K&M Profitability and Growth Strategy Excerpt K&M Wholesale Grocers Where are the Profit Pools in the Grocery Value Chain?
K&M Profitability and Growth StrategyExcerpt
K&M
Wholesale
Grocers
Where are the Profit Pools in the Grocery Value Chain?
Privileged and Confidential
Background and Context
Background: K&M is the largest wholesale grocery supply company in the U.S. and the lead supply
chain company in the food industry.
K&M served about 5,000 stores from more than 50 locations in 15 states. Among K&M’s customers are many of the largest and most well known grocery chains in the US.
Situation: K&M rose from near extinction 20 years prior, to its position of prominence largely by
focusing on a core customer group: large grocery chains. As a result of this survival strategy, K&M had grown prolifically over the past 15 years (22% CAGR versus ~2% for the grocery (retail and wholesale) industry).
Complication: However, along with this growth K&M had seen monotonically decreasing margins and
management feared a continuation of this trend may lead to negative profitability and ultimate insolvency as has happened to historic competitors in this razor-thin margin business.
Question: Could a new perspective on strategy yield a path to profitable growth or should the
company explore strategic “alternatives”?
Answer: By applying a profit pool lens, pockets of profitable growth could be identified along the
value chain to both improve the core business and once again return to profitable growth.
2
Privileged and Confidential
The “Problem”: K&M Has Experienced Unprofitable Growth
$1.8$2.5
$3.4 $3.7
$5.1$5.9
$7.1
$8.3
$9.8
$11.4
$13.6
$18.6
$15.2
$19.4
6.0%6.1%
6.4%6.4%6.3%6.5%6.5%6.6%
6.9%7.2%
7.5%7.4%
7.8%8.0%
$0
$5
$10
$15
$20
$25
Yr -
13
Yr -
12
Yr -
11
Yr -
10
Yr -
9
Yr -
8
Yr -
7
Yr -
6
Yr -
5
Yr -
4
Yr -
3
Yr -
2
Yr -
1
Today
Reven
ue -
Bil
lio
ns
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Revenue Gross Margin Net Profit Margin
Revenue
CAGR
22%
Ma
rgin
(% S
ale
s)
K&M Sales Have Increased But Profit Margins Have Declined…
Privileged and Confidential
Strategy Development: A 3 Step Process
Understanding Our
Profit Pools
Understanding “True”
Profitability
Prioritizing
Opportunities for
Profitable Growth
Define the Value Chain:
• How broad?
• Where do we “play”?
• Where could we play?
Define the pool:
• Size
• Distribution of profits
Prioritize identified opportunity areas
for “deeper dive”:
• “Fast Adapt” initiatives in current
business model place in the
value chain
• New areas to exploit:
‒ Do we have a core
competency?
‒ Do we have a strategy?
Customer Level: Profitability
• Correctly defined
• NPS and quantification of impact
on growth AND profits
Supplier Profitability:
• Pricing leverage, if any
• Cost reduction/efficiency
initiatives
Product line profitability:
• Pockets of opportunity?
• Dependency/Intercorrelation with
Customer and Supplier
Profitability
Integration into budgets, and
performance metrics:
• Keep the business units and
individuals accountable
Existing Customers/Existing
Geographies/Current Place in the
Value Chain
• Growth in the Core
Adjacency Growth
• New Customers/Existing
Geographies/Current VC
• New Customers/New
Geographies/Current VC
• New place in the VC (based on
profit pool opportunities)
‒ Existing Customers/Vendors/
Geographies
‒ New Customers/Vendors/
Geographies
New Product Extensions:
• Emerging trends
• Different ways to exploit core
competencies – “outside the box”
Execution:
• Build
• Buy/Acquire
• Partner
Privileged and Confidential
Why a Profit Pool Approach
Focuses management on both revenue and profit growth – does not ignore the
bottom line in favor of top line growth
Encourages thoughtful understanding of cost structure, existing and new
competitive threats, current and evolving customer needs, and unique core
capabilities
Identifies the location and size of profit concentrations within an industry – across
the relevantly defined value chain – and how those profits might shift and evolve
This broad view can help management identify heretofore unknown or
unexplored pockets of opportunity for profitable adjacency growth leveraging core
skills and capabilities
Applies to all logical growth extensions:
New products and services
New customers or customer segments
New geographies
New distribution channels
New related businesses
5Source:
Privileged and Confidential
Where is K&M in the Food Value Chain?
ProductionProcessing &
Manufacturing
Source: USDA, FMI, Department of Commerce, QA Analysis
Wholesaling Retailing
Consumption
$1.2 TR
$154 BN
Foodservice
$257 BN
Retail $285 BN
$238 BN
Foodservice
$529 BN
Retail $654 BN
Away From
Home
At Home
Our Vendors
and Our
Vendors’
Vendors
Our Vendors Our
Customers
and Potential
Customers
Our
Customers’
Customers –
The
Consumer
Our Place in the
Value Chain – and
Our Competitors’
Privileged and Confidential
Who are the Players in Our Value Chain: Examples
ProductionProcessing &
ManufacturingWholesaling Retailing
Consumption
$1.2 TR
• ADM
• Cargilll
• Bunge
• Ingredion
• Farm Products
• Land O Lakes
• CHS
• Large and
Local Farmers
• etc.
• Kraft-Heinz
• Nestle
• Conagra
• P&G
• Campbells
• Kellogg
• General Mills
• Unilever
• Mars
• Tyson
• Coca Cola
• Pepsico
• Other CPGs
Foodservice
• SYSCO
• US Foodservice
• PFG
• McLane
• GFS
Retail
• K&M
• Supervalu
• United Naturals
Food Inc.
• Wakefern
• Nash Finch
• Tree of Life
• Aramark
• Sodexo
• Cintas
• Compass
Foodservice
• Walmart
• Target
• Costco
• Kroger
• Whole Foods
• Safeway
• Ahold
• Albertsons
• Small Chains
• Independents
Retail
Away from
Home
Restaurants/
Dining Out
At Home
Grocery and
Specialty
Stores;
Convenience
Stores; etc.
Privileged and Confidential
The “Away-from-Home” and “At-Home” Food Profit Pool Map
K&M Current
Space
Source: Company Financial Statements; Thomson; Onesource; Yahoo Finance; US Government/Census Data; Quincy Analytics Analysis and Triangulation
K&M Margin
K&M Has Significant Opportunity to Exploit Pockets of Profitability Across
the Food Value Chain
Privileged and Confidential
Pockets of Profitability in K&M’s Core Competent Space:
Moving “Stuff” Around and Buying & Re-Selling
Wholesale Average: 6.7%
Our Industry
Emerging Customer Segment
One Third of our Largest
Customers
Our Most Profitable
Customers
Percent of Revenue (3 Year Average)* Third Party Logistics (e.g. CH Robinson; OHL)
** Broad Distribution (e.g. UPS; FedEx)
Source: Company Financial Statements; Thomson; Onesource; Yahoo Finance; US Government/Census Data; Quincy
Analytics Analysis
Privileged and Confidential
K&M Strategic Imperatives – 5 Steps to Profitable Growth
Fix The Core Accelerate Operational Improvements Already Underway
Renegotiate Broken Contracts Customers (6 Key Contracts)
Vendors (1 Key CPG)
Create a New Customer Engagement Model to Reduce Customer Anger
Expand Penetration With Existing Customers in Existing Product Categories
Highly Focused Adjacencies – New Customers Convert New Chains to Self Distribution in Existing Markets (Northeast and Mid-Atlantic)
Convert New Chains in Recently Entered Markets (e.g. Southeast; West Coast)
Leverage Core Merchandising Competency to Product Lines that Reflect Emerging Customer and Retailer Trends and Profitability
Naturals and Organics
Non-Food – Growth of GMHBC
Private Label and Value Brands
Reinvent/Revolutionize the Value Chain (“T3”) Highly Automated “Super Warehouse”/Logistics Center
Remove Steps from the Supply Chain (e.g. Mixing Centers)
Expand Beyond Traditional Grocery into New Retail/Wholesale Categories
If Acquisition, Pursue the “Mega Deal” – Either Alone or With a PE Partner Acquire #2 Grocery Wholesaler who Focuses on a Stable and Profitable Customer Base
Privileged and Confidential
The only way to succeed in a low-cost strategy was to eliminate steps in the supply chain
Manufacturing Plant
T3 – A Highly Automated
Distribution Facility
Quincy Analytics Helped K&M Implement Direct to Store (D2S), a Revolutionary, Automated Model that Eliminates Steps and Reduces Costs
DC / Mixing Center
Outside Storage / In Market Depot
Retailer Warehouse
Store
Manufacturing Plant
Store
Exploiting Profit Pools Along the Value Chain
Privileged and Confidential
Operating Cost Reductions Attainable via the D2S Model Will Result in $55M
in Annual Savings and Increased Volumes with Large CPG Vendors
Transportation
$0.32
Transportation
$0.40
Warehouse
$0.21
Warehouse
$0.63
Co
st
per
Case
$0.95
$0.61
Operating Cost Per Case
Current and Future
Current K&M Cost Future K&M Cost
at Highly Automated Facility
Cost Savings
$0.34 / case
Source: Quincy Analytics Pro Forma Costing Model and Capital Budgeting Analysis
Exploiting Profit Pools Along the Value Chain
Privileged and Confidential
Strategic Priorities, Opportunities and RisksO
pera
tin
g P
rofi
t
($m
m)
Low High
Level of Financial and Operational RiskSource: Quincy Analytics Pro Forma Financial Model
Working closely with management and drawing on extensive primary, secondary, and K&M
proprietary data, a clear path to profitable growth was identified. Even without the risky “mega
deal,” Quincy Analytics helped K&M find a path to a 10X improvement in operating profitability.