From CVS to Costco, Retailers Put the Screws to Brands

Coke, Energizer Ditched in Price Fight, CVS Bills to Make Up Profit Deficit

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BATAVIA, Ohio (AdAge.com) -- Marketers are facing the litmus test of whether their brands truly are indispensable as retailers show a growing willingness to boot even major, well-advertised brands to improve leverage, margins and lower prices.

Costco's recent decision to strip Coca-Cola products from its shelves in a pricing dispute is the highest-profile sign yet that the age-old battle between marketer and retailer is escalating, due to the growing power of private label, looming package-goods deflation in the face of falling commodity prices, rising pressure on retailer margins, and softening volumes. Facing those factors and armed with data from loyalty cards, retailers are getting savvier about which brands to keep and which to lose.

CVS/Caremark plans to remove most Energizer alkaline batteries from its stores by early next year, according to Deutsche Bank analyst Bill Schmitz, leaving just Duracell and private label. And Walmart, which stepped up efforts to pare brands from its shelves this year, will reduce assortments even more aggressively next year, according to manufacturers and analysts.

"We found we can better serve our customers with a simplified assortment," CVS said in an e-mail statement. After testing various options, the retailer found customers responded best to a single "national brand" in alkaline, plus Energizer lithium and private label.

But analysts and marketers believe increasing leverage and margin at the expense of brands is another goal of retailers. CVS recently began sending manufacturers "bills" representing the difference between the profit they made on their brands this year and what they expect to make, according to supplier executives, though it's not clear anyone is paying them to the chain. Such bill-back practices have been common in some areas, such as apparel, but rarely if ever applied to branded package goods. CVS declined to comment on whether it was charging bill-backs.

Exacerbated by the recession, the stepped-up U.S environment is starting to more closely resemble the contentious retailer-manufacturer relations of Europe, where Delhaize pulled all Unilever products from stores in Belgium earlier this year in a pricing dispute, though Delhaize ultimately relented.

Higher private-label shares in Europe have gone hand-in-hand with tougher tactics, and rapid growth of private label in the U.S. appears to be tempting retailers to flex their muscles more, too. At CVS, private label was already by far the leading battery "brand," accounting for about half of sales, with the rest split between Duracell and Energizer.

Also contributing to the stepped-up aggression is the Walmart factor—a suspicion by many retailers that they're not getting as good a deal as the world's largest retailer, said one package-goods executive. Certainly it's not lost on CVS that its gross margin fell last quarter while Walmart's improved, helped in part by vendor ad dollars (see related story).

But one package-goods executive warned U.S. retailers not to go too far. "Retailers would be shortsighted to let financial pressures decide vs. consumer or shopper needs," he said. "Many retailers in Europe tipped too far and paid the price for it in lost shoppers."

Even so, some retailers have stuck with decisions to boot big brands for years with apparent success, such as Costco, which removed Procter & Gamble Co.'s Pampers four years ago in favor of Huggies and private label, the latter manufactured by Huggies' marketer, Kimberly-Clark.

Other classes of trade are seeing that club stores have conditioned consumers not to expect every leading brand in every store, said Brendan Langan, director-retail insight for the drug and club channels at WPP consulting firm Management Ventures. Removing Coke is perhaps an extreme test of how far Costco can take that strategy. "Members are going to decide what happens there."

As with Costco's member data, CVS's ExtraCare loyalty program shows it what brands are truly important to its most-profitable customers, Mr. Langan said, and what brands it can do without.

Behind the growing number of retailer-brand battles also is failure of the prices package-goods marketers charge retailers to fall as quickly as commodity costs. Retailers are watching the resulting rise in their suppliers' gross margins with some envy, said Sanford C. Bernstein analyst Ali Dibadj, particularly given that many have felt forced to step up price promotion in key categories without a commensurate increase in trade support from brands.

This year also has been relatively light for package-goods innovation, something some marketers, such as P&G, have acknowledged. That leaves them with dwindling justification for higher margins, though several, including P&G, also vow 2010 will be better.

They'd better be right if they want to keep retailer margin grabs at bay, said Leon Nicholas, director-retail insight for mass retail at Management Ventures. "You come out with something innovative, you get to charge what the market will bear," he said. "Over time, that gets commoditized, and prices come down."

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