Are retailers losing the upper hand to CPG suppliers?

29 November 2012

Dan Hawker

Dan Hawker

Former Head of Tobacco, Wholesale & Retail

"The power of the brand, and the brand owner, is increasing at the expense of the big retailer" 

Louise Lucas, Financial Times (8/10/2012)

It's quite a bold statement, isn't it? I know a number of CPG people who would read it with a measure of incredulity. But is it really just wishful thinking?

Upwards pressure - giving CPG a tailwind?

Take rising commodity prices, which are cited as a lever that CPG can use to push through price increases. Whilst it may be true that retailers can understand the impact of commodity price increases on their suppliers, it's not necessarily true that they'll accept those price increases flowing through to them! And handled badly, discussions around "having to pass on price increases" can lead to the threat of de-listings, which can quickly offset any gains that may be made from an incremental increase.

Then look at the more advantageous operating margins and return on capital that suppliers apparently enjoy over their retail customers. That may give a stronger position for negotiation, were it not for the fact that the volumes going through the retailers are so much bigger than their average supplier. I think it wouldn't be quite so tough to suffer a lower margin % if the volumes are orders of magnitude bigger.

Going "round the back" to the consumer - is social media creating more pull?

Many companies still don't 'get' social media. . The main response to Facebook, Twitter, Pinterest and the rest is to have a team of people monitoring the activity, and reacting to it as best they can. Alongside placing the usual ads that have always existed, but this time placed on Facebook.

To get the best out of the opportunity, social media needs to be seen as a business transformation, not a trend.

However, even with the opportunity only half-grasped, engaging consumers in online dialogue with your brand at least softens the grip that retailers have on the same consumers.

Does Social Media create more pull for CPG companies? I don't know how much it does. But does it give retailers pause for thought - absolutely it should. Although CPG companies need to be careful about how they use that direct engagement and instead of simply jumping on every social media bandwagon, they need to be more strategic and determine what channels are right for them - Amazon and eBay might not be the best channels for premium branded products right now.

Private dancing, with the devil - is private label growth good or bad for suppliers?

One of the outcomes of the recent recessions - especially in developed markets - has been the cash-strapped consumer downgrading to private label products, and then being surprised at how good some of them are! This plays well to certain CPG suppliers, but clearly not to certain branded CPG companies - especially in categories where private label sales are strong (there's an interesting piece here - Private-Label Products in the Manufacturer-Retailer Power Balance.

Interestingly, though, too much private label penetration appears to be bad for overall margins within a retailer. There's evidence that shoppers who buy predominantly private label are less loyal, and the average shopper is willing to pay less for the private label equivalent of a branded product.

So lower prices, and less loyalty appear to be the outcomes of a strong private label presence.

Therefore private label growth shouldn't be seen as too much of a threat to branded CPG companies, so long as they are well informed when going into discussions with retailers.

Tango or Waltz, where in the collaboration cycle are we?

So, back to the question in the title: "Are retailers losing the upper hand to CPG suppliers?"

My answer is a tentative "yes". The upper hand is wavering slightly.

CPG companies should make sure they are fully informed when going into their next round of discussions. They should push for greater collaboration and push for less of the baseball bat. It may be that some retailers are in panic mode (and I'm sure that this coming post-Christmas period will see more retailers closing up), but referring to the Portas review, good retailers that get the importance of theatre and social engagement on the high street, should be encouraging proactive CPG suppliers in their efforts to bring win-win ideas to the table.

Retailers should also try and encourage buyers to work more collaboratively within their organisations, as too often we see merchandising actions within a store jarring with each other - promotions need to be consistent, complementary, and reinforce a positive shopper experience.

It will be interesting to see whether collaboration does become more than lip-service in the Consumer Business landscape this year. I suspect, as I mentioned in my blog - When will security of supply become the main priority for CPG? - it may take some more desperate times for it to be commonplace.

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