My Friend Mel and I

If you've kept up with me on our StoreReport Facebook page or on LinkedIn at 'Convenience Store Supply Chain Management', no doubt you have heard me talk about my associate Mel Haynes, Sr. For the past eleven years or so, Mel and I have been arguing a lot (that's what we do best) about small retailers and more specifically convenience store retailers, with regards to how they function and do not function depending upon how you look at it.

Leaving the fuel operations out of the equation, I have always believed that convenience stores are grocery stores on steroids. Where customers may spend one to two hours in a grocery store, they are usually in and out of a convenience store in four minutes or less. Mel has worked with very large retailers such as Walmart and H-E-B and sees things in a different light. But there is one thing where we readily agree. Retailers know when they are losing money, they just don't know how much or from where.

One of the most insidious ways to lose money when you're dealing with inventory is in Carrying Costs, mainly because carrying costs are like termites. You don't usually see termites unless you venture into your crawl space and observe the damage for yourself. 'Out of site, out of mind' the saying goes.

I've talked about carrying cost at length over the past 42 years in this business, but they are so pervasive, you begin to roll them up into 'cost of doing business'. You know they are there, but it's no fun thinking about it.

Things like, how much electricity does it take to keep a case of a particular beer fresh that nobody seems to want. How much of your overstock could produce a greater profit for you if it were buried in a hole in the back of your store. How many hours can that pastry last before starting to show signs of mold and forcing you to throw it out, and knowing employees are stealing food and change out of the register, but you gave up trying to catch them in 2008. I have seen carrying costs claims as high as 36% of the original purchase price annually, but no one really knows because oftentimes it ends up being a dollar chasing a dime, so retailers shove it in the dark regions of their minds and sort of forget about it.

In the late 1970's, when I first started selling computers and software to oil companies and helped them open and run their convenience stores, I saw millionaires being made from bobtail fuel truck delivers and gas station attendants. Later, I watched some of those same dealers go broke. Everything has it cycle and no matter how hard you try, you just can't prepare for every possible contingency that might come along, because people are not normally made to think that way.

Well, back to Mel. Mel is one of those brilliant individuals whose mind runs faster than his tongue. A year ago, Mel called me on the phone and before I could answer, "StoreReport", he said, "Do you know that Golden Flake Potato Chips drives Coca Cola sales at store 115?" 115 was the store number of one of our customer's stores. I think he does stuff like that to keep me from taking naps. But, we have known each other long enough that he knew I would not be able to go back to work before I figured out what this had to do with me. While you and I may discuss matters in the English language, Mel converses in algorithms. "How did you come to that conclusion", I asked. And in a Mel-ish kind of way, one that I had become accustomed to over the years, he answered proudly, "Just four lines of SQL." The data Mel had provided was not nearly as important to him as how easily he was able to come up with the answer.

A year has passed and we are still talking about it. I began to view a retailer's inventory as a large pond. When an action occurs on one item in the pond, a reaction occurs on other items that share an affinity with the first item almost instantaneously, and if you could observe that happening every time an item was touched through a sale, a promotion or even a price change, it would provide you with a lot of information.

In a practical sense, if you had a very large database of sales, and added in promotions, stock outs, out-of-stocks, and other situations that directly or indirectly affected an item, you would be able to measure those effects the instant they occurred. Further, you would be more able to make predictions and identify trends.

Imagine. If a particular brand of chips did affect the performance of 20 Ounce Coke, doesn't it stand to reason that lowering the sale price on an item having a lower margin, would increase the sales of another item with the same affinity having a higher margin, and result in producing a higher overall profit?

Sometimes affinities between products mean nothing and turn out not to be affinities at all. One day while studying the data, an employee of mine became curious as to why a popular brand of cigarettes (his brand) was seldom purchased in a store we were working in, and not knowing the importance of 'cigarette deals', replaced a poor selling Marlboro brand with his brand (not a Marlboro brand), and within a few hours saw a stark increase in sales of his brand. When the manager returned several hours later, my employee was given a stern lesson regarding cigarette contracts. However, it was a grand example of proper positioning.

I submit the idea that Affinity Marketing (with the affinity being between products) may become a powerful tool in retail for two reasons. The one I originally mentioned AND the reverse situation where a higher margin product is unknowingly sacrificed by increasing the sales of an item having a lower profit margin, thereby producing a lesser profit.

Retailers often make the mistake of allowing suppliers to create promotions that produce a lower overall profit due to the existing affinity between multiple products and don't even take that into consideration when they are planning their promotions. Also, there are cases where a small advantage seen from a promotion results in brand switching, and that can result in cannibalizations and other more permanent instances of unintended consequences.

When you consider this is happening every day, affecting thousands of products being sold in tens of thousands of convenience stores nationwide, you can begin to see the seriousness of a limited understanding of Affiliate Marketing.

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