BOOK EXCERPT: How retailer power changes marketing

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The amount of influence the retail sector exerts on the advertising industry is often underestimated or ignored. But it is real, and it is growing.

One reason for the growth is the concentration of retailing power in only a few hands. This is most evident in the grocery business, where there are thousands of products with national advertising budgets. Consider that the top three supermarket chains-Kroger, Albertson's and Safeway-operate 6,500 stores in the U.S. and rang up some $122 billion in business in 2001. Although you might not have these specific retailer brands in your market, remember that, in this age of consolidation, Kroger also owns 15 other supermarket chains (including Ralph's), 789 convenience stores under six other banners, two food warehouse stores, two department stores and 437 jewelry stores. What was once a business dominated by locally-owned-and-operated food chains has evolved into a network of behemoths.

There is an immutable truth in the connection between advertising and the sales of packaged goods: If you can't get the product on the shelves, all the advertising in the world isn't going to produce any sales.

This is where the problem lies for packaged-goods marketers. A steady stream of new products flows into the marketplace every year, but there isn't a proportionate increase in the amount of shelf space in the average supermarket.

Today, any marketer trying to place a new product into retail distribution has to provide an incentive for retail store chains to take on the product. The most common incentive is called a "slotting allowance," giving the product a slot in a distribution chain that is already jammed with entries. And there is a never-ending lineup of other new products trying to find their way onto supermarket shelves.

Retail chains monitor the sales records of these new products because they don't want to waste valuable shelf space on items that don't move. The retailer is interested in this kind of information because it enables efficient inventory control and aids in category management, the mantra of the supermarket business. The goal of all retailers is to maximize the profitability from every inch of shelf space and in every product category, mainly because the margin in the food business is lower than in most other industries. Aside from that, the collection of data can also provide an intimate look into the buying habits of individual customers.

Some major manufacturers deny they pay slotting allowances to any supermarket chains, but experts say they usually substitute some other kind of trade promotion allowance in place of the slotting fee. At least one retail and distribution expert feels that manufacturers also have a problem because in recent years they have not produced the kind of breakthrough new products retailers are interested in.

"If you consider the disposable diaper, as a new product it was a home run," asserts Eric Strobel, a managing partner in the Partnering Group, and a former marketing executive at Kraft Foods and Procter & Gamble. "But what you have now are mainly variations on existing products, different flavors, new packaging and sizes, low-calorie versions. These are singles, bunt singles, not home runs."

In discussing the biggest retail chains, we have omitted Wal-Mart Stores, which actually sells more supermarket merchandise (about $80 billion annually) than any pure supermarket chain. But since supermarket merchandise is only part of the mammoth retailer's $220 billion in sales, Wal-Mart is not considered a primary food retailer. Based on sales volume, Wal-Mart is the largest U.S. corporation on the Fortune 500 list. (It is also the largest global corporation, having surpassed Exxon Mobil in 2002.) It definitely is a player in the food business, although it may not play by traditional food-retailing rules.

The influence of retailers comes partly from industry consolidation, but also from the relationship of retailers to their customers. One example of this relationship is the customer-loyalty plans most chains have adopted in recent years. Customers register for a card that gives them special sale prices on various goods every week. When a customer goes through the checkout counter, the store clerk swipes the consumer's card over the scanner. Then all of the purchases the customer makes on that day are scanned or keyed into the system.

The accumulation of this data over time can give the retailer an intimate knowledge of each custom-er's buying habits. The retailer can determine if the customer has strong brand loyalty or is willing to shift brands if an item is on sale. The retailer knows what days of the week the customer shops, whether he or she uses coupons, what flavors and sizes the customer prefers and how frequently the customer replenishes the items. The retailer knows if the customer is counting calories or fat, has high cholesterol, is a vegetarian, is a gourmet cook or lives on frozen dinners. With all the millions of dollars manufacturers invest in research, they do not have this depth of knowledge that retailers have about their customers. And they don't meet customers face to face once or twice a week as retailers do.

What is puzzling is that most sources say retailers have not used this personal knowledge to target customers for specific items. They also have not shared this data with manufacturers (who would love to have it). Some say that while supermarkets possess an incredible amount of data, they are not advanced enough technologically to take advantage of the information. Technology, however, can be bought. It is more likely retailers do not want to be accused of invading the privacy of their customers.

Another indication of retailer influence has been the increase in sales of private-label goods. Also known as store brands or house brands, they account for an estimated 15% of total food and beverage sales, about $70 billion annually. This is expected to rise to 18% by 2004. The whole notion of private labels has changed considerably in recent years. The so-called plain-packaged generic products that hit the market in the late 1970s and early 1980s have largely disappeared. Many of today's private labels, such as Safeway and President's Choice, are of a quality equal to or better than advertised brands of packaged goods from major manufacturers. They may even be more expensive, even though they are not backed by brand advertising support.

Whatever form they take, house brands make the struggle for shelf space all the more intense. As the larger supermarket chains add stores and customers, they are able to buy greater quantities of private labels at lower per-unit costs. They want to carry-and must carry-national brands, but their own house brands usually yield more profit per unit.

In effect, retailers are doing what the advertising community has been doing for years: building brands. They have the basic brand equity in the retail establishment, plus the brand equity of their store brands. Perhaps Sears, Roebuck & Co.-despite slipping from the top retail spot-is the best example. The retailer has built powerful brands with DieHard batteries, Craftsman tools and Kenmore appliances.

Although this discussion of retail power has concentrated on the grocery area, there is plenty of evidence of growing consolidation in virtually every other area of retailing. An analysis of data from the Statistical Abstract of the United States shows declines of 20% in the number of retail establishments in several categories, including grocery stores, new- and used-car dealers, drugstores, gas stations, liquor stores, hardware stores and shoe stores.

New-car dealerships provide an example of how influence has tilted from the manufacturer to the retailer in recent years. The number of new-car outlets in the U.S. has declined from more than 30,000 in 1970 to about 21,400 in 2002 (Automotive News Databook, 2002). This means the remaining dealers are selling more cars per dealership. More important, they are selling more brands of cars, setting up competitive showdowns within individual dealerships.

CarMax only recently became a new-car group dealer and has grown steadily. While it has a sizable operation, it is dwarfed by AutoNation, the biggest auto retailer in the U.S. AutoNation operates about 285 dealerships in 19 states, handling the Big Three U.S. car manufacturers, as well as the Big Three Japanese carmakers.

At least one other notion should be noted here. Although retailers sell products from marketing companies with national advertising budgets, they have grown into major national advertisers themselves. In Advertising Age's 2002 list of 100 Leading National Advertisers, 20 were retail companies, including Sears, J.C. Penney, Target, and Home Depot.

As consolidation continues in the retail arena, there is little question that more retail advertisers will penetrate this list. It is just another way that retail is exerting influence on the advertising business and on marketing companies that traditionally dominated the realm of top brands. The interesting aspect of this for marketers is that retail has developed into a complex entity playing far more than its traditional role as the last link in the marketing chain.

Reprinted by permission from "The Future of Advertising" by Joe Cappo (McGraw-Hill Cos., 2003; $24.95). Mr. Cappo, former publisher of Advertising Age, and former world president of the International Advertising Association, is editor at large at Crain's Chicago Business.

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