Just when relationships between brand manufacturers and retailers seemed to be settling down, suddenly everything’s up in the air again.
Once upon a time, brand manufacturers ruled the roost. But then an almighty struggle for power developed between them – giving way, more recently, to a third phase of uneasy accommodation, through initiatives such as Efficient Consumer Response. The big question now is, where next?
Destabilising factor number one is retail internationalisation. Just a few years ago, building a global brand seemed to be a perfect way to trump burgeoning retail power. Tesco might wield enormous power in the UK, Carrefour in France. But a global brand with global economies of scale could cope with that if Tesco and Carrefour accounted for only a small percentage of total sales.
As retailers internationalise, brand manufacturers are discovering a big downside to global branding: centralised sourcing, where the retailer sources centrally and demands the volume overriders and discounts that a multinational volume deal merits. Every international brand manufacturer is now struggling with such demands. Now and again the tussle spills out into the public domain, such as Asda’s recent spat with P&G over the price of Pampers and Pantene in the UK relative to Germany.
How manufacturers respond will mostly depend on their product portfolios. According to Nestlé board member and head of European operations Robert Raeber, for example, Nestlé markets an astonishing 10,000 different product and packaging formulations around the world, but only 50 of them are identical internationally: in areas such as petfood, confectionery and formula milks.
Nescafé is a global brand but it is not a global product – it comes in 150 blends and variations to suit different local tastes. The company is keen to work closely with internationalising retailers and has set up special teams to work with the likes of Carrefour, Metro, Wal-Mart and Ahold. It has signed three formal international partnership agreements – but only where the retailer accepts local sourcing and “bans” parallel imports, international volume overriders, bonuses or offshore payments. Insisting on local terms and local sourcing is not an attempt to avoid market-by-marketing cost competition, insists Raeber, it merely reflects the facts. “Business is local, so our payments terms are local.”
That’s not cutting much ice with some retailers, however. Raeber admits: “A lot of our big customers have punished us.” And nor are many of Nestlé’s peers impressed either. Policies such as this boil down to “taking your ears off and putting them in your pocket,” declared Procter & Gamble’s Tom Muccio at a recent international retailing conference. According to Muccio, who has led P&G’s partnership with Wal-Mart since 1987, manufacturers need to focus on sorting out these issues, rather than defending “positions”. But as P&G’s tussle with Asda shows, it’s easier said than done.
A second destabilising factor is the rocketing rise of new Internet exchanges, such as the Global Net Exchange and the Worldwide Retail Exchange. Their biggest benefit, insist retailers, is the opportunity they create to streamline supply chains. Better, faster, richer information flows will allow the dream of collaborative planning, forecasting and replenishment (CPFR) to come true – to everyone’s benefit. For example, new product development and design times could be slashed from 40 to 50 days to just four or five, predicts Sainsbury’s e-commerce czar Patrick McHugh.
Yet at the same time, the new exchanges boost retailers’ efforts to push the issue of cross-country price harmonisation – and international volume discounts. They enable retailers to “gang up” in buying clubs. And they also let retailers play the marketÃÂ ever harder, with auctions and reverse auctions. Price, price, price, in other words.
McHugh insists that auctions will only ever account for seven per cent of the Global Net Exchange’s overall income, most of the savings will come from streamlining existing contractual relationships. No doubt he’s right – but note the likely effects. On the own-label front, where the auction approach will hit hardest, real strains could soon sour retailers’ relationships with “captive” suppliers. As Royal Ahold chief Cees van der Hoeven noted recently, rationalising the buying of own-label products and produce can generate “a wealth of opportunities”, such as own-label suppliers looking to escape this pressure by building their own brands.
Meanwhile, on the international brands side, suppliers are going to have to become experts at facing two ways at once: collaborating on things such as CPFR while coping with ever more ruthless and adversarial price negotiations.
Enter destabiliser number three: the consumer. For decades, consumer trends have favoured multiple retailers. Consolidating retailers acted like magnets, sucking ever more consumers through their portals. But now that process seems to have peaked and gone into reverse as consumers eat out more, buy takeaways and demand convenience. Retailers’ biggest challenge is no longer how to grow their customer base, but how to keep it – which is a fundamental shift.
For some manufacturers this is a godsend. The consumer, notes Raeber, is becoming much more “spontaneous” and “volatile”, and manufacturers can address this volatility much more easily through initiatives such as vending machines, impulse outlets, online sales and so on. Thirty per cent of Nestlé’s European sales already take place outside of traditional retail channels, notes Raeber. And that’s just the beginning.
So what conclusions can we draw? Until recently, the core options facing a Pampers, a Nescafé and a Hovis were basically similar: how to deal with three or four big, national buyers. But now such brands find their paths diverging. As a global brand with identical product specifications, Pampers is ripe for centralised buying. The fact that Nescafé’s formulation differs from country to country makes it harder to buy centrally. It has huge opportunities in food service. As a basically local brand, Hovis is “immune” from the pressures of centralised buying, and food service represents a big question mark. In other words, there is no “generally right” solution for brands. For brand managers, “know thyself” (and “thy potential”) is now truly a crucial skill.
Alan Mitchell, firstname.lastname@example.org