During recent  lectures given to retail management students at the University of Alberta’s School of Retailing, on manufacturer and retailer relationships, I posed some challenges that I thought might be facing retailers in the future, and  they included the following:

1. Will you be willing to share customer data with manufactures?
2. How will you respond when and if the manufacturer supplies the consumer directly?
3. How will you respond when manufacturers set up their own retail outlets?
4. How do you make the shopping experience easier and more enjoyable than shopping on the internet?

Clearly point #2 above has now become a reality, and the question remains, how will retailers respond?

The answer to the question depends on whether retailers perceive this initiative, and others to follow, as a threat or an opportunity to more effectively understand and market to their customers. On the surface, it would appear to be the former. Bob McDonald, Chief Executive Officer of P&G, has stated in interviews with the Financial Times: “I don’t feel the need to have every sale go through a retailer.” This sentiment is also being reflected by other leading US consumer brands that are testing these waters through an online direct to consumer web site: (www.Alice.com). Faced with a growing use of the internet and mobile phones for shopping online, branded marketers are being forced into a more direct dialogue with their consumers in order to protect their position in this online market. Given that this is essentially a zero sum game, assuming consumers will either purchase in store or online, these initiatives do represent a threat to both brick and mortar retailers, and online retailers. So what is the positive for retailers?

To understand this we need to understand how the consumer is shopping online, and to a greater extent, how they are using their mobile phones in this process. We do know from recent studies that online shoppers use the internet to check prices at different retailers, and receive digital coupons that can be scanned at the checkout. We also know that recent advances in Smartphone technology allow consumers to scan UPC codes in-store, and compare pricing to other retailers. This certainly intensifies the retailer fear that shoppers will choose to visit retailers’ physical stores to view products, scan codes, then purchase from a rival lower-cost retailer. Is this a valid concern?

TNS Compete, which produces a quarterly study of Smartphone usage, found that two thirds of users had researched information about stores on their phones, while half of them had used phones to look up product reviews.  “We are definitely seeing a lot more being used for research than for shopping,” says Danielle Nohe, an analyst at Compete. “If you talk to folks however, price plays a role but it’s not the final factor. Brand and trust are really important as well. So the brand promise; service; and trust; are all tools that the retailers can use to win sales. How can they do this?

Most retail web sites are a reflection of their weekly flyers, and generally feature a litany of price and items under various categories. This is an open invitation to shop based on price, which reinforces the comparative price shopping mode that retailers are hoping to avoid. Conversely, branded manufacturers are moving towards setting up their online web sites to contain product information. The move by P&G into online sales with their www.pgestore.com site reflects product information along with pricing, and also links back to the brand site with detailed information and demonstrations of the brand’s benefits. Based on the Smartphone usage studies for shopping, this would appear to be a winning formula, and could be a significant competitive threat to both brick and mortar and online retailers. From the manufacturer’s perspective however, whether they sell the brand through their new online sites or through their retail channel partners is of little consequence as long as they make the sale. To that end, the manufacturer is willing to share product information with the retailer, and would welcome sharing this brand expertise with their retail partners. as opposed to spending marketing dollars on discounting their products. Wal-Mart has started doing this kind of sharing on their site by imbedding some key brand logos, which when clicked on, take the shopper to the brand’s information and demonstration web site. Over time, I suspect these will become more seamless and integrate the manufacturer and retailer even more effectively.

In the Financial Times article, P&G argues that the initiative represents a direct challenge for retailers, describing it as a “living learning lab” that will “help us listen, learn and collaborate with online shoppers.” Kirk Perry, vice-president of its North America operations, added that the site “will also help deliver new tools, services and features that can ultimately be shared with retailers.” Accordingly, retailers will need to make the decision on whether or not they want to share and incorporate this information in their marketing efforts, or treat their suppliers as competitors.

Although many of these actions were of short term duration, with concessions being made by both marketer and retailer, of notable exception was Wal-Mart. The world’s biggest retailer had already stepped up efforts to pare brands from its shelves, and had confirmed that it would be reducing assortments even more aggressively during the upcoming year.

Fast forward to March 22, 2010. In an Advertising Age article entitled: “Wal-Mart Reversal Marks Victory for Brands…. Retailer Restores 300 Items to Shelf After Consumers Were ‘Aggravated’ by Loss.”

Since Wal-Mart can be considered an acid test of the litmus test, what happened, and what was learned?

Customer aggravation

Bill Simon, chief operating officer at Wal-Mart U.S. told a Merrill Lynch investor conference March 10 that Wal-Mart had discontinued a number of branded items that didn’t sell well and were only bought infrequently. However, these items which were mostly in food and consumables were in flavors and sizes that customers are very accustomed to …and liked very much. We disappointed them by taking those out Mr. Simons stated, and although we put them back, we had hurt sales because it cost us shopping trips. You know, said Mr. Simon, Lee Scott [former CEO and current board member] told us recently, rule No. 1 in retail…don’t aggravate your customer.

Clearly there is a need to be constantly re-evaluating the contributions of both brand and private label items, and making adjustments where it makes economic sense. An important element in making these decisions, beyond margin returns, is what customers are being affected. By analyzing shopper data, many retailers are able to identify what individual customers are buying. Further, a number of retailers are able to segment their customers into those that are profitable and those that are unprofitable (e.g., Best Buy). Depending on which customer segment is buying which items, a more knowledgeable decision can be made on whether or not to delist them. Mr. Simon noted that Wal-Mart relies on low prices for branded products and a large assortment to differentiate itself, but lacks individual shopper data that show the impact on its most-valued customers from assortment decisions.

Arrogance

Initially Wal-Mart had described the number of items to be returned as only a small percentage of the items originally delisted. However, Wal-Mart was subsequently forced to review another 18 categories where cuts had been made. Having made decisions based primarily on the margin impact and market share of the brands. Wal-Mart had failed to weigh the effect of assortment decisions on broader category and store sales. Moreover, Wal-Mart underestimated the power of its Great Value private-label line, which grew at only mid-single-digits during the most recent quarter, a quarter in which the chain recorded its first ever sales decline.

Wal-Mart, which remains primarily a retailer of national brands, has been forced to re-evaluate their branded versus private label strategy. However, this is being done in an environment in which marketers have a growing list of complaints about the chain. In addition to aggressively expanding  its Great Value private-label line, these complaints included its moves of reducing promotional space and stepping up category assortment reviews that pit brands against one another in a battle for survival. This retreat by Wal-Mart, combined with growing competitive strengths being experienced by a number of its competitors, has emboldened many marketers to take a harder line against Wal-Mart.

Marketer Revenge

A marketer, having been delisted, has an added incentive to redouble efforts in other retail outlets. Such was the case with Arm & Hammer liquid laundry. Having been delisted by Wal-Mart during the previous year, the brand’s marketer, Church & Dwight Co., stepped up promotion at other retailers in response to the delisting. In this particular case, Wal-Mart confirmed that it lost the important laundry category share as a result of these kinds of efforts, and upon re-evaluation, began relisting Arm & Hammer SKU’s.

The decision by Wal-Mart to delist Arm & Hammer was made based on receiving more promotion funding from a lesser competitive brand. Believing that this decision would have little impact on total category sales, Wal-Mart learned that some brands have loyal customers who are willing to shop elsewhere rather than substituting. This has an even greater impact when the category in question is a destination category, which the laundry category is.

Clearly there is an ongoing need to continually evaluate the right balance between branded and private label items. Given rising pressures on retailer margins, there is an incentive to move the balance towards private label. However, like branded items, private label has to earn its way into the customer’s value matrix. Strong brands have built up this value matrix over the years. Recognizing that low pricing is only one component of this value matrix, retailers need to understand their customer so they can better optimize the balance between brand and private label.

During a recent lecture I spoke of the changes in communications strategies employed by marketers and retailers in building both consumer and shopper loyalty. I pointed out that the traditional use of television, radio and print by both marketers and retailers represented a one-way dialogue used to influence consumer attitudes and purchase decisions. This one-way push strategy proved effective in an environment where the consumer had limited access to information, and relied on the marketer and retailer to provide relevant information. But in today’s environment, the consumer is becoming increasingly empowered by the internet. This is changing the paradigm which requires an engagement strategy where two-way communication is becoming the norm. This is being evidenced as consumers are making greater use of online research, and becoming more engaged in social media as inputs for their buying decisions.

In a recent article which appeared in Hub Magazine (www.hubmagazine.com), an industry authority on marketer and retailer business insights, Mark Renshaw of Arc Worlwide analyzes how social media is changing shopping behavior. Entitled “The Socialized Shopper,” the article details research findings on the emerging relationships between traditional media (TV, radio and print), social media, online research and in-store/word of mouth, and the extent to which each is currently impacting the shopper decision process.

http://www.hubmagazine.com/archives/the_hub/2010/jan_feb/the_hub34_arc.pdf

An article appearing in the February 8 issue of the New York Times entitled: “The Fight Over Who Sets Prices at the Online Mall”, brings a new dimension to the issue of the manufacturer’s ability to control retailers from advertising their products below a certain price. At issue is the ability of online retailers to feature product pricing throughout their e-commerce site pages, or only be able to disclose this pricing at the final checkout page.  Clearly, manufactures are concerned with the internet’s ability to drive down pricing on their brands, which they regard as a negative, while online retailers are concerned that online shoppers are reluctant to continue shopping without knowing the prices of items until they finally reach the checkout.

Historically in the U.S., manufactures have fought to limit the amount that offline retailers could discount their products, and accordingly set minimum advertised retail prices at which their brands could be featured.  Based on the concerns that aggressive price discounting devalued their brand’s equity in the eyes of consumers, and that this discounting created a hostile environment among competing retailers, manufactures walked the fine line between dictating advertised retail pricing, while avoiding violating antitrust laws. The key word in this argument is: “advertised.”  For offline retailers, the term “advertised” has applied to prices which appear in their newspaper circulars and ads, and for the most part has not presented any major issues.  While manufacturers consider e-commerce sites to be an extension of price and item circulars, and therefore constitute advertising, online retailers argue that their sites are listings of products they have available for sale, much like being within a store, and do not represent advertising per-se.

How this argument plays out long term as e-commerce retailing grows is of critical importance to both manufacturers and retailers. The argument presented by in this article Brian Bieron, eBay’s senior director for domestic government relations: “We think consumers are best served when the retail marketplace is open and transparent and retailers have an opportunity to offer the best prices and services, and are not controlled from above by manufacturers,” will need to be balanced with the concern that could facilitate a race to the bottom, whereby neither the manufacturer or retailer wins.  This will require greater strategic cooperation between the manufacturer and retailer as the consumer becomes more empowered to shop for the lowest price, and e-commerce sites expand to service this growing empowerment.

Source: http://www.nytimes.com/2010/02/08/technology/internet/08price.html?pagewanted=1&ref=business

In the November 30, 2009 edition of Advertising Age, two articles appeared: “From CVS to Costco, retailers put the screws to brands“, and “Wal-Mart ups the ante with brand co-op ads in more ways than one“. The first article posits that well advertised brands are not indispensible to retailers, while the second discusses how Wal-Mart is taking over the role of communicating the brand’s equity message in 30 second television spots, paid for by the marketer of the brand. The common thread to these articles is how retailers are dominating the marketing to consumer process, which was once the purview of marketers. How has this role reversal evolved, and how is the term marketer becoming a misnomer? Let me explain.

Traditionally the marketer and retailer roles had been clearly defined in terms of interaction with the consumer. The marketer understood the consumer in terms of their wants and needs and created products to meet those criteria. In order to build a market for those products, the marketer, through its appointed advertising agencies, created compelling messages to create awareness and purchase intent among consumers, and then executed these messages through traditional media, including broadcast and print. Concurrently, retailers played their role as the distributer of these brands to the consumer, and used the tactics of price and promotion to draw these consumers to their store locations. Although this may be simplistic, there was a clear distinction between the keeper of the brand equity… the marketer, and the promoter of the brand… the retailer. What evolved over time, however, was the balance between what the marketer spent on their equity building efforts versus what was spent on retailer driven activity… and this balance shifted significantly in favor of the retailer. So what happens over time when marketers spend a fraction of their marketing budget on convincing their consumers of the value of their brand at a regular price, while the bulk of the marketing budget is spent with the retailer who is convincing the consumer that the brand has value only when it’s discounted…brands become commodities.

During the 80′s and 90′s, my agency had the opportunity to help Procter & Gamble develop a unique approach to overcome this dilemma by developing shared equity advertising programs. The concept was to combine the equity of the brand with the equity of the retailer in a seamless fashion so as to communicate the value of the brand, and the positioning of the retailer as a preferred place to shop. No mention was made in these executions of pricing or promotion. P&G clearly received value in converting marketing funds that would normally have been spent on price promotions into equity reinforcement, while the retailer received bonus advertising support. This concept worked because P&G had the courage to implement an approach which was difficult for retailers to accept initially, but proved successful for them over time. It was then with interest that I read the second article in which Wal-Mart has introduced co-op ads that seamlessly integrate the brand into a 30 second television commercial, without mentioning price or promotion. And of even greater interest, funding for these commercials come from what remains of marketers’ advertising budget.

In the article: “From CVS to Costco”, the question is asked: are brands truly indispensible? Mentioned in the article is the fact that Costco has recently stripped Coca-Cola products from its shelves in a pricing dispute. The answer to the question of whether well advertised brands are indispensible to retailers may be no, unless real value can be created and communicated.