February 23, 2010
A Store Brands Decisions' Exclusive
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| Safeway's O Organics store brand |
While suppliers are accustomed to reimbursing retailers for packaging artwork and redesigns tiered according to the degree of work done, Safeway is navigating into uncharted waters charging a flat $500 fee per SKU per quarter no matter how simple or complex the packaging rework, according to documents obtained by Store Brands Decisions.
“We believe that Safeway’s new artwork program simplifies and increases the predictability of artwork expenses for participants, and thus helps to eliminate waste from the system,” the Pleasanton, Calif.-based grocer wrote in a letter sent via email to an undisclosed number of its store brand suppliers on Dec. 2, 2009. The email also asked suppliers to participate in half-hour conference calls to discuss the new program. “Our new artwork program is a ‘pay as you go’ system based upon the number of SKUs you provide Safeway. This makes artwork expenses easily and instantly knowable; simply multiply the number of SKUs by the per SKU amount. (Not surprisingly, the increased predictability helps Safeway as well, both in terms of planning and in negotiating with our artwork vendors.)”
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| Safeway's Eating Right store brand |
The letter goes on to specify that as part of current agreements suppliers are responsible for production of all packaging and labeling costs, which the operator of 1,743 stores said are difficult to predict and control.
“To be fair and equitable to participating suppliers, we will not be allowing entrance into the new program until the next redesign has been executed and paid for in full by your company,” the letter continued. “That may occur in 2010 or the following year but we wanted to be clear on the window of opportunity to participate in this program. “
While some suppliers concede the flat-rate system is more predictable, it doesn’t take into account the wide cost variation between a complete product packaging redesign –– which occurs on average every two to five years –– and minor label changes or simple line extensions.
“If a retailer is going to redesign every two years, then the cost is going to be applied on a pretty consistent basis and suppliers would get some value out of that because there is not that much amortization that continues to change over a two-year period,” said an anonymous industry source. But if a redesign does not happen that frequently and consistently “then this really just becomes an annuity and the fees over time are not really appropriate because of what the true marketplace costs are.”
The other area that concerns some suppliers is how Safeway plans to handle labeling and packaging errors, which can occur frequently because so many people are involved in the process including the retailer, manufacturer and often brokers as well.
In a separate agreement document, Safeway wrote that the “seller will be responsible for any additional design and/or artwork costs incurred by Safeway that are attributable to errors or incomplete or incorrect information from Seller with respect to NLEA/ingredients, dielines and/or printer specifications, and Safeway may deduct such costs from invoices payable to Seller as such costs are incurred.”
Charging manufacturers 100 percent of correction fees on top of the flat fees is unfair because “so many people are involved in the redesign processes – it can be as many as seven to 10 people – and the likelihood of rework and errors is common,” the industry source said, adding that high retail turnover increases the chances of errors, which isn’t taken into account in the program. “Redesigns are not a smooth running ship. They never have been.”
New SKUs will be added in the quarter they ship, and discontinued SKUs will be dropped in the quarter following their final shipment, according to the agreement document.
Store Brands Decisions contacted Safeway, but the grocer declined to comment.