Rebuilding the Relationship Between Manufacturers and Retailers

In the perennial tug of war between manufacturers and retailers, retailers seem to be winning. But manufacturers can benefit by understanding what type of business model a retailer emphasizes — and tailoring their approaches accordingly.

Wal-Mart’s business model seeks to drive down costs and maximize margin per unit sold.

Image courtesy of Wal-Mart.

In the perennial tug of war between manufacturers and retailers, retailers seem to be winning. Just a few years ago, manufacturers had hopes of being able to manage consumer relationships and product delivery directly. But today’s retail industry is more concentrated than ever; in many industries and markets, a handful of retailers account for the majority of sales. Retailers, whether they operate traditionally or electronically, have become increasingly astute at capturing consumer loyalty with effective merchandising, innovative private-label offerings and targeted pricing and rewards programs. Their ability to control market access and influence consumer buying behavior means not only that manufacturers need retailers more than ever but also that manufacturers’ need to understand what makes retailers tick is more pressing than ever.

As retailer influence has grown, power has moved downstream in a wide range of industries, including hardware, books and consumer electronics. A prime example is the grocery industry, where global manufacturers have seen their brand clout erode in favor of consumer relationships cultivated by retailers. Manufacturers across industries rightly ascribe retailers’ power to their increasing size and concentration. For example, in 2007, Wal-Mart’s sales were approximately 4.5 times greater than those of its largest supplier, Procter & Gamble.1 Consolidation and retailers’ global scale have reduced the number of “buying points” that manufacturers can develop.2 By 2010, the 10 largest grocery retailers represented nearly 70% of U.S. sales, up from less than 30% 10 years earlier. The trade is even more concentrated within regional markets in the United States, as well as in most developed countries.3 Retailer scale has other consequences, too: It makes private-label programs viable, and it justifies the costs and effort of setting up loyalty and data-mining programs.

The Leading Question

How can manufacturers learn to work more effectively with retailers?

Findings
  • Recognize that there are different types of retailers.
  • Learn what makes specific retailers tick and tailor offerings to their particular business models.
  • Work with retailers to develop exclusive products that will contribute to their profitability and success.

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References

1. Wal-Mart, “2007 Annual Report” (Bentonville, Arkansas: Wal-Mart, 2007); and Procter & Gamble, “Designed to Grow: 2007 Annual Report” (Cincinnati, Ohio: Procter & Gamble, 2007).

2. D.A. Griffith and R.F. Krampf, “Emerging Trends in U.S. Retailing,” Long Range Planning 30, no. 6 (1997): 847-852; L.W. Stern and B.A. Weitz, “The Revolution in Distribution: Challenges and Opportunities,” Long-Range Planning 30, no. 6 (1997): 823-829; and N. Wrigley, “The Landscape of Pan-European Food Retail Consolidation,” International Journal of Retail & Distribution Management 30, no. 2 (2002): 81-91.

3. E. Ogbonna and B. Wilkinson, “Power Relations in the U.K. Grocery Supply Chain: Developments in the 1990s,” Journal of Retailing and Consumer Services 5, no. 2 (April 1998): 77-86.

4. A.C. Nielsen, “Trade Promotion Practices, 16th ed.” (2007), 20.

5. A.C. Nielsen, “Trade Promotion Practices, 16th ed.” (2007), 18; and L. Moses, “Trade Promotion Better; Frustration Remains,” Supermarket News, March 21, 2005, 51.

6. S.Y. Kim and R. Staelin, “Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment,” Marketing Science 18, no. 1 (winter 1999): 59-76; K.L. Ailawadi, “The Retail Power-Performance Conundrum: What Have We Learned?” Journal of Retailing 77, no. 3 (2001): 299-318; and M. Corstjens and R. Steele, “An International Empirical Analysis of the Performance of Manufacturers and Retailers,” Journal of Retailing and Consumer Services 15, no. 3 (May 2008): 224-236.

7. C. Humby, T. Hunt and T. Phillips, “Scoring Points: How Tesco Continues to Win Customer Loyalty” (London: Kogan Page, 2004), 69.

8. Tesco, “Annual Report and Financial Statements 2011” (Hertfordshire, U.K. http://ar2011.tescoplc.com/business-review/growing-the-uk-core.html).

9. Humby, Hunt and Phillips, “Scoring Points,” 68.

10. Ibid., 273.

11. C. Murray, “The Marketing Gurus: Lessons from the Best Marketing Books of All Time” (New York: Portfolio, 2006).

12. Tesco, “Annual Report.”

13. “The Leaders in Loyalty: Feeling the Love From the Loyalty Clubs,” white paper, CMO Council, Palo Alto, California, 2010, pp. 3, 8, 11.

14. “Loyalty Programs: Mining for Gold in a Mountain of Data,” Aug. 1, 2007, http://knowledge.wpcarey.asu.edu; and Humby, Hunt and Phillips, “Scoring Points,” 79.

15. N. Kumar, “The Power of Trust in Manufacturer-Retailer Relationships,” Harvard Business Review 74 (November-December 1996): 92-106.

16. http://shop.safeway.com/content/touts/landingpages/22_mcr_landing.asp.

17. “Survey: Canadians High on Store Brands,” Private Label Store Brands, Aug. 1, 2010, 7.

18. Loblaw, “Balancing Act: Loblaw Companies Limited 2009 Annual Report” (Brampton, Canada: Loblaw), 4.

19. S.K. Dhar and S.J. Hoch, “Why Store Brand Penetration Varies by Retailer,” Marketing Science 16, no. 3 (1997): 208-227; and K.L. Ailawadi, K. Pauwels, & J.-B.E.M. Steenkamp, “Private-Label Use and Store Loyalty,” Journal of Marketing 72 (November 2008): 19-30.

20. D. Dunne and C. Narasimhan, “The New Appeal of Private Labels,” Harvard Business Review 77 (May-June 1999): 41-52.

21. R. Vaidyanathan and P. Aggarwal, “Strategic Brand Alliances: Implications of Ingredient Branding for National and Private Label Brands,” Journal of Product & Brand Management 9, no. 4 (2000): 214-228.

22. S. Clifford, “Where Wal-Mart Failed, Aldi Succeeds,” New York Times, New York edition, March 30, 2011, p. B1; and B. Deelersnyder, M.G. Dekimpe, J-B.E.M. Steenkamp and O. Koll, “Win-Win Strategies at Discount Stores,” ERIM Report Series ERS-2005-050-MKT (Rotterdam, The Netherlands: Erasmus Research Institute of Management, 2005).

23. Deleersnyder et al., “Win-Win Strategies.”

24. Costco Wholesale, “Annual Report 2010” (Issaquah, Washington: Costco Wholesale), p. 8.

25. Costco, “Annual Report 2010,” p. 9.

26. Thomson Reuters, “Wal-Mart Stores Inc. Analyst and Investor Webcast,” (June 4, 2010): 6, available http://media.corporate-ir.net/media_files/irol/11/112761/Transcripts/Analysts_meeting2010-06-04.pdf.

27. P.N. Bloom and V.G. Perry, “Retailer Power and Supplier Welfare: The Case of Wal-Mart,” Journal of Retailing 77 (2001): 379-396.

28. P. Callahan and A. Zimmerman, “Wal-Mart Tops Grocery List with Its Supercenter Format,” Wall Street Journal, May 27, 2003.

29. Deelersnyder et al.,“Win-Win Strategies.” This method is adapted from J. Mullins and R. Komisar, “Getting to Plan B: Breaking Through to a Better Business Model” (Boston, MA: Harvard Business Review Press, 2009).

30. N. Kumar and J.-B.E.M. Steenkamp, “Private Label Strategy: How to Meet the Store Brand Challenge” (Boston: Harvard Business Review Press, 2007).

i. ThomsonONE (New York, NY: Thomson Reuters) www.thomsonone.com.

Acknowledgments

The authors wish to thank ECR Europe’s International Commerce Institute for funding that supported this research.

1 Comment On: Rebuilding the Relationship Between Manufacturers and Retailers

  • drsergekuznetsov | February 21, 2013

    Long-term pipeline partnerships used to be one of the main marketing assets of a prosperous company along with market intelligence, brand equity and customer loyalty.

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