We make mega-retailers rich, so how about them making us rich, too?
Q: Our product range includes those that giant retail supermarkets carry as store brands. We hope you won’t mind and you’d understand if we don’t refer to any specific giant retailers. We don’t want this request for Marketing Rx to be misinterpreted as accusative.
We’re a company that is between small and medium size. Our access to truly inexpensive local sources of raw materials have enabled us to price our products 15 percent to as much as 25 percent lower than established and well-known brands. So we thought we’d get easy entry in the biggest giant retail supermarkets.
We were wrong. We could not gain entry because our price is almost as low as those giant retailers’ prices for their store brands. We were told to up our prices. But we know that at higher prices we’re no longer competitive against the known established brands.
What have companies similar to us and to our situation been able to do to still gain placement in the shelves of giant retail supermarkets?
A: Those giant retail supermarkets you refer to are known as mega-retailers. In the US, the most known pioneer and most written about mega-retailer is Wal-Mart. In the local scene, the largest is SM supermarket. This mega-retailer was able to attain a scale that has earned for it a larger and larger share of the retail industry sales. In turn, this now dominant market share enabled it to enjoy larger discounts from manufacturing suppliers especially including known signature brands.
The larger discounts raised a mega-retailer’s margin and profitability. In turn and in time, becoming cash-rich led to the thinking: “Why am I making manufacturers richer when I can myself make what they place in my supermarket shelves?” Being smart enough to choose those product where there’s little or practically no differentiation among brands like toilet paper, bottle water, facial tissue, and the like, the mega-retailer came out with its own store brands which were cheaper or much cheaper versions of the known brands.
Coming out with its own store brands was quick because the mega-retailer need not set-up its own manufacturing plant. It took advantage of a manufacturer’s excess capacity and engaged that excess capacity to produce its store brands. This was at big discounts because pricing need not be based on full costing.
Meanwhile, as success after success kept coming in quick succession, the mega-retailer finds he is extending his reach to the large mass and low-end market segment. So it took little time for him to realize that he can hasten owning a larger and larger participation in that unserved or else underserved market segment by putting up a regular retailing outlet located in areas where the low-end shoppers are. That’s what’s probably behind SM’s move to develop another SM, namely, Save More.
It’s easy to imagine how the accumulating power can be often intoxicating. Manufacturers of leading brands were squeezed of their margin. The mega-retailer’s store brands were equal in quality to the signature brands. After all, those store brands came from their own factories. Consumers came to appreciate the store brands’ quality at par with the known brands and appreciated even more the store brands’ lower prices. Manufacturers felt desperate but knew what’s happening was beyond their control.
But everything has a limit. Cross that line and you can provoke retaliatory actions. This was what happened when three or four large manufacturers who were just as big as the mega-retailers felt that the behavior of the mega-retailer was just too much. Asking for higher and more frequent discounts and extending the terms of payment from 15 to 30 to 45 and even 60 days reached the point of unacceptable. The big consumer brands affected decided to band together and took the offensive. The stalemate did not last long. It was the mega-retailer who relented and agreed to come to the negotiation table and smoked the peace pipe.
So here’s one option you can explore but not alone. If you act alone, you’re way below the mega-retailer’s radar. If one mega-manufacturer approaching the scale of the mega-retailer could not move the mega-retailer, how much more frustrating it would be for your size. It had to take a partnership of 3-4 known mega brands for the mega-retailer to take notice, listen and to start acting as a reasonable businessman.
If a large manufacturer is not enough to get a large mega-retailer to reconsider and retreat, you can see how a supplier like you who’s between a small and medium in size can have an even more miniscule influence. But if you create a community of fellow small and medium size suppliers, that stands a better chance of turning the tide in your favor.
We patterned our diagnosis and Marketing Rx along the non-specificity of your request. We want to also not be misunderstood.
Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!
