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?
This all goes back to the age-old question of “Who owns the customer?” The retailer feels that they own the customer, and if a particular brand does not exist in their store, the customer will purchase the brand that is on shelf. The brand owner feels that THEY own the customer, and if they do a great job of building brand loyalty, the customer will walk out of the store that does not carry their favorite brand, and instead find a store that better fits its needs.
The fact is, in today’s consumer-centric environment, both the retailer and the brand owner have it wrong. Neither owns the customer; the customer is their own person, and makes decisions neither on where product might be located physically, nor based on marketing messages to evoke loyalty. The consumer chooses to purchase product where they want it, when they want it, and for reasons that both marketers and retailers continue to try and understand.
So while the retailers battle the brand owners, and do silly things like invoice them for lost profits, the consumer will make decisions not on what product is carried in the store, or what brand shouts the loudest on television. The consumer refuses to be owned, and the retail community (CVS are you listening?) needs to make certain that before they make decisions solely on dollars and cents, that they dialogue with their customers and really ask THEM what THEY want.
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).
There have been a number of new trends lately that concern me about how some retailers are approaching suppliers, the economy, and product assortment. Here, I can only touch the very surface:
• Many suppliers feel that some retailers are abusing suppliers in order to survive the economy, themselves. One retail chain has gone as far as to “ask” small suppliers to fork up as much as an additional incremental 12% of sales in new funding even without any guarantee of promotional performance.
• The above is just one example of how niche brands, innovation, and specialty offerings are becoming too expensive and unprofitable for entrepreneurs and smaller suppliers to even attempt. This would seem to have an erosive effect on the economy, the retailer and above all, the consumer.
• SKU rationalization has mostly good intentions but most of the processes I have looked at have a tendency to judge the future only by the past. In my estimation, SKU rationalization also results in nearly every retail chain selling only the same assortment of products without differentiation. Again, the impact can be quite erosive. Let me count the ways?
• Overall, some retailers have approached the economy by coming down hostile on suppliers as though the suppliers have unlimited funds available and are somehow not equally as entangled up in the same economic situation as the retailer.
That said, retailer-supplier relationships are often cyclical and these periods of hostility are often followed by periods of partnership and cooperation. I predict that will happen soon again when retailers realize again that they will have the upper hand only for so long.
In a period of challenging sales, retailers are always looking for ways to lower costs and build margins. The argument goes–hey, why should we pay for XYZ vendor’s marketing, R&D, and profits? We can do this ourselves, right?
Wrong.
Eliminating branded goods and turning the assortment into a commodity essentially turns the retailer into a manufacturer. As manufacturers learned with their foray into outlet malls, this “says easy, does hard.” There are skill sets and motivations that branded manufacturers have that retailers do not.
More importantly, it diminishes the offering to the customer in the store. I have yet to see a private label product that is as attractively packaged or carries the same level of earned consumer confidence as a well-known branded product.
This is a classic example of not understanding the difference between markup and margin. Markup is what you put the product out with. You have to actually sell it to get margin. I, for one, will not buy a CVS battery. I’ll go somewhere else to find the Energizer.
Bad idea.
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.
When half of the items in a store with 40,000 SKUs contribute less than 10% of the sales (and many of those items don’t move a single package in an entire month) there is obviously room for massive improvement. But then these facts have been known for years, by both brands and retailers, and yet nobody gave a care for the impact on shoppers. This is because the dominant relationship at retail is between retailers and brand suppliers. And their knowledge of each other vastly dwarfs their knowledge of shoppers.
Self-service literally means, “sell yourself,” mister or missus shopper. The corollary of this is that neither retailers nor brands are especially knowledgeable about SELLING. Glen Terbeek illustrated this well in his book (The Agentry Agenda) with a picture of the retailer and brand doing big business between themselves, while the confused shopper is left out. This situation is well described as PASSIVE retailing.
The real solution of this relatively appalling situation (billions of dollars of potential profit are being ignored,) is for either or both retailers and brands to learn the sales skills that their businesses lost 100 years ago. If shoppers weren’t buying a lot, nothing would be happening in the stores, because nobody is really SELLING anything there.
What is needed is a totally new selling mind-set.
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.
Historically, power cycles back and forth between suppliers and retailers, and for very predictable reasons. On one level, much of the power derives from brand strength. Consumer products companies have for at least two decades focused on establishing aspirational brand values, and non-tangible brand benefit delivery. Advertising became less and less about product features and benefits and more and more about consumer perceptions of themselves related to the brand’s lifestyle positioning.
In the height of this period, brands were dominant, and indeed, as an ex-retailer I DO recall when I had to beg to be allowed to buy brands…and was given brand derivatives instead! The commodity level of each product category was happily abandoned to either private label or value-brands…..after all, who wanted to fight it out for very thin margins? Wasn’t it better to be in the better/best grouping, demanding and obtaining premium pricing?
But budgets and spending are not infinite, and with enormous amounts spent on marketing — plus with rising shareholder value appreciation expectations — where was the cutback made? Product development. Not true of every industry, but the numbers are there to prove the point.
The social climate has changed. Aspirational marketing is not only inappropriate in a 10% unemployment world, it is seen at some level as the ultimate culprit (because consumers are never at fault for their own behavior). See recently published research on this subject for validation. Instead, consumers are value conscious.
Another factor combines with the above to create the current situation. A lack of clearly understood product advantages. Do Energizer batteries actually outlast the CVS ones? Maybe, but by how much? If the price difference is 30%, do the Energizer batteries last more than 30% longer? No one knows! And this is only one example. Product attributes have been lost in the marketing mix.
So if aspirational marketing is no longer a valid communication approach, and product attribute differentiation is poorly understood or completely opaque, why is it inappropriate for the retailer to exercise power? Branded manufacturers have become branded marketers. And if marketing isn’t driving consumer behavior, what value is there in carrying the product?
One last point. Over the past decade, entire product categories have been developed, expanded, and become mature. Lacking technological advances and clearly understood and real product differentiation, it is completely normal for these categories to become commodities. In fact, from a product perspective, these categories were commodities many years ago. It was only the marketing process of lifestyle association which kept the classic economic curve from being experienced.
If brands want to regain power, they have to regain relevance. And for some, that will prove to be a painful process. Instead of leveraging vast and powerful marketing functions, they will need to leverage an atrophied and devalued product development function. In the meantime, if the brand delivers no relevant value, the retailer will eliminate it in favor of a higher margin alternative.
No bad guys. Just completely predictable market behavior, and a tragic loss of focus.
Brand rationalisation is a different gig from SKU rationalisation.
In an environment like Australia (which has smaller grocery store footprints than the US, on average) still the average store ranges 33,000 SKUs and numerous studies indicate shoppers are bamboozled by sku choice.
So rationalising SKUs, in a strategic way using segment and product de-duplication (not just hurdle rates) is not necessarily a bad thing.
Deleting whole BRANDS however, particularly in order to make way for private label (most categories are becoming Brand 1, Brand 2 plus PL and brands 3 and 4 are often being deleted) is having the following effects:
1. Independent and smaller grocery chains are stocking the smaller brands and becoming known for it, resulting in some shopper destination trips (with resulting top up and impulse purchases) for specific items they can’t find in the ‘big boys’… so the big retailers are losing some top up trips to indies.
2. Manufacturers, particularly those whose brands are/have been deleted, are looking for alternative profit channels (route, foodservice and offshore) to plug the gaps.
Part of the problem is that both manufacturers and retailers do not apply strategic SKU rationalisation, so it becomes all-or-nothing, and manufacturers could get better at presenting the case for their brands.
I agree with TNS Sorensen, upskilling and a new selling mindset is required here.