On Point: Power vs. profits

Fighting among trading partners may be counterproductive.

By Tom Weir

Was it really only a couple of years ago that commodity prices were going through the roof, grocery manufacturers started charging bigger wholesales for smaller packages and retailers were screaming because they had to cut their margins to stay competitive? All the power seemed to be in the hands of the suppliers.

Well, time passed and things changed, as always. Now, in an economy where demand for almost everything has fallen and the lowest price is never low enough, retailers are putting the squeeze on suppliers. The two most striking examples occurred in the fall, when Costco said it would stop selling Coca-Cola products and CVS decided to cut out Energizer alkaline batteries. Costco’s rationale was a pricing disagreement; CVS, which has reportedly imposed bill-backs on suppliers, cited a desire to simplify its assortment.

Coke and Costco resolved their differences after about a month and the beverages were back in the wholesale club for Christmas and New Year’s. The CVS plan called for removing most Energizers by early this year, so it’s always possible that those companies could come to a resolution as well.

Regardless of the outcome, the underlying issue is one that deserves thought on the part of both retailers and suppliers in the grocery channel. Should the industry’s direction at any given time depend on which one has more muscle? Is it reasonable to think that will produce the most cost-effective and profitable distribution of grocery products? With one side throwing most of the punches and the other waiting for its turn to get even, economic efficiency is not the most likely outcome.

Some observers have noted that the increasing penetration of private label in the U.S. has given retailers considerably more power, just as in Europe, where house brands are widely accepted. Further, they say, what we’re seeing now may be just the start of more contentious relationships like those between retailers and suppliers across the Atlantic.

It is a point of pride among some Americans that we should never model ourselves on anything European. That’s not always a rational position, but in this case it may be good advice. Energy devoted to fighting is energy that is not being directed toward growth.

Some good, frank discussions about how retailers and suppliers can reduce friction and increase profits would certainly be more useful. Trust is probably in short supply right now, but it can be built with time and patience—and the belief that one side doesn’t have to lose in order for the other to win.

A critical advantage to that approach is that it frees up a lot of time and energy that can be devoted to the consumer, who is, after all, the only reason retailers and suppliers exist. The battles between trading partners seem to focus on letting the retailer charge the lowest prices possible. The problem is that once shoppers get used to amazingly low prices they view them as ordinary prices, so if price is all you’re offering they’ll jump ship as soon as someone undersells you.

For long-term benefits, retailers and suppliers need to do a better job of engaging consumers with their stores and their brands. That just might make it possible to run a business based on reasonable prices and fair returns for both sides.

Tom Weir can be reached at tom@taweir.cnc.net.

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