A change of seasons: Skokie, Ill.-based Topco tackles industry consolidation by bringing...

No one can deny that the food industry is changing, sometimes even more dramatically than the weather at this time of the year. As the leaves turn vibrant hues and flutter to the ground peacefully, the retail industry is abuzz as big retailers become behemoth ones and many smaller ones strategize

survival skills. Topco Associates LLC offers some protection from the forest fires as it brings retailers and distributors together to create a "multi-channel powerhouse" providing procurement, quality assurance, new product innovation, packaging and other services that ultimately come together to create an end-to-end provider of private label solutions. Collective volume for the member-owned cooperative of 56 retailers, wholesalers and foodservice entities is second only to Wal-Mart. A large number of the country's leading regional retailers are Topco members, including companies such as Meijer, Ukrop's Super Markets, Haagen, Schnuck Markets, Giant Eagle, Hy-Vee, Fresh Brands. K-V-A-T Food Stores, Big Y Foods, Starer Bros. and many more. Topco recorded a record-breaking year with member purchases topping $4 billion.

"Because our members collectively the second-largest company in the industry," says Steve Lauer, president and chief executive officer, "that outs us in a powerful negotiating position."

That same power, Lauer says, is driving national companies to get bigger, creating tremendous economic advantages" for them. It s that economic advantage that Topco seeks for its members when it approaches the vendor community with high-volume negotiating power. "Topco is a way for our members to maintain their independence and their unique market expertise and knowledge, while at the same time having the advantage of being national scale. Topco is the vehicle that allows them to band together to get the best of both worlds."

As major retailers blur channels and become hybrid organizations by tapping into foodservice, for example, the industry has seen significant growth become concentrated despite its reputation for being low-growth. Lauer says from 1997 to 2002, the major national companies have grown from a combined $130 billion to $335 billion, and "obviously they're growing at the expense of somebody else."

"The nationals grew 158 percent, says Jeff Penner, executive vice president and chief procurement officer. With that happening, we need to look at who is really the threat. Our membership has concluded it s the major national companies. There's been a universally accepted recognition that we have to focus on competing against the big guys."

With a strategy in line, Topco aims to provide its members not only the world-class procurement capabilities" it garners by leveraging volume across its membership, but also top-notch private label capabilities in many categories. Topco features a three-tiered program with strong economy brands, a combination of member brands and Topco brands for the mainstream, and its own twist on the premium proposition with its Full Circle natural and organic line and its Dining in ready-meals line, already a big success after only one year on the market. Topco's key objectives, Lauer explains, are to help members drive product cost down, drive private label penetration up and maximize differentiation from competitors.

Delivering differentiation

The private label proposition from Topco is geared toward helping its members differentiate themselves in the market, while at the same time using efficiencies derived from the cooperative business format. Most, if not all, of its members face major pressure from price driven competitors right in their backyards. Topco sees private label programs as an imperative tool to help members make their stores become destination points for consumers.

"If you think about competing with time national companies and the products they sell, they all sell major brands," Lauer says. "Companies end up competing a lot of the time on price or promotion--a lot of the time it's simply price. It is difficult to differentiate with products everybody carries. You can best do that through private label and perishables, both hallmarks of Topco."

Combining its core competencies of procurement and private label, Topco seeks to operate in what Posner calls "the sweet spot."

"What we really are is two companies that are integrated--a purchasing services company and a private label solutions provider," he says. "The intersection a synergistic one--is that we buy a lot of private label. That is a core competency and one of the hallmarks of Topco over the years. That's where the sweet spot is, and that's where it will continue to be."

Topco's private label capabilities run the gamut from vendor/product sourcing to brand and product innovation. Other aspects include packaging design, label management, quality assurance and promotional planning. Posner also points to Topco's complementary relationship with broker Daymon Worldwide and says the synergistic partnership between the two companies is important and often misunderstood.

"Topco's focus is on the buy side--we're the buyer's agent. Daymon's expertise is in category management, promotional planning and in-store merchandising, all key activities that drive consumption in the local marketplace. We're driving supply chain efficiencies and the development of innovative brands and products," he says.

Although now there is a significant focus on the importance of private label from the innovation process all the way through category management, that was not always the case. "Fifteen years ago, private label was not a strategic plank for most companies," Posner says. "It was more of a simple cost benefit for consumers. Now it's really a means of differentiation with Wal-Mart occupying the price space. As such, our members have fully embraced the strategic importance of private label."

As its members ramp up their efforts and increase private label penetration, Topco works to maintain its flexibility. Members are more often choosing a mainstream tier with their own name on the products, making Topco's role a bit more complicated. Topco currently supports 36 brands made up of 13 Topco "all member" brands and 23 member brands. Many of Topco's members go to market with banner brands, for example using a Meijer or Big Y brand as its mainstream and filling in with Topco brands where appropriate.

"The multitude of brands has created some challenges for us, but we have figured out how to handle it and maintain the economies we need," Posner says. "We're servicing 36 brands and close to 30,000 SKUs."

Tackling the tiers

If managed correctly, the rapidly growing economy tier can be a place for members to really experience the cost effectiveness of the Topco organization. Topco's Valu Time brand, which has 450 SKUs and is growing to 500 in the next few months, has earned a "tremendous reception, and the business is growing very, very significantly," Posner says. "We are in the process of trying to get all the members to rally around Valu Time. And it's growing rapidly."

The economy tier, Posner points out, is the perfect weapon to compete with low-priced competitors while maintaining file integrity of one's mainstream tier, which should reflect the store's name and reputation.

"Regardless of your mainstream brand, if you don't have an economy brand with a different label to compete against low-priced formats, you might be tempted to deeply discount your mainstream label," Lauer says. "Aside from the economics, having an economy brand actually protects the mainstream brand."

While many members have shifted to member-specific brands, Topco's own brand, Food Club, continues to play an important role on a few levels. A number of members use Food Club as their own corporate brand. Many other members use Food Club items to fill in their product assortment in categories where producing their own member label would be prohibitively expensive. The multi-member Food Club brand encompasses 2,300 SKUs.

Topco's upper tier, however, veers off the common three-tier model that traditionally places quality and price in a direct relationship, ultimately making premium the highest quality at the highest price. Posner says Topco redefines the quality-price relationship, focusing more on consumer needs in the premium tier.

"Basically, if you go with the traditional three-tier model then you're defining the universe based solely on a relationship between quality and price," he says. "Economy is functional quality at the lowest price. Mainstream is better quality at an affordable price, and premium is the best quality at a premium price. It's always a price vs. quality dimensional way of looking at the world. There is another perspective, which the marketplace is suggesting we should use on private label. It's what the national consumer goods companies have done for years--fulfill consumer needs.

"Consumer needs are not defined as 'give me the premium-priced products.' They are 'give me products that meet or exceed my needs, and in return, I will reward you with a premium price.' That's the concept," Posner adds.

Premium propositions

To address what Topco feels are the most important consumer needs of health, well-being, great taste and convenience, Topco's premium tier carries the already well-recognized, yet young, brands Full Circle and Dining In. Full Circle addresses health and well-being through its natural and organic products and its "Return to the Natural Way of Living" tagline. Dining in offers ready-meals solutions, "Great Taste in No Time." These "concept brands" as Topco defines them are distinguishable from category-specific brands. "The lines have a broad range of products all serving a clear consumer need," Posner says.

Full Circle features approximately 125 SKUs, and will be growing to more than 200 natural and organic products. Full Circle's cross-category approach takes it to many areas of the store, including perishables, snacks and beverages. The line includes such products as organic broccoli, carrots, celery hearts, baby spinach and mixed baby greens, as well as sally snacks including Ranch Ripple and Kettle Cooked potato chips. It includes a variety of upscale cookie varieties, and a bagged coffee line that gives a percentage of profits to Coffee Kids, a non profit organization supporting children who live in coffee-growing communities around the world. "The Full Circle brand stands for something more. It's not just eating, it's living. It's a lifestyle choice," Posner says of the growing brand.

While Full Circle is making inroads and earning its stripes, its sibling Dining In is really the child-star at Topco. With 80 SKUs currently, the brand will grow to more than 100 by the end of the year. Dining In has refrigerated and frozen products such as Cheese Manicotti, Sausage Ravioli, 6-Cheese Pizza in a number of varieties, Certified Angus Beef Chili, Beef Strips for Fajitas, Self-Rising Crust Pizza with Portabella Mushrooms or BBQ Recipe Chicken, Alaskan Cod Fillets, and much more.

The Dining In line evolved from what was a simple and narrow request from one of Topco's member retailers--six or seven refrigerated entrees similar to a new national brand proposition doing quite well at the registers. Realizing that no national brand had a cross-category concept of great taste and great convenience at an affordable price, the Topco team took the idea and ran with it.

"It was just a matter of taking a kernel of a good idea and really expanding it," Posner says.

"Ultimately, our vision for Dining In is that it will go throughout the store and will hit all the day parts," says Maryruth Wilson, vice president of brand and product innovation. "It won't be just center of the plate, but will go into side dishes and all kinds of products that stand for great taste and convenience. It's a very broad platform with a lot of legs, we're very excited about its long-term potential."

In the past year since Dining In was launched, a member or two joins the party and adds the line almost monthly, bringing participation up to 17 members, the Topco team says. And with the strong support members are giving it, Dining In has already established itself among consumers who trust the brand, ultimately opening the floodgates for innovation. Mexican-style macaroni and cheese, for example, illustrates the purposeful design of Dining In as anything but a 'me-too' brand. "Setting the standards high gave us license to do something different, something the national brands aren't doing," Posner says of the spicy line extension. "The success of our macaroni and cheese let us define differentiation in a different way. We're not just differentiating with better quality on items similar to the national brand. Now that we've established the brand and the product, we're offering a Mexican-style variety unique in the category. Only a brand like Dining In could do that because not many companies world have the critical mass to develop and produce the product. The opportunity for innovation is enhanced with Dining In because of the economies of scale."

Dining In also sets itself apart thanks to the strong co-branding relationships it has established. Certified Angus Beef logos adorn the front of some packages, while others feature co-brands like Sargento Cheese and Sweet Baby Ray's BBQ sauce. And there are few boundaries as the Topco team sees it for this young brand expected to reach into perishables (another of Topco's competencies) where there are additional convenient meal solutions opportunities.

"We started with center of the plate," Posner says. "Now we have two ways in which to go--we can expand around the dinner meal with allied products like potatoes that we're already doing, or we can move into other day parts. It's a platform that has opportunity, but we don't want to rush. Mission No. 1 is to establish what we've got. We want to build a consumer franchise and a following, and that will allow us logically to go into aligned areas. We're focused right now on making the 80 SKUs that we've got a great success."

Beyond the plate

Topco's health and beauty care Top Care line is 800-items rich, including products such as nail polish remover, shampoos, conditioners, lotions, sunblock, cough and cold products, shave gel and much more. And the key to Topco's success in this category is that it ties directly to Topco's mission of reducing cost through aggregation.

"Because we're focused and have critical mass and scale, suppliers want to work with us, particularly on all member brands. It's efficient for them," Posner says. "We've seen this in HBC where individual companies are unable to develop their brands because there's just no room at the inn--on the supplier side."

Lauer adds, "In HBC, typically it's broad line, it's expensive product and it's code dated. If you're trying to do it on your own, you're looking at very small production runs. Our HBC members are able to share in our production runs. We reduce both the cost and the economic risk."

Topco's Top Crest brand features 700 non-food SKUs and offers similar advantages to Top Care on both the vendor and member sides of the business. The Top Crest line includes products such as dishwashing soap, cleaners, paper products and other homewares.

"Because there's huge investment in these categories by suppliers on infrastructure and capital, they have to nm those plants at 99 percent capacity," Posner says. "Providing an all-member brand like Top Crest gives the vendor commitment to significant volumes, and volume matters."

A meeting of the minds

Once Topco leverages its core competencies in product development, process and procurement, it doesn't leave members in the cold with the products dropped at their docks. From the earlier steps of label design and label management, Topco works closely with members so products meet particular specifications and serve the markets that the members know best. And it doesn't end there. Once the products are developed and launched, Topco and its members work closely to ensure in-market success.

"It's very much a collaborative package. There's a lot of interaction, talking to members about what kinds of tools will work for them," Wilson says. "We can't develop promotional materials in a vacuum and ship them out, since they won't necessarily fill our members' needs. For Dining In and Full Circle, we deliver templates. We can't tell our members how to go to market, but we do give them an understanding of each brand's strategy and positioning along with signage, point-of-sale and graphic treatments that they can customize or use as is. We provide tools for them to do what they need to in their markets. Our members are experts in merchandising, and they're the experts on their markets."

Dan Mazur, senior vice president of center-store program management, adds, "We can develop the brand concept, great packaging and point-of-purchase materials, but when it comes to making it happen at retail, we depend on our Daymon sales force, and most importantly, our individual members. We understand our obligations. We have to deliver the right finished package for them to execute in market."

Certain categories lend themselves to more merchandising materials that come directly from Topco, in particular HBC's Top Care. Mazur points to shippers, modules and in-store displays as extremely effective and impactful means to communicate a brand message and ultimately sell product. "There are different marketing strategies for different brands, but we've found it very effective for Top Care to have standalone modules so that a retailer can put it up at the end-aisle display and the product will fly off the shelf," he says.

Another HBC resource Topco offers is an annual promotion calendar with monthly themes and pre-pack displays available for members to buy. "Our members can sit down and plan a year's worth of private label HBC promotions," Mazur says. "It's all done seasonally so that our members have the product they need on the shelves and don't run the risk of being out of stock."

Other key merchandising and marketing strategies derive from the co-op business model, with members openly sharing best practices and sometimes even failures. Topco often acts as an intermediary, encouraging and organizing share groups and member advisory committees within its membership.

"Nothing is more effective than having a member merchandiser stand in front of his peers and talk to them about the firings that have worked and have not in a particular market," Mazur says. "That's the hidden benefit. We're a built in share group 56 members strong."

Quality counts and it costs

Having to serve so many retailers and work with so many suppliers on so many SKUs, Topco takes quality assurance very seriously. A staff of 17 QA professionals samples more than 200,000 products per year and audits every plant that manufactures for Topco. Topco has developed specifications for all products it procures and regularly conducts comparison testing. And QA, in particular, serves as a key benefit for Topco members who can take advantage of QA capabilities that would be prohibitively expensive for any one member to maintain.

"Quality assurance is a good example of where our membership can share costs," Lauer says. "With 56 members having private label programs, they could all do their own quality assurance. However it's usually not an area of expertise for them, and if you do it well, it's expensive. In a sense, they are all a part of a very well-run, high-quality, professional-quality assurance lab. And as suck their cost is minimized."

From the flicker of a new marketing idea through product development, procurement and quality assurance, Topco makes its members a part of an overall organization seeking to drive efficiencies by pulling together companies with common goals. As leaders in their own markets, they're working to grow their businesses and compete in the always challenging and changing retail environment. Purchasing more than $4 billion from Topco in 2002--a record year in the company's 58-year history--Topco's members have experienced the value of a united front.

Posner says," The analogy I like to use is the 13 colonies. They didn't get together because Georgia loved Vermont, and Vermont loved Maine--they all shared a common goal of gaining independence from England! From those small 13 colonies grew the most powerful nation in the world. A select group of independent companies with the goal of maintaining their independence have banded together against the common threat posed by Wal-Mart and the other national companies. And they are succeeding."

Topco AT A GLANCE

HEADQUARTERS:

Skokie, Ill.

NO. OF TOPCO MEMBERS:

56, including retail, wholesale and foodservice entities

PURCHASING POWER:

Members purchased more than $4 billion from Topco in 2002, primarily in private label and perishable products.

PRIVATE LABELS:

36 total labels: 23 member brands and 13 Topco brands. Topco brands include: Food Club--2300 SKUs, Shurfine--2600 SKUs, Shurfresh--450 SKUs, Top Care--800 SKUs, Top Crest--700 SKUs, Valu Time--450 SKUs, Price Saver--330 SKUs, Saver's Choice--250 SKUs, Dining In--80 SKUs Full Circle--125 SKUs

PROGRAMS AVAILABLE TO TOPCO MEMBERS:

Center Store Private Label Programs

* Frozen

* Grocery

* Dairy/Bakery

* Health & Beauty/General Merchandise/Pharmacy

Perishable Programs

* Fresh Meat

* Branded Meat

* Produce/Floral

National Brand programs

* World Brands

* Diverting

Cost Reduction Programs

* Equipment & Supplies

* Business services

WEB SITE: WWW.TOPCO.COM

TOPCO'S TAKE ON ONLINE AUCTIONS

Topco's Jeff Pusher, executive vice president and chief procurement officer, points to four ingredients critical to the 56-member cooperative's success in purchasing--power, tools, skills and marketplace intelligence Power is ticked off the list thanks to Topco's size and buying power, Skills emerge from its core competencies including procurement and private label, and marketplace intelligence oozes from its members' mastery of their markets. Then there stands a tool box with a plethora of options for tackling every element of the business.

"We believe that power is the No. 1 ingredient, but we also believe in the myriad of tools available in the tool kit," Pusher says "There are strategic alliances, category reviews, lock boys, dynamic sourcing, and, yes, e-auctions have become another tool"

Posner says Topco prides itself on knowing which tool to choose from the kit in each circumstance, and this choice is imperative to success.

"It is not a panacea. It needs to be put in perspective," he says emphatically "We have utilized e-auctions in many different categories--some work, some don't. A lot of the commodities have been a good application for the e-auction tool. Today, we aggregate our volume and use e-auctions for mostly those kinds of products."

Topco's President and Chief Executive Officer Steve Lauer agrees "It works very well in some circumstances, and it's not the right tool in others, such as for certain value-added or quality-specific products What's really important, though, is that the tool is enhanced by aggregation. If it is the right tool, you'll get bettor prices if you're able to aggregate volume."