The Downside of One Big Customer

Discussion
Jan 29, 2009

Commentary by George
Anderson

Going back to the early nineties,
we remember numerous discussions with consumer packaged goods executives
regarding the wisdom of sales strategies that concentrated on a handful
of big accounts while essentially walking away from smaller merchants.

We were told over and
over (we’re a slow learner, you know) that it made perfect sense because
costs were reduced by having to deliver to fewer points of distribution
and sales increased because more product was sold in one (name a big chain)
rather than in 30 independent outlets.

“But,” we asked, “what
happens when all those little guys go away and you only have (name a big
chain) to sell your products? Won’t they own you then?”

You’d be amazed at how
many top folks told us back then that by the time that happened they’d
be hitting tee shots somewhere near Hilton Head or off on some other retirement
adventure. The problem would be someone else’s.

The reason for bringing
this up now is not because we’re looking to make big chains out to be villains
or to excoriate CPG executives for short-term thinking based solely on
getting theirs. The spark was the news this week that Wal-Mart, the world’s
largest retailer, had ended its exclusive deal to have Cott Corp. supply
its private label soft drinks.

Cott, which happens to
be the largest supplier of store brand soft drinks on the planet, “is
unclear at this time” how it will be affected when its deal with Wal-Mart
ends in 2012. Revenues from the Wal-Mart account are in the “the high
30-percentage range,” according to Cott CEO Dave Gibbons.

According to a statement
from Cott, it and Wal-Mart “continue to discuss a redefinition
of their ongoing business relationship.”

Discussion Questions:
Can suppliers avoid over-reliance on a handful of
big accounts? Where is the balance of power in the relationships between
suppliers and retailers today? What does this mean for consumers?

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15 Comments on "The Downside of One Big Customer"


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Camille P. Schuster, Ph.D.
Guest
13 years 3 months ago

Four years is a long time in which their relationship can be renegotiated and/or their business plan can be changed. Certainly over reliance on one or a few large accounts is an issue. As a result, companies need to have contingency plans so they have options when something like this situation occurs.

Carol Spieckerman
Guest
Carol Spieckerman
13 years 3 months ago

As a matter of POLICY, Walmart does not want to represent more than 1/3 of any supplier’s business; however, the dirty little secret is that in many cases, declaration can disagree with reality (through no fault of Walmart’s). Every successful supplier out there is balancing a portfolio; of brands, products, price points and distribution points. Pure players and those having only one or two “positions” are going to be the most vulnerable.

The rub is that, in the incredible shrinking world of retail, diversification is more of a challenge than ever before. This is particularly true in consumables, where owned retail just isn’t an option (at least for now). The best option for some is to become a position in a larger entity’s portfolio. Put someone else in charge of the balancing act!

Randy Huffman
Guest
Randy Huffman
13 years 3 months ago
In Supplier/Retailer relationships you should have joint accountability. With the announcement of Walmart moving away from Cott as the exclusive supplier of private brand beverages, one must consider the underlying reasons. Was Cott taking advantage of the exclusive agreement and not remaining competitive? Is Walmart looking to diversify the supply base to minimize future risk? Is there a market trend that would dictate a change in direction for Walmart within the category? If you consider that Walmart grows to 30% of a supplier’s business, which is the threshold of where Walmart wants to be with any supplier, you must also consider Walmart or any retailer should not have more than 30% of a category with one supplier. To do so puts not only the supplier but retailer at risk. If a supplier were to experience an interruption in the supply chain that would put retailers at risk and conversely if a retailer faces business interruption or worst is forced to close or is part of an acquisition that puts the supplier at risk. Bottom line… Read more »
Craig Sundstrom
Guest
13 years 3 months ago

Better to have supplied and lost (the account), than never to have supplied at all ??? There’s the question.

Kai Clarke
Guest
13 years 3 months ago

Wal-Mart emphasizes that they do not want to be greater than 20-30% of a supplier’s business all of the time. This is nothing new from a policy perspective and Cott and others should always have alternative strategies whenever a single customer becomes so large. Diversity in product offerings, category offerings as well as customer partners is the key for any manufacturer, especially in today’s global economy. These lessons are not new, and we have the dot.com bomb, the housing bubble and the financial institution crises to remind us not to put all of our eggs in any one basket!

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
13 years 3 months ago
Unintended consequences. Food brokers used to be numerous, helpful, and profitable. Now there are only a few big food brokerage companies following an enormous unification some years ago that was forced by manufacturers. During this transition the unifying brokers had to abandon long-term brand clients because they conflicted with their new, inherited brands. Eventually, the big brokers became exclusively connected to certain major brand manufacturers and all of their products. The unintended consequence was that the manufacturers could no longer fire a broker because there was no other broker who did not represent a competitive product. Ha! Apparently manufacturers didn’t learn from that experience. Nor did they learn from the crystal-clear examples from the domestic auto industry, where some of their dedicated parts suppliers are now in the process of liquidating because demand for new models is in the dumper. For consumers who are trying to figure out peanut butter recalls, mercury in corn syrup, fake organic products, and other issues, caveat emptor. Be careful and delay any and all purchases until the last possible… Read more »
John Gaffney
Guest
John Gaffney
13 years 3 months ago

Cott played with fire, and guess what? Walmart has no moral commitments to any of its suppliers, and I’d actually love to know how much money Cott actually made from that account. My guess is that it was a pretty tight margin. In my experience, one big account is an opportunity to grow the foundation of a business to prepare for the inevitable contraction of that one big account. Supply-Retail relationships are all about leverage. You have it or you don’t, and if you don’t have it, you better get some.

Michael Boze
Guest
Michael Boze
13 years 3 months ago

The old marketing notion of channel captain. The strongest partner in the channel makes most of the rules. Big important vendors lead the way in some cases where as the dominant retailer sets the tone of the relationship in others.

Gene Detroyer
Guest
13 years 3 months ago
This leads to several thoughts: 1. Walmart represents only 30% of Cott’s business. Cott has managed their business very well. For any vendor, if Walmart is not 20% to 30% of your business, you aren’t doing the job with Walmart. 2. This is precisely why companies with brands have greater multiples in their enterprise value than companies without brands. The customer of the companies with brands is the consumer. The customer of the companies without brands is the retailer. I’d rather have my future with 300 million consumers than with 100 retailers. 3. I am surprised that Cott is an exclusive supplier. What happens to Walmart if Cott has a problem? That puts Walmart at significant risk. I suspect that the exclusivity part of the deal is the part that going to change. 4. My experience with Walmart is that they do not wish to represent an extraordinary portion of a vendors business, as opposed to most other national retailers who like the idea of having the vendor over a barrel. 5. With a nod… Read more »
Steve Montgomery
Guest
13 years 3 months ago
As a supplier/manufacturer, it is very tough to turn down the chance to do business with someone who can bring you revenue/profits especially if they can significantly increase both. The danger is not in having a large client, but in being overly reliant on them. While Walmart is one-third of Cott’s business they still have two thirds spread amongst other retailers. Perhaps not the best ratio, but far better than if they sold exclusively to Walmart. As noted by Mr. Seesel they have several years in which to adapt to their changed situation. The balance of power between retailers and suppliers has always depended on the players and the economic climate. I doubt anyone would deny that Walmart has more power than does someone with a single store or that P&G has more than a small manufacturer. This balance also shifts depending on the times. Today, more and more retailers are going out of business making those remaining more desirable as customers. The question for the consumers is how is the entity with the power… Read more »
Warren Thayer
Guest
13 years 3 months ago

It’s all going to depend on how much risk you’re comfortable with. Some folk are aggressive in the stock market, some do nothing but T-notes. You might want to set a cap of, say 25% or 33% as your max with a single customer and then try to stick to it. As always, easier said than done.

Ron Margulis
Guest
13 years 3 months ago

Some companies, like Tootsie Roll, which does almost one-quarter of its revenue through Walmart, would probably make up for the loss of the retailer’s business. Walmart represents about 15% of P&G’s business, but, again, they would make most of it up from other channels. Even Cott’s should be able to restructure and ward off terminal problems. The kind of supplier that will get into trouble is one where more than half of sales are from one or two clients, and the best thing to do in that case is develop new clients while taking very good care of those 800 pound gorillas.

Dan Gilmore
Guest
Dan Gilmore
13 years 3 months ago
I think the larger question is how big should the largest retail chains be allowed to get? As Walmart, Best Buy, Home Depot, etc., continue overtime to grow, they naturally will increase market share and force out smaller players. So, more and more (most?) consumer products companies will be in the situation faced by Cotts–what then? What happens when Walmart is 40% of everybody’s business? Until recently, no one really had the critical mass to achieve this sort of super status, or natural competitive forces seemed always to beat down the leaders eventually and give rise to new store formats and ideas. But info technology and perhaps reaching a level of critical mass that becomes unassailable now makes you wonder whether this turnover will really continue. I am a free market person in general, but at some point, the level of concentration in retail becomes a bad thing, doesn’t it? For consumers and certainly suppliers. This isn’t anti-Walmart or anyone else, but just an important question that needs to be answered at some point.
Dick Seesel
Guest
13 years 3 months ago

At least Cott has three years in which to develop a new strategy. If they maintain their position as a non-exclusive provider to Walmart and also gain a foothold with grocery retailers eager to build their store brands, they can withstand the change. On the other hand, if Walmart drops Cott entirely, it’s hard to recover a third of their sales by shoring up business with other discount or warehouse-club accounts.

There are far tougher examples of this situation, in which a vendor relies on a single account for half or two-thirds of its business. (The wholesaler graveyard is filled with companies that thought Sears was impregnable back in the 1970s and 1980s.) As the pool of healthy retailers gets smaller and smaller, it will continue to present big challenges to Cott and many other suppliers.

David Livingston
Guest
13 years 3 months ago

This is an issue many of us face in all aspects of business. With Walmart dominating the retail industry, Cott Beverage is just one of many of Walmart’s vendors that could be crushed by Walmart’s decision to dump them. Can this be avoided? Sure, just don’t do business with Walmart. But that might not be too smart. This is no different that a person who relies on their job with one company for their income. Criticizing Cott for their relationship with Walmart is like criticizing my neighbor for working for Harley Davidson who is now getting laid off. Businesses and individuals both need a plan B for when their primary source of income goes away. When you put all our eggs in one basket, its just a calculated risk we must sometimes take. With no risk there is no reward. Cott Beverage should have no regrets.

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