Store Wars

The Worldwide Battle for Mindspace and Shelfspace, Online and In-store

Greg Thain, John Bradley

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118374245
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

The sequel to the highly successful Store Wars: the battle for mindspace and shelfspace published in 1995. The new edition will retain all the strengths of the old book including a comprehensive and complex approach to the consumer & retail market and the interaction between FMCG retailers and manufacturers. The book will be thoroughly revised and updated and will consist of 4 main parts:

• A section on leading FMCG companies and brands (such as Coke, P&G, Unilever, Nestle, L'Oreal etc.), their marketing and branding strategies in the western markets (USA, Western Europe: UK, France, Germany and others).
• A section on leading retailers (Wal-Mart, Tesco, Carrefour etc.), their developments and expansion over the last 10 years.
• A section describing the interaction between retailers and manufacturers, including competition for end-consumers, trade marketing.
• A section covering the Emerging Markets—the retail landscape in the major developing economies, results of the expansion of major FMCG brands and western retail chains, challenges related to distribution and FMCG marketing in those countries.

The book will also discuss the impact of the Global Crisis on the consumer and retail markets as well as predictions and prospects for the future.

Chapter 1

SHIFTING OF POWER IN THE VALUE CHAIN

DURING THE LATTER half of the twentieth century, manufacturers had control of virtually all the marketing variables – such as price, promotions and presence on shelf – that resided within the retail environment. Brand-positioning strategies always included the consumer price point for the brand, which could then be counted on to appear in-store. A shortfall in distribution was seen as a tactical failure of the manufacturer’s sales department to negotiate properly with their customers, a failure that could be easily rectified. Manufacturers cared little in whose shops their brands were bought as distribution was near universal. However, shifts in the balance of power between manufacturers and retailers have made this era obsolete. In June 2009, Progressive Grocer reported:

Five years ago, manufacturers and retailers say they held equal shares of power in their partnerships, but today, manufacturers believe that retailers control almost two-thirds of the overall power and will extend their control to 71 percent five years from now, while retailers believe they currently control 60 percent of the overall power, and expect to control nearly two-thirds in five years’ time.¹

Manufacturers’ sources of power from the past no longer work today. They used to be the sole provider of consumer knowledge, but they have been overtaken by retailers’ own information, analysed by experts. For example, 28.5 million shoppers use Tesco’s loyalty programmes.² In 1994 Tesco’s hired dunnhumby to help them analyse their database, and within three months then Tesco Chairman Lord MacLaurin was moved to say, ‘What scares me about this is that you know more about my customers after three months than I know after 30 years.’³

The conversation between retailers and manufacturers used to be dominated by the manufacturers’ latest brand initiatives, but it is now dominated by retailers’ latest supply chain initiatives. Retailers used to welcome brand innovation for the store traffic it would drive, now they often lead the way innovating under their store brands. Whereas the marketing budget used to be dominated by television advertising, now manufacturers pay more for retailer-related costs than consumer-related costs, spending anywhere between 10 and 25% of their annual revenues on trade deals, the second-biggest cost after manufacturing. Savings from reducing overheads and improving productivity have been generated to help offset the increase in trade spending, but many manufacturers are forced to spend less on consumer marketing to balance the books and remain profitable.

The outcome of these shifts is that manufacturers now have to consider retailers as a separate and dominant force in the market rather than compliant minions who could be relied upon to do their bidding. Thanks to the success of private label strategies (see Chapter 9), five of the top eight FMCG manufacturers in the world are actually retailers; giants such as Unilever and Coca-Cola are no longer even in the top ten, their global sales dwarfed by products under the names of Wal-Mart (now the world’s largest FMCG manufacturer), Carrefour, Tesco, Aldi and Lidl. The branded manufacturers who have been tempted to produce private label are in no doubt where the power now lies. Indeed, it is rare for a branded company to even admit to being involved in private label; Weetabix are an example of one being open about their involvement.⁴ Unilever, PepsiCo, Nestlé, Heinz, Playtex, Ralston Purina, Hershey, RJR Nabisco and McCain are less public about their move to the dark side.

But such shifts are neither a recent phenomenon nor an irreversible tide of history. To better understand how and why they have occurred we need to analyse the basis of retail power and examine how and why the balance of power in the value chain has shifted over time between manufacturers, distributors and retailers.

The Emergence of Branding as a Value Chain Weapon

The history of trade is dominated by a struggle for the control of profits between producers, distributors and retailers. In the early days of the consumer economy, ‘Mom and Pop’ retailers were serviced by a complex network of middlemen who supplied mostly generic products sourced from a multitude of small-scale manufacturers. The anonymity of the products meant that manufacturer accountability for product quality was non-existent; shoppers neither knew nor really cared who made them. Retailers were the key players. Since they were the last stop in the supply chain, they were the only party the shopper could hold accountable as guarantor of the quality of goods purchased. As a counterbalance to retailers’ necks being on the line with regards to quality, they had the ability to set prices, most often individually by shopper, which gave them a large degree of control on the transaction profits.

The more enlightened retailers realised they could increase turn­over and hence profits by becoming an attractive destination. One way of achieving this was by gathering themselves under one roof, where their combined pulling power benefited all with the extra shoppers who thronged in their thousands. While the first recognisably modern shopping mall was the Southdale Shopping Centre, opened in Minneapolis in 1956, London’s Royal Exchange, opened in 1568, fulfilled a very similar purpose. The invention of plate glass revolutionised retailing and was used to impressive effect in Paris’ Palais Royal in the late eighteenth century, which spawned the nineteenth-century retail cathedrals that were to be found in London, Paris, Vienna and most large cities, attracting shoppers from far and wide.

The only way for distributors and manufacturers to end this relative dictatorship of the retailers on the size of the cake and their taking the biggest slice, was to take away their status as the ‘agents of trust’. If a member of the supply chain was willing to take responsibility for product quality and to stake their reputation on it, they could then inform the consumer of the product’s quality by placing some kind of mark on the product and (it was hoped) thus create a demand for their products as opposed to anyone else’s – and the notion of brands evolved.

The first brand used on packaged goods was created almost 2000 years ago in Pompeii. The product, Vesuvinum, which combined Mt Vesuvius with the Latin word for wine, vinum, was a type of red wine – a category highly vulnerable to middlemen adulterating the quality with cheaper wine, water or worse. Rome’s brick-makers also employed branding devices imprinted onto the bricks such that buyers in the city’s brick market could recognise those bricks built to last. The United Kingdom’s first brand trademark was registered in the late eighteenth century: the red triangle on bottles of Bass Pale Ale Beer, sold around the world.

It was essential that the branded manufacturer be able to package their product securely if their guarantee of quality was to be worth anything. Many packaging breakthroughs came about as a result of the demands of warfare. Foods became practical for mass manufacturing and branding with the invention of airtight food preservation in bottles by Nicholas Appert, in response to a prize offered by France’s Napoleonic government as a means of feeding the Emperor’s armies. The process for canning food was patented in 1810 but was slow to catch on, not least because the can opener was not invented for another 45 years. Similarly, the American Civil War gave a huge boost to embryonic food producers as the massive military orders forced them to scale up and reap huge economies of scale; prices consequently plummeted, making their products much more affordable when peace returned.

Many of the famous early consumer brands, such as Procter & Gamble’s Ivory Soap in the United States, and Pear’s Soap in Britain, came from the first manufacturers in the value chain to stake ownership of product quality. Their competition was not other brands – theirs was the first – it was the unbranded and largely untrustworthy generics.

Towards the end of the nineteenth century, after industry manufacturers grasped both the advantages of economics and technology to make branding synonymous with manufacturing, they were able to take the initiative ahead of distributors and retailers because of the scale economies of mass manufacturing combined with developments in packaging and transportation technologies. Together, these enabled the efficient production, transportation and retailing of individually sealed, branded packages, giving the manufacturer a route with which to build and own the relationship of trust with the consumer, and thus leverage with which to squeeze the distributor and have some influence over the shopkeeper.

The Demise of the Middleman

The middleman had had a good life in the nineteenth century. His monopoly on distribution, particularly in America, gave him substantial leverage over the manufacturer, who was a distant third in the battle for power. But, as middleman, he was vulnerable as he had no direct contact with the consumer and did not have the means to establish branding on the thousands of product lines in which he dealt.

When Procter & Gamble (P&G) were building their new soap brand, Ivory, their route to market was through the middleman. The early advertising was not just singing the praises of Ivory, but directing the shopper to make sure it was Ivory they were buying, thus hoping to generate a pressure on the retailer to ask for it specifically from the distributor.

This advertisement (Figure 1.1),⁵ ‘Examine Before You Buy’, ran in the Century Magazine in 1886 – it indirectly encouraged grocers to stock Ivory Soap so that their customers would not be fooled into buying soap of a lesser quality.

Figure 1.1 ‘Examine Before You Buy’. Century Magazine, printed in 1886.

Source: The National Museum.

The brand sold well with this approach, but P&G were still the poor relation in the value chain and had not been able to shake the grip of the retailer and the middleman on the profits. Despite increasing the investment in consumer advertising – up to $146 000 in 1886, Harley Procter reported that ‘soap is in excellent demand but prices are low and profits small.’⁶

P&G began to experiment in 1913 with cutting out the middleman by selling and delivering to retailers direct, and by 1921 they adopted the approach nationwide. This was a big bet by P&G.

Overnight, the sales force had to be expanded from 150 to 600, 125 more warehouses had to be acquired, 2000 contracts had to be written for deliveries by trucks and the accounting department had to be reorganised to handle 450 000 accounts.⁷

A boycott of P&G products by enraged distributors meant that the initiative was on a knife-edge for a while, but ultimately the gamble proved a success. Many other major goods manufacturers were able to follow P&G’s lead to reap the benefits of greater profits of doing distribution for themselves, as well as the incremental benefits of having their own salespeople and merchandisers regularly visiting shops and building relationships with the shop owners. The original reason for P&G considering the initiative – greater predictability in orders and shipments – paled into insignificance with the benefits that influence over the point of sale were to bring.

A battle that had always been biased in favour of retailers because of their ability to influence the consumer and the middlemen for control of the route to market now began to swing inexorably in favour of the producer. This switch prompted innovation within the retail sector to fight back against the increasing power of the manufacturers.

An Early Appearance by Private Label

The Atlantic and Pacific Tea Company (A&P) opened their first store in 1859, founded on the principle of importing tea direct from China and Japan, thus cutting out the middleman and passing on the extra profits in the form of lower prices. This was an early example of the retailer realising that, having the key position of being in direct contact with the shopper, they had the potential to cut out one or even both of the other players in the value chain.

Within six years, they had expanded to 25 stores and decided that the same principle could be extended to other grocery items, which, for the most part, they executed by selling under a private label strategy. By 1930, A&P had become the largest retailer in the world, selling over a billion dollars’ worth of goods a year through their 15 700 stores.⁸ While they did sell the most popular brands from manufacturers, slightly over half of the 300 products they sold were under the A&P private label – a ratio that a modern retailer would see today as a reasonable target to aim for. As part of their strategy, A&P had vertically integrated back into producing their private label products, thus also cutting out the manufacturer from the equation. They owned and operated coffee roasting plants, bakeries, food factories, cheese warehouses and salmon canneries, making them, at their peak, one of the world’s largest FM...

Table of contents

• Cover
• Title page
• Copyright page
• ACKNOWLEDGEMENTS
• INTRODUCTION
• Chapter 1 SHIFTING OF POWER IN THE VALUE CHAIN
• Chapter 2 DIFFERENCES BETWEEN MANUFACTURERS AND RETAILERS
• Chapter 3 THE FRAGILITY OF A MARKETING ORIENTATION
• Chapter 4 RETAILERS AND THE MARKETING CONCEPT
• Chapter 5 THE BATTLEFIELD FOR MINDSPACE AND SHELFSPACE
• Chapter 6 THE BATTLE FOR MINDSPACE
• Chapter 7 THE BATTLE FOR SHELFSPACE
• Chapter 8 CREATING A SUSTAINABLE RETAIL DIFFERENTIAL ADVANTAGE
• Chapter 9 PRIVATE LABEL
• Chapter 10 TRADE MARKETING
• Chapter 11 INTERNATIONALISATION AND EMERGING MARKETS
• Chapter 12 E-RETAILING
• Chapter 13 THE NEW ORDER AND ITS CHALLENGES
• Appendix 1: TOP PRIVATE LABEL MANUFACTURERS
• Appendix 2: BRIC MARKET SNAPSHOTS
• Index
• STOREWARS IS THE WORLD’S LEADING BUSINESS MANAGEMENT SIMULATION PROGRAMME