The Perils of Reverse Auctions

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May 17, 2002
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Retailers have embraced Reverse Internet Auctions and “on-premise shootouts” with respect to their store brands, where the sole consideration in negotiating supply contracts is price. All of the other necessary parts of building and securing one’s brand equity such as quality control, consistency, service levels and marketing support are completely ignored, according to Chris Hoyt in an article found on Reveries.com.

Mr. Hoyt describes auctions where “retailers post their private label product specifications on the Internet and set a time limit for the bidding. Potential suppliers, including their current supplier, are asked to participate. The retailer starts the bidding about 10 percent below what it is currently paying for the product and then sits back to watch suppliers successively drop their prices in a frantic, time-compressed effort to win the business. The lowest bidder gets to manufacture the retailer’s private label products. It is via this method that Kroger reportedly purchased $500 million of products and services last year, saving about six percent.

“In ‘on-premise shootouts,’ suppliers are called in to the retailer’s offices and put in little rooms, similar to the criminal investigations where suspects are put in separate interrogation rooms and relentlessly bullied into confessions. Shoot-out rooms differ primarily in that it is the buyer who shuttles back and forth, asking each potential supplier to go lower to beat their competitors’ bids, or what they buyer says are their competitors’ bids.”

Mr. Hoyt reveals the irony that every recent survey puts “grow store brands” at the top of retailers’ priority lists. “Their store brands are their names and reputations. Their store brands cross hundreds of categories in the average store. For the past ten years, retailers have focused on improving the quality of their store brands to make them reflect the image they want their names to convey. Some even recognize that store brands hold the greatest potential for consumer differentiation, improved profitability and, quite possibly, long-term survival,” he says.

Moderator Comment: How should retailers approach the
reverse auction process?

Recently, we’ve heard increased grumbling from private
label suppliers involved in reverse auctions. As we were told recently by one
supplier, “If I can’t make any money, I’ll go out of business. If I sell at
the price they want, they’ll be selling inferior product that consumers won’t
want to purchase. We’ll both be out of business.” [George
Anderson – Moderator
]

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