International key account management

Faced with expanding international operations, grocery retailers expect their suppliers to establish competent international key account management (IKAM) organisations. And most suppliers meet their demands. However, some suppliers complain that grocery retailers still offer too little in return for their international key account management efforts.

Elsevier Food International Vol.8, No.3, September 2005
Heiner Olbrich and Christian Gieselmann

Grocery retailers are expanding internationally and they clearly define the rules of the game. They expect their suppliers’ counterparts to adapt accordingly when dealing with international retailers. Suppliers are willing to do so, but expect this to benefit negotiations and conditions. Suppliers want something in return, “even if that is only peace”, as one respondent put it.

There are retailers that are not in a mood for negotiations to collaboratively support their international operations and decided to act in a straightforward manner. A notorious example is the German discount drugstore chain Schlecker, which distributed products from its central depot in Germany to markets abroad without consulting its suppliers first. The company disregarded the fact that sale of these products was not permitted because of illegible packaging. Another example – also from Germany – is Rewe, who successfully distributes Ferrero's German ‘Duplo’ product in Italy through its Penny markets. This creates confusion, however, because Ferrero also has an Italian ‘Duplo’ brand.
The problem emerged fairly recently in the food industry, but has a longer history in non foods where international sourcing has been happening on a larger scale. Some sportswear retail chains, such as Foot Locker and Décathlon, already have efficient centralised international sourcing operations in place. For suppliers, national sales planning is pointless in this case, so some suppliers have responded by planning revenues for international customers as well as for specific categories and countries.
As far as food and consumer goods retailers are concerned, the examples mentioned above are exceptional. The majority of retailers in the Roland Berger survey pursue clearly-defined goals in their international operations. They mainly try to boost profits by bundling international volumes and improving trade terms. Yet they are also looking to offer a better range of private label products. Further down their list of priorities is cost cutting by standardising, tapping synergy effects and sharing international best practices.

Suppliers think benefits are poor
Many suppliers confronted with retailers leveraging their international buying clout are going with the flow. Some suppliers like the idea of stronger retailers for mutual benefits, such as data exchange or support in new markets (e.g. eastern Europe). These suppliers are not afraid of the risks typically involved, such as eroding margins due to stricter terms and conditions. Most suppliers negotiate international agreements such as the ‘Eurobonus’ system, which awards incentives for instance when joint sales targets are met.
In order to cater to multinational retailers like Metro, Carrefour, Ahold, Tesco and Wal-Mart, suppliers need to invest more in international joint projects, such as international category management, and meet additional conditions (e.g. additional rebates). Other retail groups, like Intermarché, Auchan and Schlecker, still tend to unilaterally stipulate certain conditions, such as additional rebates or volume bonuses.
On average, suppliers think the benefits they get (such as extra promotional campaigns) are poor considering their spending in additional terms and their efforts in managing accounts internationally. Even the grocery retailers with the best scores – Casino, Metro Group and Carrefour – were barely rated ‘satisfactory’ in this respect.
Nevertheless, all leading European retailers now work with powerful international sourcing organisations. Carrefour, for example, handles 15 per cent of its sourcing volume through Direction Merchandise Groupe (DMG) in Les Ulis, Paris, and Carrefour World Trade (CWT) in Geneva. These organisations employ 500 people managing 200 strategic supplier partnerships. Metro Buying Group and Ahold Global/European Sourcing feature similar headcounts (300 employees), sourcing shares (15 to 20 per cent of their global sourcing volume) and approximately half as many strategic partners.
These buying organisations focus on consolidating international negotiations and food supplier contracts. The purchase of non-food items and large private labels are often negotiated on an international level only. In addition, these organisations develop methods for sharing best practices (e.g. Carrefour's global merchandising showroom) and set up an efficient global sourcing infrastructure, which is often based on regional buying organisations. Metro Group for instance bundles regional purchasing volumes for similar products to reduce cost price differences. And Ahold operates regional buying desks to offset its lacking pan-European presence.

Purchasing alliances
Smaller retailers tend to combine their buying power in purchasing alliances such as International Retail and Trade Services (IRTS) founded by Auchan and Casino with combined sales of €50 billion in 27 countries. However, IRTS has faced enormous difficulties meeting expectations as the partners did not cooperate openly and had no control over their local country organisations. Consequently, suppliers largely refused to cooperate with IRTS.
Associated Marketing Services (AMS) is another example of failure, caused by a lack of partner commitment. The origins of AMS date back to 1989 when Edeka, Ahold, Caprabo, Dansk Supermarked, ICA, Jeronimo Martins, Kesko, Safeway and Superquinn formed an alliance with combined sales of €84 billion. One major objective of the venture was to create the ‘Euroshopper’ private label, which failed because partners could not align their strategies. For various reasons this alliance did not meet expectations either: Casino and Cora walked out, Ahold was hit by a crisis, Safeway was sold to Morrisons and Edeka prioritised development of its private label ‘Gut und Günstig’ (Good and Affordable).
Individual buying organisations, such as Metro Buying Group, are more likely to succeed. Their structures better reflect category and sales channel requirements. Metro has area managers for different store formats who manage the store banner's assortments, determine final consumer prices and negotiate promotions. Strategic buyers analyse annual assortments, bundle volumes and negotiate purchase prices for the different categories in this matrix organisation.
Among the discounters, Lidl is a pioneer in international sourcing, which helps accelerate its international expansion substantially. Lidl generates €20 billion in sales with no more than 20 to 30 international buyers.

Three IKAM models
Traditional retailers are keen to ensure sufficient influence on their national organisations. This influence is significant already and keeps growing constantly. Some retailers issue central directives on national listings and exercise veto rights for local product launches, promotions and shelf space agreements. This is important to suppliers who often agree on promotions on an international level, but run the risk of agreements not being implemented in local markets due to lacking commitment of local retail managers to international arrangements.
In conclusion, retailers are not yet prepared to efficiently collaborate with their suppliers on a large, international scale. Consequently, many suppliers are dissatisfied with international sales agreements. Yet retailers expect substantial benefits from international sourcing and international collaboration. Ahold and Metro show the right direction as some suppliers report satisfactory collaboration. Such structures and new initiatives are likely to be strengthened even further in future. The first suppliers to respond and build an international key account organisation will certainly benefit and build long-term partnerships where synergies can be exploited via trust-based data exchange, category management and better implementation of capabilities on local levels.
Most suppliers in the Roland Berger survey are setting up international key account organisations. Thirty-five per cent of respondents have implemented the most rigorous form of this, the ‘dedicated IKAM model’. These companies have established structures that are separate from the national KAM system and managers focus exclusively on international key customers. Another 35 per cent of the respondents use a ‘lead country IKAM model’. In this case, the national key account manager in the key account's home country also coordinates international activities for his specific account. A third option, the ‘hybrid model’ (30 per cent), features aspects of the two other organisational forms. Suppliers using this model employ dedicated IKAM staff (with no national responsibilities) for customers who require particularly intensive support.

The time is ripe
Almost all suppliers who took part in the survey have a corporate IKAM department that acts as a control centre. These departments comprise ten managers on average. Depending on the organisational model, companies use different reporting systems. Fifty per cent of all dedicated IKAMs report directly to the head of the IKAM department. Under the lead country model, IKAMs usually report directly to national sales directors.
The bottom line is that a small ‘Champions League’ of companies with clearly defined international sales strategies and efficient IKAM organisations is emerging. The other players want to keep up, but are still unable to do so because their top managers do not think there is a need for change, or feel that retailers should offer a higher return on their investments in IKAM models. Often, retailers’ organisational structures favour local power centres of country managers who do not want to lose control on their key account sales, which are often linked to their incentive systems. These local kings tend to see international agreements as a threat.
Finally, there is a small group of ‘spoilsports’ who flatly reject grocery retailers' efforts to boost international purchasing and coordination, allegedly because local products are too different.
In general, both retailers and suppliers are rapidly setting up or expanding international structures. Leading industry partners are working hard to create mutual efficiency gains in the supply chain, share best practice, exchange data and help each other enter new markets. The time is ripe to reap the benefits.

 

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Dr Heiner Olbrich is partner and manager of the "Fast Moving Consumer Goods Industry" Practice Group at Roland Berger Strategy Consultants (heiner_olbrich@de.rolandberger.com)
Christian Gieselmann is senior project manager in the same Practise Group (christian_gieselmann@de.rolandberger.com).

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