeuvres to desserts. While the success of orange concentrates is somewhat a typical Of new frozen products, many product categories have entered the field, contributed respectable volume and have expanded the total market for frozen products. Prepared Foods, which is an increasingly broad category, now represent about 25 per cent Of the total dollar sales of the frozen food industry. The original success of meat pies and dinners encouraged progressive packets to introduce other convenience products such as fish sticks, fruit pies, cakes, main course dishes, casseroles, and other new products, or improved formulations of old products, that number in the thousands. There is no indication that new concepts in the prepared foods category, if they are quality and convenience oriented, will not have the same potential for success that has been enjoyed by some of the high volume products now being marketed. 3. Low Pricing. AS the volume of the frozen food industry rose and attracted new processors, the per unit 52 cost and selling price declined. This has been particularly true in the case of commodity categories such as fruits, vegetables, potatoes, and concentrates. Continual low pricing in comparison with fresh produce counterparts has broadened the consumer base for frozen products and con- tributed heavily to the volume growth of the entire industry. The basic reason for the maturing of the COOperative group was the early recognition of the competitive advantages enjoyed by the chain in the areas of buying, retail pricing, advertising, and merchandising. If the independent was to survive, he had to Operate his business on the same basis as his competition. This was accomplished by banding together with other retailers in the same Operating Situation and the resulting formation of COOperative groups has made the individual retailer member a very important competitive factor in the retail food industry. The selling of private labels, initially restricted to dry grocery products, has expanded to include almost all food categories, and frozen foods is not one of the exceptions. While the corporate chain was the first to demonstrate that the consumer could be satisfied with private label products and would repurchase them on a regular basis, the large cooperative has been leaning more and more toward imitating this retailing approach. Because the retail store of the COOperative is not directly controlled 53 by headquarters, a middle of the road approach is often taken by using a control label, rather than a strict private label. A control label, which is usually sold by COOpera— tive members in their marketing area on an exclusive basis, theoretically has the generally accepted inherent advantages of private label. These advantages can be summarized as follows: low price high margin DUMP no direct competition 4. volume In analyzing the frozen food Operation of the retailer owned COOperative on which the study is based, it is apparent.that a successful frozen food business is being conducted. As is the case in analyzing and business, the areas of volume and gross profit are of paramount importance. Sales of $1,112,000 by the retailing members at a gross profit of 24.4 per cent would certainly be considered as satisfactory, considering the competitive climate in which the members Operate. It is also apparent, however, that each product, category, and brand does not contribute to total profit in the same degree. An examination of the warehousing and advertising areas would lend support to this statement. Warehouse costs. The COOperative group has been expending approximately $1400.00 per month for warehouse Space 54 over and above the amount paid for their regularly contracted space. The additional charge represents about three- quarters of one per cent of total frozen food sales. While it would be difficult to pinpoint exactly how much of the charge should be allocated to each item and label, it can be determined that fifteen per cent Of the total frozen in— ventory carried can be assigned to control label vegetables which represent only six per cent of total frozen sales. At the same time, it can be determined that one national brand vegetable line represents more than twenty per cent Of the total frozen business but requires only eleven per cent of the total dollar inventory. In addition to this inconsistency, it was also pointed out in Chapter VI that in some cases the five per cent charge that is made to the stores cannot possibly cover costs other than actual delivery costs. Therefore, it might be reasonably assumed that some items and brands are not carrying their share Of the expense burden and are being subsidized by the dollar charges that are made on higher priced products. The figures presented in Table IV, supported by the more complete Appendix figures, Show that private label itemS--because of low price—-are less self supporting than are their nationally advertised counterparts. Advertising costs. It was pointed out in Chapter VI that the COOperative group collected advertising monies from various packers in an amount representing 1.4 per cent of total warehouse frozen food sales. In considering adver- tising allowances and costS——as they apply to both private and national labels—~it might be well to further illustrate the extent of the national packersE contribution to advertising costs. If only National Brand "A" vegetables are considered, it can be calculated that the 74,971 cases sold during the period represents 130,680 dozen. Since the packer pays .05 per dozen for advertising, $6,534.00 was collected by the COOperative group for advertising National Brand "A" vegetables. This amount represents 2.6 per cent of the brand's sales. Since there is no advertising allowance available on private or control label lines, the retailer and/or the warehouse must obviously absorb the costs of advertising these labels. If the 2.6 per cent allowance is added to the markup Of National Brand "A" vegetables or subtracted from the markup of the private label line, it can be seen that the private label line enjoys only.a 0.23 per cent higher markup than the National Brand and oneof the main advantages of handling private label seems to be eliminated. Miscellaneous costs. Other cost factors such as the additional expenses of buying, billing, and promotion that are necessarily involved with handling a new line might be considered but because no actual figures on these costs were available to the writer, they will not be dwelt upon here. However, it should be remembered that these costs do exist despite their sometimes intangible nature. In addition, it might be logically assumed that the stocking of a new 1ine--either private or national 1abe1--directly competes with the lines already being carried and must subtract in some measure from the sales of the established line. Because Of the continual growth of over-all frozen food sales, it is difficult to precisely determine this effect, but it should again be remembered that the sales of the new line are not necessarily, or even usually, "plus sales" but represent a transferral of volume from one brand to another. Conclusions As was previously stated, the writer's intention in undertaking this study was to bring to light the mechanics of the frozen food Operation of a retailer owned cooperative group and by an analysis of sales figures and costs, to determine the profitability of commodity groups and brands. The writer also stated that universal conclusions could not be drawn from such a study, but he hOped that an analysis of the available figures of the COOperative group might give some indication of how an over—all successful frozen food Operation might be improved, at least to some extent. It is also admitted that any possible long range philOSOphy of the cooperative group has not been recognized. Such recognition conceivably could justify what might appear 57 to be short term inconsistencies or outright poor policy decisions. On the basis of only the data collected and the writer's personal knowledge of the COOperative Operation, the points enumerated below are being submitted as recommenda~ tions for improving the frozen food Operation of the COOperative group. I. Brand Elimination. Based on the figures Shown in the Appendix,——particu1ar1y the volume and turnover history-- it appears the elimination of "Brand B" is dictated. The Obvious advantages of taking this step are reductions in the need for inventory investment, warehouse space, IBM and clerical time, buying time, and frozen food cabinet Space. II. Reduction of Product Duplication. In determining the extent of product duplication that should exist in a long term profitable retailer Operation, consideration must be given to permitting the consumer a choice Of brands in the retail frozen food cabinet. It is the Opinion of the writer, and at least somewhat supported by volume data, that a product the sales rate per store of which averages one case every seven weeks, should be a definite candidate for oblivion. The data exhibited in the appendix illustrates that products which produce this rate of sale are not only stocked in the warehouse but under several labels. III. Refinement of Product Lines. Prepared foods Should be closely examined to determine the real need for many Of the entrants in this category. It is recognized that some Specialty products, particularly products that have nationality, color or religious appeal, can effect the store traffic and volume of any single retailer. Whether it is sound business for a warehouse to stock products the warehouse movement of which is under fifty cases per year is, at best, very doubtful. Products which fall in this category are being stocked with all the accompanying handling costs. These products Should be considered for elimination. IV. Consolidation of Advertising Groups. It was stated that the COOperative is made up of 40 stores adver— tising under eight different chain store names; another 28 independently owned stores advertise as a group and the remaining 40 independents advertise on their own——if they advertise at all. It is again recognized by the writer that there are some sound reasons for the desire for independence among these groups and this is not being disputed, but from the viewpoint of economics, it appears that there is much to be gained by combining the advertising and merchan— dising strength of each of the groups. Perhaps the business philOSOphies of some of the chains are not compatible and therefore an advertising and merchandising merger would be too restrictive. Certainly it seems unreasonable however, that this would be true in all instances and therefore, this is an approach that should be considered by the members themselves. The above recommendations are the ones that appear most obvious to the writer. These could be elaborated on and perhaps less significant recommendations added. Many other pro and con conclusions concerning the stocking of nationally advertised labels, as well as private and control labels could be drawn from the figures presented. It has been the intention of the writer to draw out those he felt to be most pertinent and his hope that they may be of some value both to the reader and to the management and members of the COOperative group on which this study is based. BIBLIOGRAPHY BIBLIOGRAPHY Books Beckman, Theodore N. and Nathaniel H. Engle. Wholesaling. New York; The Ronald Press Company, 1951. Beckman, Theodore N., Harold H. Maynard, and William R. Davidson. Principles of Marketing. New York: The Ronaly Press Company, 1957. Zimmerman, M M. The Super Market. New York: McGraw—Hill Book Company, Inc., 1955. , Periodicals Editorial. ”It Isn't Quite Fair, 1s :t?,“ Quick Frozen Foods, June, 1958, p. 178. H Editor's Report. "A New Look at Frozen Foods, Progressive Grocer, June, 1958, p. 153. ”Frozen Food Advertising Surges 57% Over Prior Record Total,” Quick Frozen Foods, March, 1958, p. 250. "Frozen Food Prices Slide as Cost of Living and Other Foods Hit New High,” Quick Frozen Foods, May, 1958, p. 41. I1 Mueller, Robert W. "1957 Grocery Store Sales, Progressive Grocer, April, 1958, p. 72. T o 1 1 nPackers Urged to Stress Frozen Food idea in AdS,’ Food Field, March, 1958, p. 15. Frosted ll "Trends in Distribution to Food Stores, Progressive Grocer, April, 1958, p. F15—16. "Unprofitable Operations are Shelved by Munite Maid,” Frosted Food Field, February, 1958, p. 21. Williams, E. W. “What Are the Immediate Trends in the Frozen Food Industry?,” Quick Frozen Foods, March, 1958, pp- 77-820 ”1958 Almanac of the Frozen Food Industry,” Quick Frozen Foods, March, 1958, DP. 166~l76. Publications of the Government United States Bureau of the Census. Eighteenth Census of the United States: 1954. Wholesale Trade, Volume 3. Washington, D. C.: U. S. Government Printing Office, 1956. APPENDIX 64 Listed on the following pages are the resulting figures of computations based on the account records of the cooperative group selected for this study. While in most cases, the figures represent a six- month period, approximately eighteen per cent of the items considered were not in stock for the full period. These items are denoted on the following pages by an asterisk (*). Actual Sales for the period they were in stock are shown. In order to precisely calculate the annual turnover rate by category, it was necessary to project the sales of the asterisk denoted items to a full-six month period. Ther;fore, total category dollars are represented by two separate figures. 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