Retailers Keep Pressure on Brands

Retailers, at least as anecdotal evidence goes,
are playing hardball with suppliers, offering
them the choice of playing along or taking their products to other venues.
In
a recent story here about Costco’s decision to remove Coca-Cola products from
its stores, 50 percent of those in a RetailWire poll
said Coke would take the biggest hit from the move while 21 percent said
both parties would be equally hurt. Twenty-eight percent said Costco would
suffer financially from its decision.
Now, according to AdAge.com, Deutsche
Bank analyst Bill Schmitz has reported that CVS/Caremark
will pull the popular Energizer brand of batteries from its stores
in early 2010. The chain intends to go with its own line of batteries along
with Duracell. CVS said its private label line was the category leader in its
stores.
“We found we can better serve our customers with a simplified assortment,” CVS
said in an e-mail statement to AdAge.
The publication said CVS’s action
is part of an overall strategy that is focused on extracting more profits from
the sale of branded goods. The chain is said to be engaging in bill-backs much
as apparel merchants do.
“CVS recently began sending manufacturers ‘bills’
representing the difference between the profit they made on their brands this
year and what they expect to make,” according to unnamed supplier executives
who spoke to AdAge.
Discussion Questions: Is the type
of adversarial relationship seen between retailers and merchants in Europe
going to be replayed in the U.S.? What recourse do consumer goods manufacturers
have in an environment where retailers are focused on reducing SKUs and increasing
margins?
Join the Discussion!
16 Comments on "Retailers Keep Pressure on Brands"
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There is a difference from what is good for consumer goods manufacturers and what is good for my brand. This difference will likely drive brands’ actions going forward in this environment.
SKU rationalization/inventory optimization are now key tactics for retailers. The natural result is less variety but if done right, the impact on sales is minimal. The result on gross margin may be significant depending on what the brands being evaluated do.
For each brand, the object is not to improve the well being of consumer goods manufacturers to improve their respective position. This means working with retailers to become the brand of choice. How? That depends on the retailers’ needs. The end result may be the retailers’ PL and one brand. The trick is to make sure it’s yours.
Go retailers go! Show those manufacturers who’s the boss here! After decades of being bullied by manufacturers, it’s great that the tables have turned. But while vengeance is sweet, it’s important for retailers not to use this power foolishly. Make sure that decisions to drop manufacturers are guided purely by data-driven insights–not personal vendettas. Retailers who make these decisions wisely will create forms of channel power that they can leverage for many years to come. The manufacturers get what they deserve for their own failures to use data properly (and their years of arrogance).
Brands have done it to themselves, allowing their image to be spread around for any price. When the price of a toy is $10 at Wal-Mart, when it should retail at $20, the retailer in bed with the mass merchant has established their value to the consumer as $10–where does that lead? Sinking profits, commoditization of items (like branded batteries), independents dropping those lines and ultimately a dumbing down of choices for everyone. But a swell load of cheap products that can be seen as “a deal.”
There is little doubt that retail consolidation over the past decade has put greater pressure on brands to cooperate with (or in some cases, bow to) their key accounts. At the same time, national brands own a smaller share of a shrinking pie as large retailers put their focus on private or exclusive labels. So the power in the equation has definitely shifted toward the retailer. The Costco-Coke dustup takes it to a new level, however. At what point does the power struggle between the brand and its retail “partner” start to affect the consumer adversely?
Retailers have had the upper hand for quite some time now, IMHO, with “fees” for everything from slotting to sneezing. True, some are trying to get away from that somewhat, but it’s the manufacturer who is hat-in-hand today, not the retailer. Can anybody seriously imagine a retailer begging a manufacturer to let it carry a brand?
At many retailers, SKU rat is going way too far, without regard to the ultimate consumer. It’s commoditizing everything, and, ultimately, the retailer with the most efficiency and the lowest price on brands is going to “win.” The winner in this battle, obviously, will be Walmart. Once more people realize this, they’ll get serious about differentiating in other ways, and those other ways will include greater variety and carrying more brands. But I think the lemmings will continue their march to the sea for another year or two.
For decades manufacturers forced retailers to “eat” their infinitely-expanding lines and SKUs of well-packaged goodies. Retailers went along with the ride, sometimes reluctantly, and got “fat” and “fatter” as their stores continually enlarged. That eventually created niches for the likes of smaller innovative retailers, lean of national brands, such as Trader Joe’s and Aldi.
Eventually, financial doctors, spurred on by stockholders, starting prescribing that retailers begin to “diet” and cut down on the insatiable adornments of colorable and appealing SKUs being offered to them and become more spartan with fewer goodies of their own imagination to offer to their stores’ guests.
Retailers began taking that advice, enrolling in marketing and design schooling, and now think that there is fiscal beauty in being lean among its own creations. While the jury is out, the parade appears to have begun.
There were expected results in Europe when Ahold took Unilever products off their shelves–resolution was found, and UL products returned to their shelves fairly quickly. At the end of the day, shoppers decide. Removing an iconic brand is risky business, and lessons will be learned along the way.
Private label is hot and it’s the ace up the retailer’s sleeve. Vendors seem to have forgotten what retailing is all about and the assumption that your product has reserved space on the shelf is now just that, an assumption.
I don’t condone an adversarial relationship with vendors. Retailers cannot survive without products to sell but I do think vendors, especially brand names, can do a better job of supporting their merchants. Private label branding is becoming the name brand in certain chains and I’m seeing more instances of category exclusivity in the grocery world. This is where embracing a policy of ‘change or die’ would work well for vendors.
No question that it is a “consumer-centric” world, and that the retailer is best positioned to serve that master. However, the manufacturer will not be cut out of the equation. The consumer continues to like to go to the bazaar (either via bricks or clicks). When they “travel to,” arrive, and explore that shopping experience, they want choices. One size fits all, in terms of products and services, simply does not hold up.
To paraphrase Rodgers & Hammerstein’s OKLAHOMA, “The retailers and the manufacturers must be friends.”
Both end up the winners, as they are serving the true master–the consumer.
SKU rationalization of this sort is just another form of retailers rationalizing the overall supply chain. Stated differently, the intention is to squeeze profits out of the supply chain so that those savings can be passed on in the form of lower prices for customers, and greater share and volume for retailers. It’s the recognition that in many categories (such as batteries) the differences between brands in the customer’s eyes is insignificant. In the world of mass-market retailing, everything’s a commodity now, and the race to the bottom continues unabated.