What Happens When There Are Fewer Big Retailers?
By Al McClain A recently released A.T. Kearney/GMA study of CPG execs found that finding growth is their #1 issue, and that consolidation and the power of retailers tied for third. In the study, half of the execs who found retailer consolidation to be the top issue also considered it to be a possible source for competitive advantage, as they can collaborate with their large customers.
Retailer consolidation is nothing new; it’s been happening for years. What is new, for me at least, is hearing from consumer packaged goods (CPG) manufacturers that “38 percent of our business is with Wal-Mart” or “over 80 percent of our business is with our top ten customers.”
Progressive Grocer, cited in the study, said that in 1995 the top five U.S. supermarkets/supercenters represented 26 percent of total sales for supermarket-type items. By 2004, they represented 48 percent. According to the A.T. Kearney/GMA study, of those execs who ranked retailer consolidation as their top priority, 50 percent were dealing with it by exploring collaboration opportunities with retailers; 21 percent were staying flexible to adapt to a changing environment; 21 percent were improving innovation and product development; 14 percent were reducing cost base and increasing efficiencies; and 14 percent were exploring acquisitions and consolidation.
A number of issues are raised as big retailers become bigger. Here are a few to think about:
- As the largest retailers become more and more powerful, are some suppliers beginning to lose control of their brands as a result of deals calling for exclusive SKUs provided to retailers, exclusive promotions, and the like?
- Are some suppliers increasingly ignoring independents and regional chains, and is that dampening future success for these suppliers and smaller retailers?
- Will new retail channels emerge to fill niches left behind by the “big guys”?
- Will new suppliers emerge to supply smaller retailers not served well by some of their current suppliers?
- Five years from now, who’ll be in charge – retailers or suppliers?
Moderator’s comment: What’s your take on the ultimate end-game of retailer consolidation?
There are no easy answers to these questions. Suppliers are naturally going to work most closely with retailers who can deliver the most sales and profits.
The catch is that what’s smart for the next quarter and what’s smart for a five-year plan may be two very different things. Middle managers with 20 or 30 years left
in their careers may have a whole different perspective than senior managers closer to retirement age. –
Al McClain – Moderator
Want a bird’s eye view of the future? See this link… It outlines some of the retailer concentration controversy in Australia, where 3 grocery chains have a combined market share in excess of 80%. There’s no doubt that American retailing will continue its increased concentration and supplier concentration will also continue.
Retail consolidation will continue from 80% in the top 10 to 75% in the top 7 over the next five years. CPG companies have taken the easy route of just working with their largest customers to achieve short term sales quotas. This in turn has diluted and killed many viable brands. More than one CPG company has gone out of business due to their reliance on a key customer. The combination of Gross Margin compression and items/brands being discontinued makes this a risky strategy. CPG companies should match their products to the retailer target consumers. This means more than just taking orders from retailers below the top 10.
I would not want to be a commodity supplier to any segment of retail. Becoming and sustaining a low cost supplier position in a world with increasing costs to serve is not a proposition I’d invest in, if I had a choice. The antidote for this has been to create differentiation through perceived lifestyle identification (branding). Unfortunately, society is changing, and the ability to establish and sustain a brand identify which motivates shopping behavior is harder and harder to demonstrate.
The consequence is that suppliers with undifferentiated products are going to be less and less profitable, particularly with the growth of private label in those segments. Even when differentiated, the consolidation of retail market share does reduce overall margin. My clients are rediscovering the secondary and tertiary channels and account types which, if managed properly, can contribute significantly to both growth and profitability.
The reality is that growing your WM business at 1% takes less effort and resources than growing your independent specialty business by 50% (equivalent numbers). However, once margin is taken into consideration, the ratio drops to about 1% versus 25%. And the ROI on that is much different. And easier to control.
Alternative channels of distribution exist for almost all products. Finding them and maximizing them requires different skills, methods, tools and approaches than building your TG and WM business. The initial leverage is not there. Yet if you put pencil to paper and make it a 5 year horizon, spending the money to build outside the gorillas is a very viable proposition.
Retailers and brand manufacturers have long been in the same business. Once a retailer begins acquiring major brand manufacturers, the world will change.
I think focusing on retail consolidation needs to be considered within the larger issue of “share of stomach.” Food retailing share of stomach continues to free fall and discussions like this about consolidation suggest that these bigger retailers will have the best stateroom on the ship. However, a focus on this to the exclusion of the customer is like having the best stateroom on the Titanic.
Instead of focusing on consolidation, I suggest that these big, plain vanilla retailers give some thought as to how they can get out of the sagging middle of the market. When anyone discusses food retailing successes today, beyond the Wal-Mart phenomenon, the retailers most cited include Wegmans, Whole Foods, Trader Joe’s, Costco, Aldi, and the like.
Yes, size matters but no more so than differential advantage.
Many interesting dynamics going on here. A few observations:
Large retailers are expecting more and more of their suppliers, and, to a large extent, suppliers are responsible for many of the product management functions previously tended to by the buyers, planners and store personnel within the retail organization, including internal and competitive analysis, forecasting, product selection, planogram design, in-store signage, product training and store maintenance.
Within a supplier, entire company divisions are often created to service one retailer.
As these retailers grow, fewer suppliers are qualified to provide the wide range of services and the product volume required. In some cases, retailers are also looking to consolidate their vendor base for the sake of simplicity.
On the flip side, I have seen retailers go out of their way to continue buying from a sub-optimal source (and help that source improve) out of loyalty and the knowledge that the supplier would go under if the business were taken away.
Suppliers fighting to stay in the game with the large retailers definitely lose focus with respect to smaller stores.
Certainly there are endless opportunities for small retailers and suppliers to differentiate themselves from the large players, by targeting regional, niche, demographic and upscale preferences.
In the 70s and 80s no food retailer had as much as 5% market share and independent grocers did as much aggregate volume as food chains. With those grocery distribution fractions, grocery manufacturers were the driving force in the marketing business and they made the most of it by guiding the flow of things and thereby gaining the lion’s share of product profits.
Then, as the 2nd and 3rd generations of independents grocer families began selling out and conventional food chains became tied-up by old practices, the big chains got larger and two new gorillas emerged – Wal-Mart and Costco. Now, 25 years later the pendulum had swung in the other direction and has empowered a few retailers to control 50%+ of the total marketplace. This has opened up opportunities for new-style niche retailers to emerge such as Whole Foods and Trade Joe’s. But Wal-Mart, Costco and Kroger still continue to grow.
Today, grocery manufacturers must channel the majority of their products through a few controlling retailers as well as the smaller niche retailers. That gives increasing power to the few huge retailers…and power is the ultimate aphrodisiac. Thus, will we not see new marketing paradigms stimulated that could modify how the grocery profit pie is divvied up? Or will the GMA team be able to develop an anti-aphrodisiac?
In the short-run the consolidation will take out all of the line-extension opportunities which on one hand can be viewed as good as it creates duplication, on the other hand line-extensions help keep consumers in categories and creates growth. In the long-run, the consolidation will only increase the internet as a consumer destination location. The internet knows no boundaries when it comes to SKU proliferation. In time, manufacturers will be forced to begin selling through their own websites as a way to get around the inability to have full distribution at retail.
I see the trend like the life of a star. Eventually, all the scattered material condenses into a small dense matter in the center, containing the same mass it previously did in a larger form. Eventually, the star is going to explode. That’s not to say that the big retailers are going to go under, but I think once the consolidation has reached a final point, you’ll see the opening for smaller, niche stores. We’ll see more of the Stew Leonard’s type stores giving consumers a unique experience, and probably unique brands or products that motivates shoppers to shop there instead of the one-size-fits-all big retailers left over. With success, these niche retailers should eventually grow, start acquiring each other and the cycle of life continues. Or, we could just end up pledging allegiance to the United States of Wal-Merica.
When everything else is the same, having something different stands out. Think how successful the Target store near Bentonville is.
Retail consolidation makes product differentiation more important. To achieve this, the retailers are seeking “exclusive” brands and dramatically increasing their direct foreign sourcing, primarily for private label programs. At the same time, the very large retailers are pushing more costs and supply chain management responsibilities onto their suppliers. The majority of the off-shore suppliers are small to mid-sized manufacturers. As retail consolidation continues, there will be fewer and fewer suppliers capable of meeting the rigorous demands and capacity requirements of the mega-retailers. As the mega-retailers are forced to seek the largest manufacturers, it will create an opportunity for tremendous growth in small to mid-sized retailers sourcing directly from small to mid-sized foreign manufacturers.
Having been on both the supply side and the buy side, I’ve found the discussion interesting. As a supplier, I’ve seen my customer base shrink from 12,000 to 4,000 with the growth of certain big box retailers. On the buy side, I’ve seen my supplier base shrink as suppliers opted to leave the market when they could not support the big box retailers.
However, on the buy side, I constantly need innovative products to differentiate my business. As niche marketing and customer segmentation marketing grows, and cycle times shorten, there is an opportunity (as always exists in consolidating markets). Suppliers need to learn how to be more nimble, flex to what their customers want, and avoid becoming married to one or two major players. Small suppliers have ample opportunity to wedge themselves into the game with specialty, innovative, differentiated product offerings.
This is a great time to build both new supplier and retailer businesses – if you are willing to be innovative and take risks.
Certainly consolidation of retail players is a major issue and will continue. However, the top players are going to be global players. While purchasing large amounts of products, they are not going to be purchasing identical products. Global consumers are not identical and the consumers wield the power – they are becoming more demanding and are able to get what they demand. As a result, just because one retailer is selling products around the world and constitutes 40 or 50 or 80% of a manufacturer’s sales, does not mean that all items are commodity items.
To grow, the retailers have to meet local consumer demands — they are not all the same worldwide and they constantly change. Suppliers and retailers have to work together to meet local demand. If either suppliers or retailers dictate to the other and the consumer loses, then the suppliers and retailers will also lose.
In this world of consolidation a bifurcated market exists – large, global players trying to create “global” products and only modifying when necessary and small players catering to the local market demand. These small players may not be a large percent of the manufacturer’s sales, but they may be a good percent of a local market. Those manufacturers that are creating niche products, have an efficient production schedule and partner with retailers to create niche products can be very profitable. This competition will continue to force the large global players to innovate because they can’t afford to lose local markets all around the world.
The nature of the competition may change. To stay competitive both manufacturers and suppliers need to stay abreast of changes in all their local markets.
Newsline: 06/15/2006
Wal-Mart today announced its acquisition of “Al’s General Store” of Middleville, Missouri. Al’s was well known as the last independent retailer in the United States. WM officials immediately announced they plan to close the location; former Al’s shoppers will be served from WM’s new 3 million Sq. Ft. SuperMegaStore in nearby (120 miles) Stalkwell, Nebraska. “This will allow us to leverage our strengths and maximize our cost downsizing synergies,” these same officials remarked.
For years many manufacturers have bowed at the feet of Wal-Mart and other big retailers. These same companies have ignored or done little to sell to and serve the needs of smaller chains and independent retailers. Every retail company in America started with one store! There are today, and always will be great opportunities with smaller chains and independent retailers. Savvy CPG manufacturers are taking advantage of those opportunities while others complain about being too dependant on Wal-Mart and the other big chains.
A relevant analogy I’ve provided in these spaces previously is the evolution of the manufacturer/broker relationship (yes, I know they no longer like the term, “broker”).
As manufacturers consolidated (they did it first!), they tried to shift the various brands they inherited during M&A to regional brokerage firms they already employed. Often as not, they found that these brokers had category conflicts. Thus, brokerage firms also began to consolidate (they did it second!) so they could exclusively represent consolidated manufacturers. When this dance ended, large national brokers were representing large national brands. Inevitably, some of the brands grew displeased with their brokers and issued the time-tested threat, “we’re going to fire you!” The problem was, the brands couldn’t find an alternative broker to hire because all of the other consolidated brokers now represented competing brands. Catch 22.
Lessons learned? Apparently none.
What happens when there are fewer and bigger players? Especially when the number issue for Manufacturers is growth?
The interesting fact is that many of these operators are not the ones with which manufacturers can grow, because they’re not growing themselves. Today, of the top 20 most productive retailers in America by market, eight are regional and/or independents. Not only are independents filling a market niche, they are the ones promoting the national brands. Private label participation in major US chains is around 26%. Some major retailers are ignoring national brands, while for example IGA retailers, one of the oldest private labels available, have a participation rate of around 10%. The strategic implication for manufacturers is evident – help independent retailers ring up greater sales. A quote from GMA Forum, September ’05 issue, reflects the current mindset.
“The largest retailers are not necessarily those that will win – they are simply those with which manufacturers have figured out how to work. ‘We’re on line with them. We have teams, we have collaboration, we have top-to-top meetings, we understand them, we’re really getting these people.’”
The independent channel and regional chains have a different structure, mindset and culture. I have been in the alternative channel for more than 20 years, as a son of an independent operator, working in wholesaling and manufacturing in the US and abroad. My experience is that the alignment between corporate cultures is easier to achieve with the chains because it resembles their own.
The GMA quote above indirectly illustrates the issue that they figured this out. The culture of the volume, of large, should be rethought by some manufacturers. There is only so much the fewer and bigger companies will “collaborate” on no matter what a manufacturer does. Perhaps the question should be, what kind of collaboration should be established with retailers that are helping our brands by having better participation instead of thinking only about volume.
Let’s experiment by shifting the measuring focus to the national brands’ participation in stores. Another question that may be put forward is what selling strategy and structure manufacturers should adopt when the channel they expect to grow doesn’t mimic their corporate structure and culture.
The article listed many of the issues that arise when there are fewer retailers. We all understand that fewer retailers means that those remaining have greater clout with manufacturers and suppliers. It is also understood that when a manufacturer or supplier has such a high percentage of their business with a single customer, the impact of losing that customer can be devastating. Thus consolidation of retailers will result in consolidation of suppliers. It also makes it more difficult for newer companies to get a foothold at retail.
The ultimate impact of fewer retailers means fewer choices for everyone, be it the supplier, manufacturer or the ultimate purchaser, the consumer.
However, like in everything else in life, there is a pendulum. Sometimes it swings in the manufacturers direction and sometimes in the retailers direction. it appears that for now it might be swinging towards retail. Rest assured, one day it will swing the other way.