Published on: February 4, 2009
It was suggested here the other morning that the current economic crisis may offer manufacturers and retailers an opportunity; I wrote:It is hard to understand why manufacturers would prefer a system that relies on promotional fees and discounts, rather than encouraging a migration to a more consistent cost-based system that gets rid of corrupting influences such as slotting allowances. If retailers actually are willing to go there, manufacturers should be willing to make the change … especially because the moment will not last forever.
Ultimately, if they need any better reason to come together on this, they ought to look to consumers…who may have less patience than in the past with policies that obscure real values and value.
user responded:I would argue that manufacturers are looking out for their consumers by increasing promotional spend v. taking a price decline. Many retailers do not reflect a manufacturers price decline in whole, or sometimes at all. In the past I have often seen a retailer take the incremental margin generated by a decline straight to their bottom line. In these hard times a retailer may take the additional dollars generated by brand A's decline and apply them to category B if they think B is more important to their consumers.
By deploying commodity favorabilities back as performance based trade dollars, a marketer can require price performance by the retailer. This ensures that the people who ultimately buy the product - the brand’s consumer - gets the savings, not the retailer.MNB
user Bill Green wrote:The first thing I learned in ECON 101 was that 'prices are sticky on the down side'. A manufacturer who permanently lowers his price is not likely to see a reduction at retail. Remember, retailers have also faced rising costs during the recent past. The temptation to pad margins courtesy of a supplier price decline is too great.
Most of us agree that reliance on short-term trade promotions is unhealthy. However, it does offer the manufacturer some ability to control the application of his 'investment'. Permanent cost reductions result in the total loss of control.....and that's just not acceptable.
user wrote:You’ve been in the business long enough to know once they ask for a dead net price and get one, then they ask for promotional money again. It’s hard to break bad habits, like smoking, drinking and graft.
user wrote:A critical issue here revolves around how job performance is evaluated and how incentives are paid - for both manufacturers and retailers.
If buyers are judged and paid on how much money they "collect" in slotting fees, promotional allowances, flyer ad placements, displays, etc. - then they will keep on pushing the sales folks to give them more.
If sellers are judged and paid to generate ads, displays, price features, etc. - then they will keep on pushing buyers to go down that trail.
If careers are made on the manufacturer side by getting new products on the shelves (at "any" cost) - then slotting fees will never go away. Face it - slotting fees came to be when sales teams were told to "get this new product to 100% distribution no matter what it costs."
A few years ago a major trade show presentation (I think that it was at NACS) highlighted that Wal-Mart and Tesco were among the leaders in retail profitability. One common theme is that both do not take slotting fees. They each control what goes on the shelves in their stores.
We, collectively, are working on the wrong issues. Put manufacturer promotional money to use as "working funds" - to drive in-store results. New products should be purchased (or not purchased) based on the merits of the marketing behind the products.
user wrote:Take another drink of Joe and get real. While retailers have been asking the vendor community to get down to “Net Pricing” policies, I still see the retailers hitting us for marketing deductions that exceed the promised net price policy. If a vendor doesn’t keep marketing funds in the budget we will see more go away like a bad bank. It needs to start with real retail policies that can be counted on day in and day out, not just another strategy to get another pound of flesh from the vendor. We have some customers where the “Cost of Doing Business” exceeds 20% of their purchases. These are all items in that feared vendor agreements we all must sign in order to even speak with the buyer. The buyer than asks for added deals. My point is that the whole issue needs to be more transparent to all involved.
A secondary benefit will come about if this could really happen. Smaller companies with new and innovative SKU’s could compete with the larger more established vendors. The little guy doesn’t have the war chest like funds that the retailers demand.
Still another MNB
user wrote:I have to disagree with your viewpoint that lowered prices would result in lesser or discontinued slotting fees etc.; the sad truth is that many (most?) retailers have raised their margins pretty significantly and are now crying because they’re getting drummed by Walmart and others. Ad fees are spiraling out of sight as well, and there is no resultant increase in case volume either from ad placement or TPR programs at store level for the most part, so part of your view was correct – manufacturers are definitely caught between a rock and a hard place!
And, from yet another MNB
user:In your blurb about supplier vs. retailer pricing wars you wondered why suppliers wouldn't be more willing to move to a better cost structure (doing away with slotting fees, etc.) All suppliers would move in this direction if they could trust the retailers. Suppliers trust Costco, Trader Joe's, and Walmart, thus they give everyday pricing consistent with what those retailers are looking for. When it comes to the rest of the field the retailers are not as believable. Suppliers view retailers as trying to raise the cost of doing business. For example, if Safeway were to do away with slotting fees it would be for a period of time to get suppliers to everyday pricing. Then as that took place and suppliers all were compliant Safeway would then bring back slotting fees to raise more money. So, it isn't necessarily the suppliers being resistant the burden is on the retailers to be consistent, fair, and true to their suppliers. If that were achieved suppliers would fall in line. As all things in life, it's a 2-way street.MNB
user Mike McGuire wrote:The challenge for manufacturers is that retailers continue to increase the amount of product that they sell on promotion. So, lowering your everyday cost and taking out marketing money puts you at a disadvantage compared to your competition. When you see 10x lift (or more) when you promote (even at low discounts) from many retailers, there really isn’t reason to try to do true net pricing. By going to true net pricing, you are possibly tying your hands when your competition makes any move in the future.
The CIES “Top of Mind” survey was posted yesterday, and I wondered why “human resources” was so low on the list of priorities…”because if retailing and manufacturing executives alike do not pay attention to the people on the front lines – understanding that they are no better than their employees – then they have little hope of achieving excellence in all these other areas.”
user agreed:Kevin, as I was reading this article I came to the same conclusion as you. Why is Human Resources so low?
I work for a retailer and I will tell you what the survey says is exactly how they make their employees feel. If you don’t like it, go somewhere else. (Good luck finding another job…) It is not verbalized that way but body language, directives etc sure send that message loud and clear.MNB
user Al Kober wrote:I wonder how the ranking of human resources, or “people” would change if it was limited to the top ten most successful companies in the country?
The most successful companies put people first, that is, getting the right people in the right seats, and then get out of their way so they can perform to their highest potential. You can’t go wrong with putting people first, as long as they are the right people.
On the subject of the peanut butter-related salmonella outbreak, connected to product made by Peanut Corp. of America, one MNB
user wrote:This whole peanut fiasco illustrates the need for all involved in the food manufacturing and distribution chain to regularly audit their suppliers' operations. FDA and USDA cannot be trusted to do it. That large food manufacturers were unaware of the filthy conditions (or did nothing, even worse) described at this plant is inexplicable. It's part of the total quality process to which lots of companies claim they subscribe. Part of the blame for this tragedy belongs to PCA's customers.
user wrote:There really is no excuse for this. All of the manufacturers using this product are culpable. Where is there oversight? Are they questioning why a supplier can undersell all of the competition? No, they are just bidding to get the best price. I have seen some very dirty, poorly run food processing plants. The FDA cannot possibly get to all of them. They concentrate on the majors and on perishables as well they should. Hold those buying the ingredients to some standard.
If PCA had been processing a "finished" private label product, this would never have happened. Those selling ingredients are the least scrutinized of all. It's price, price and price.
I’m not sure that the manufacturers should be blamed…though in the future, they may have to take a lot more responsibility - and demand greater transparency – in the supply chain.
A related story suggested that the time has come for irradiation, which sounded like a pretty good idea to me, especially since it has been approved by the FDA. Which led one MNB
user to write:I usually agree with your thinking, but your comment today was a little off-putting. Why should we trust anything the FDA says? And, please do not call me a head-sander, I have done research and find irradiation has not been fully tested. Please let me know, on which side of the issues, for the last 50 years, should I have been when the FDA approved such items from Thalidomide to the latest peanut butter disaster in order to not be called a person with their head in the sand?
Good point. I was uncharacteristically trusting of the FDA’s opinion of irradiation.
Not sure what got into me.
We took note of a report the other day that Amazon was considering a move into the e-grocery business in the UK, which led MNB
user Mike Griswold to write:I usually agree with Amazon but think they should re-think this one. The UK market is one of the most mature home shopping markets in the world. Customers know what they want, and retailers such as Tesco and Sainsbury have a huge head start. The physical shopping experience is also very different with smaller, more frequent transactions the norm due to smaller storage spaces. At the end of the day, I am not sure what differentiated experience Amazon can offer to force a switch from the well established existing alternatives (but I wish them luck).
I got roasted pretty good the other day by MNB
user Bill Warren, who thought that my attacks on the FTC over the Whole Foods case proved that I was an anti-regulatory knee-jerk conservative who wears “W” pajamas and worships at the feet of Sean Hannity.MNB
user Terry Shirley wrote:Who is this know-it-all nut case that jumped all over you politically for your opinion about the Whole Foods / Wild Oats merger. Anyone in that segment of the industry knows how poorly Wild Oats ran because of the extraordinary number of varied size formats they had through questionable acquisitions over the years. He’s making a lot of unqualified prejudgments in that bitter sounding diatribe.
It is interesting to note that in the wake of this merger that Whole Foods is looking for ways to lower their prices (counter to his arguments), rather than raise them. As more and more mainstream operators look for ways to enter that market segment, the consumer will benefit because of the increasing availability of organics – both fresh and packaged. I would suggest your reader should have done a background check on the parties involved prior to lambasting you as he did. He’ll find too that traditional operators toyed with the idea of purchasing Wild Oats, but there were just too many potential problems – and they weren’t FTC related.
user responded:I can only assume that by the comments from Bill Warren that he must be related to the FTC or have an agenda that parallels that of the FTC. From everything I have read and the facts that have been shared, your analysis of the "Whole Foods vs. FTC" story has been pretty good.
The fact that you shared his comments showed the integrity of you as a pundit and willingness to open up further discussion on this topic. I applaud your efforts but feel the topic is dead and only waiting on the new administration to open their eyes.
Don't praise me too much. His comments burnished my credentials with one segment of the MNB
user Michael Phelan wrote:Regarding the recent criticism of your stance on the Whole Foods-Wild Oats acquisition with which you and I essentially agree:
Critics claim that challenging the merger will "protect consumers from the expected harm of the result of higher prices in the absence of bona –fide organic-dedicated retailers." At the same time, neither the FTC, USDA, HUD or any other entity hiding behind an acronym, has taken any substantial steps to ensure that the availability of fresh fruits and vegetables – or even awareness about them - is increased in lower-income areas.
Proclaiming to protect the rights of those of us who are fortunate enough to already have several options for natural and healthy foods, reeks of insincerity. By and large, Whole Food customers, of which I am one, are fortunate enough to have choices and choose to shop there.
Whole Foods customers need protection but the lower income single mom who can't afford to buy fruits and vegetables doesn't even get some advice?
Why aren't these agencies putting their efforts into making sure that more Americans have the same healthy food choices instead of wasting their time with this effort? Or better yet, what about food inspection and safety?MNB
had a story yesterday about Nash Finch closing on an $80 million acquisition of three warehouses that will allow it to pursue and better compete the US military commissary market.
Which led one MNB
user to ask this question:Why is the government in the food business in the first place? If we paid our enlisted military folks a living wage, why couldn't they shop their local supermarket? We give away huge subsidies to our military for food and are competing with tax paying businesses....go figure.
There are two competing questions here...one suggests that we’re not paying our military enough, and the other that we’re paying “huge subsidies.”
I think the better question is why the US government doesn’t at least consider outsourcing the whole business to a company that is in the retail game…get rid of the infrastructure, cut costs, and maybe even generate a profit. As it is, companies like Walmart often are positioned outside bases and are able to compete for customers in a way that the commissaries cannot.
There may be a perfectly good reason not to do this, but I’d like to hear it…and I certainly think the option ought to be explored by an administration that has said it wants to do things differently.MNB
reported the other day that Bruce Springsteen made a mistake and let it slip through the cracks when he allowed Walmart to sell a compilation CD; he noted that he has long been a workers rights activist, and Walmart’s image is contrary to his beliefs.
But several MNB
users didn’t take his statement at face value.
user wrote:He didn’t goof; money trumps judgment.
Because they’re only selling those CDs for $10 apiece, and I’m guessing Bruce must have plenty of money...
user wrote:The words “... and he will send the profits to some appropriate PC cause...” seemed to be missing from the article. Looks like the Boss was advised to put a little PR eyewash on the problem and move on. He has been profiting from CD sales at Walmart for years. Somewhat suspicious that it became an issue just before his big Super Bowl bonanza. I imagine that we will have to endure a parade of lefty entertainers acting shocked that their Asian made CD’s/DVD’s/books are sold at the world’s largest retailer so they can keep their “ blue collar” creds. Too bad they don’t use their prestige to help figure out how to make our manufacturing sector more competitive so it can employ more people at solid pay . I imagine they have little interest in the answer.
I don't know. My inclination is to take the Boss at his word on this one. And I’m guessing that those who don't probably aren’t fans. Or just don't like “lefty entertainers.”
I mentioned the other day, when writing about a new Fairway Foods coming to Stamford, Connecticut, that it would be going in right across the street from the gym where I take boxing lessons. Which led one MNB
user to ask:The Content Guy vs. Danny Bonaduce?
No way. No chance.
I’m not even sure I could take Susan Dey.
On the other hand, I might have a fair shot against Shirley Jones.