Buying Power Provides Competitive Advantage
Bigger isn’t necessarily better, but it does have its benefits. Just ask Apple, which has found a competitive advantage in being able to buy all kinds of components for its iPads and iPhones at a fraction of what other manufacturers pay because they simply don’t have the market to manufacture nearly as many units.
According to an Associated Press report, the reason that Apple has been able to add sophisticated features to its new generation iPad while keeping the price at the same level as the previous model is buying power.
Increased buying power is often given as one reason for mergers. The just completed BI-LO and Winn-Dixie merger means the combined company will now be the ninth largest grocer in the U.S. Certainly the combination of the two entities should produce better deals than the chains — ranked number 47 and 27 respectively by Supermarket News — have been negotiating separately up until now.
"Together, we are a stronger company that will be focused on meeting and exceeding our customers’ expectations by offering even greater value with the service and shopping experience that they have come to expect," said Randall Onstead, CEO and President of BI-LO Holding, the parent company of BI-LO and Winn-Dixie, in a press release.
Regional chains and independents have long complained that they could not compete with the likes of Costco, Walmart etc. even when they were purchasing on a net price basis and not looking for any of the typical trade fees.
A center store category manager once told me the best he could do is get within seven or eight percent of a much larger rival by going to net pricing. Of course, on that basis, he could never compete unless he lost money on every sale and the advertising to generate it.
Discussion Questions
Discussion Question: How important is buying power in today’s competitive retail environment? What competitive tactics do successful regional chains and independents rely on?
Buying power is not nearly as important to CPG retailers today as it was back when pricing brackets were much more common. Most retailers and CPG suppliers and manufacturers have found other ways to do business for better or worse.
Buying power is huge. It’s a major reason why there are far fewer independents and regionals today than there were a generation ago. The best smaller retailers find a way to differentiate, other than price. That generally means stocking unique products that the big chains aren’t carrying, more service, or more “healthy” foods to meet the growing demand.
Buying power is hugely important and has gained traction during the era of retail consolidation. Whether you are talking about department stores, big box retailers or discounters, there are simply fewer players with more leverage over their vendors than 10 or 20 years ago. Walmart is probably the best example of a retailer with pricing power — and they have used it for many years to gain market share at their competitors’ expense.
The buying power that comes from being big, through growth or merger, is a big advantage if you are going to compete primarily on price with merchandise from very large manufacturers.
Regional and independents can’t compete effectively in this arena, but they have an advantage that the big players don’t. They can build relationships with smaller vendors (new and/or regional) who are looking for a partner to grow their business. This has two advantages. It is a great competitive differentiation and it provides price control against the big players.
One need only look at the development of Walmart in the last 20 years to understand the huge competitive advantage provided by buying power. Regionals and independents can never beat a national player on price, so they must instead beat them in areas like customer service, assortment and product quality.
Buying power comes not only from size, but from buying well. As many have learned, the total cost of acquisition is far more complex than the invoice price. Being bigger means you have more buying power, it doesn’t necessarily mean the retailer knows how to use it.
This topic has been beaten to death, as we independents have zero chance of a level playing field. The fun is gone in the center-store, as all major players have been ignoring us for years. What is tough to swallow, is that WE made all of these big suppliers wealthy, and now they don’t need us anymore. Am I bitter? Absolutely, as the way business is being done today simply isn’t even close to being fair. I have changed my way of thinking years ago, and I’ll survive because of my perimeter deals, but it still is difficult to come to grips with the huge gap in costs we now face, with no chance of changing the situation at all.
Thank God for regional suppliers who respect our business, and will work with us.
@Steve Montgomery — absolutely true.
In the world of online retail, buying power has made Amazon the 900 lb. gorilla, forcing start-ups and mom and pops to have to compete on service and obscure products. They just can’t match prices with the big guys, especially inclusive of shipping.
Apple went from a desktop PC manufacturer that lacked the influence Microsoft had, say on companies like Intel, to being the spoiled kid that everyone fawns over.
Buying power is a huge advantage as it gives retailers better value that they can pass on to customers. It also gives retailers leverage to tailor the vendors’ product roadmap to fit the retailers strategy. Plus the retailer will get options on new product launches, etc.
Regional chains and independents can compete on customer experience vs. price. It is harder in a large retailer to act like an owner and take care of the customer.
It can’t be the only answer, but it has huge benefits. It’s interesting that social tools are beginning to enable consumers to leverage group-scale buying power in some areas too. This could create some interesting dynamics for the traditional supplier-retailer relationships.
It feels like buying power continues to be a key competitive advantage, but that advantage has shifting from commodity goods to more distinctive components and SKUs.
As supply chains for pure commodities have gotten better and better, the price gap from the largest to smallest buys seems to have actually narrowed, reducing the advantage to the big buyers. At the same time, those with buying power have been able to lock up unique goods, such as Apple’s ability to lock of the complete supply of a constrained memory chip, or a new higher density LCD technology, Best Buy’s ability to source private label goods with bleeding edge features, and Target’s exclusive designer collaborations.
Buying power in today’s retail environment is the ultimate aphrodisiac … but power when improperly or inefficiently employed slips imperceptibly into the hands of innovative others such as Trader Joe’s and Whole Foods.
I believe the rationale for volume-related discounts has elapsed. Yes, there are certain minimums that translate directly into transportation savings, such as truckload or pallet minimums, but even a regional retailer can meet most of these requirements. Manufacturers must also focus on retailer services that give the manufacturer better insight into store level and consumer level actions. By providing the manufacturer real-time access to store inventories, enabling them to understand consumer participation in promotions, and helping the manufacturer increase sales the retailer can provide support that larger competitors may not offer. The ability to reduce manufacturer accounts payable servicing costs such as timely and automatic payments is important. Pre-assigned appointments that minimize detention charges on warehouse deliveries improve the efficiency of deliveries.
So although there may not be economic savings, there still is a significant cultural hurdle for the regional chain who competes with the Costcos or Walmarts for attention within the manufacturer’s organization. The large national accounts will have the most senior members of the manufacturer’s organization handling their requirements. I don’t know how you put a value on this, even though you know it helps.
We should take note of Tony Orlando’s comments. He is in the fire, and knows from the inside what is happening in the real world he lives in and we comment on.
If you are in the mass market business, buying power is huge. In the mass market, competition creates constant pressure on retail prices, and the only way to keep up is through driving economies of scale through sheer volume.
I think the old axiom still holds mostly true — the real money in retail is made on the buying side.