Who Has the Power?

Discussion
Apr 21, 2005
George Anderson

By George Anderson

In an opinion piece in Grocery Headquarters, Gary Giblen, senior vice president and director of research at CL King & Associates, writes that the combination of consolidation
on the manufacturer front along with the growing strength of alternate shopping channels has weakened supermarkets bargaining position with suppliers.

According to Mr. Giblen, “The history–and profitability–of supermarketing is driven by the balance of power between retailers and consumer packaged goods manufacturers.”

There are a number of measures, writes Mr. Giblen, that demonstrate supermarkets are losing their edge in trade negotiations. One is the percentage of CPG marketing budgets that
go to trade spending versus direct to consumer (DTC) vehicles such as advertising and couponing. Mr. Giblin cites a recent presentation made by Valassis showing increased couponing
activity by manufacturers.

Another measure is the attractiveness of supermarkets as an investment. Aside from recent Yucaipa purchases (Pathmark and Wild Oats), there has been scant activity in grocery
channel acquisitions. Even when businesses become available for purchase, officially or otherwise, other chains haven’t been rushing in to make offers.

To swing the balance of power back to grocers, Mr. Giblen says, growth is in order. Whether through acquisition or by staking out a sustainable point-of-difference to grow organically,
supermarkets need to gain a bigger share of consumer expenditures if they want to more forcefully influence manufacturers. Or, as Mr. Giblen writes with tongue firmly planted
in cheek, “to more harmoniously work with those angelic brand partners.”

Moderator’s Comment: What is the current balance of power between “traditional” grocery retailers and their CPG trading partners? Do you agree with the
statement: “The history–and profitability–of supermarketing is driven by the balance of power between retailers and consumer packaged goods manufacturers.”

George Anderson – Moderator

Please practice The RetailWire Golden Rule when submitting your comments.

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9 Comments on "Who Has the Power?"


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Ben Ball
Guest
15 years 10 months ago
The power is where it has always been — with the people! Or said another way, with the consumer. The prize is always “share of consumer franchise.” That’s the source of economic value added. So what we really have is a battle between “brand franchise” and “outlet franchise.” Simply put, the question is whether a given consumer “buys Bounty paper towels” or “shops for paper towels at Safeway.” And the answer is decided consumer by consumer, brand by brand and outlet by outlet. On a more macro level, many of us have been waiting for the economic returns of US grocery retailers and manufacturers to move to the more balanced levels we have historically seen in the UK, Canada and Australia. Their very strong outlet franchises, coupled with the fact that these retailers have long understood that they can also own the “brand franchise” portion of value if they market strong own label brands, has led to a more equal profit picture between retailer and manufacturer. But a funny thing happened on the way to… Read more »
Michael L. Howatt
Guest
Michael L. Howatt
15 years 10 months ago

Another thing Supermarket management must remember is that the Manufacturers still have all the money. They have resources for research and development, marketing and advertising that the supermarkets can only dream of as they still operate on a low profit margin.

My advice for the ones who want to succeed is to “play nice” and be smarter by using the manufacturer as THEIR resource.

Ed Dennis
Guest
Ed Dennis
15 years 10 months ago
I think one of the major problems the “traditional” grocery industry has failed to recognize is the power issue. For years, the retail buyer/merchandiser has wielded a great deal of power. In most cases, the power they had over product marketing far exceeded the background and training they needed to manage this power properly. Manufacturers live and die on the quality of their products and spend a great deal of money developing these products, developing promotions, merchandising and advertising designed to get their message to the consumer. The traditional grocery buyer, in many cases, evaluated most supplier programs as revenue sources rather than utilizing them to communicate and provide value to their customers. Grocery management used supplier promotions to provide short term income rather than long term benefits. If you think this is all BS, I only ask you to compare Publix to 90% of the other major grocery chains. Publix thrives because they truly value their suppliers and reward those suppliers based on their service to Publix shoppers. The grocery industry is going to… Read more »
Stephan Kouzomis
Guest
Stephan Kouzomis
15 years 10 months ago

Supermarkets are realizing the value of differentiating their businesses, and marketing a Brand that helps build shopper loyalty.

Yes, the center of the store is still a CPG supplied and supported business. But they are under the gun to deliver their numbers and supermarkets are the major source… even though alternative venues are surfacing and gaining strength.

Supermarkets demanding marketing and consumer information support can have the upper hand with CPGs, for we do know supermarkets are placing greater value on the perishable side, and are beginning to source on their on.

Let’s not forget, supermarkets are strengthening their businesses with their own upscale signature brands which affects CPG companies.
Partnering and sharing ideas and information can bring
benefit to both sides…. leading to growth and long term results! Hmmmmmmmm

David Livingston
Guest
15 years 10 months ago

Conventional supermarkets have been divided into two groups – winners and losers. Wal-Mart has helped us to be able to easily identify who belongs to which group. The privately held, well run regional chains like Wegmans, HEB, Publix, Hy-Vee, Ukrops, WinCo, etc still swing a big bat with manufacturers. These well run grocers continue to grow and expand.

The Winn-Dixies of this world, along with the Winn-Dixie wannabees like Safeway, A&P, Ahold, and Albertsons, will continue to lose their power. Since these companies make more headlines because they are publicly held and get impacted by Wal-Mart more severely, we tend to let their shortcomings appear to be the industry norm. To me, the overall balance of power issue is only an issue with poorly run companies.

David Mallon
Guest
David Mallon
15 years 10 months ago
Currently there is a stalemate. By “bargaining position” I assume you mean ability of the retailer to extract more trade funds from the supplier. For years, trade spending kept increasing, but now all the manufacturers are allocating money for each account from a fixed trade funds budget. The growth in trade spending has flattened. Slotting, deductions and other new fees are simply being taken from the fixed pool of money. The one point of leverage that remains is refusal of price increases. I do think that manufacturers are becoming more sympathetic to food chains because of Wal-Mart’s recent propensity to mandate costly programs such as UCCnet and RFID. Suppliers with solid measures of account profitability know that Wal-Mart has been in their top three customers for profitability. As long as that was the case, people were less concerned about their size. Now, I believe most manufacturers have become concerned by Wal-Mart’s behavior. The solution for food retailers is to become more adept at selling their promotional programs. They need to make fact-based arguments for why… Read more »
Len Lewis
Guest
Len Lewis
15 years 10 months ago

I tend to agree with Mr. Giblen. However this can easily be turned around to say that the profitability and history of CPG companies is driven by the same balance of power.

The interesting thing about power is that it is constantly in motion and the balance of power can always shift. As such, having the upper hand may only be temporary. For a while, Wal-Mart had the upper hand with suppliers. Let’s face it, it still does. But companies like P&G are changing this scenario. No one wants to come out and say it, but what we’re facing is a constant battle between the two sides. This is why the term “industry cooperation” is something of an oxymoron.

Kevin Sterneckert
Guest
15 years 10 months ago
In my opinion, the question of who has the upper hand in a relationship between retailers and manufacturers is really the wrong thing to be looking at. As long as these two entities are trying to assert power over one another, they will continue to miss the real opportunities that exist. The most successful retailers work diligently to develop partnerships. This is not about who has the power, this is a question about how can both move more product with the highest possible profit (again for both companies). The questions should be….how can we reduce costs of doing business together and maximize our opportunities with the customers? Most of the supply chain costs are known, the manufacturer has a good idea of what the retailer needs to be profitable, and the retailers understand the right prices to charge for these goods. Through partnerships that I have seen work the best, the questions posed are not about who has the upper hand, but how can they work together in the best interest of the consumer. While… Read more »
victor martino
Guest
victor martino
15 years 10 months ago
Turning the author’s argument on its head a bit might be instructive. Traditional supermarket operators still focus too much on the “buy side” (trade buying, etc.) rather than on the “sell side” (marketing to the consumer). Thus, today we find Safeway, Albertsons, Winn-Dixie and others in the dire situation the author describes. I agree completely with his premise–but suggest another way to get the desires results. Rather than trying to “cure” this so called trade imbalance, these retailers need to take a lesson from the retailers that are doing very well by focusing on the consumer/shopper. Just two examples: Whole Foods Markets and Target Stores. What these retailers have in common—and what Safeway/Albertsons/Winn-Dix are lacking in—is a focus on the consumer/shopper (the “sell-side”). Each of these retailers has adapted the science and art of brand marketing to the retail arena. Positioning, focus, differentiation are hallmarks of Whole Foods’ and Target’s success. Once the retailers the author describes puts more focus on the consumer/shopper they will find that they will have far more leverage on the… Read more »
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