www.reveries.com - 1/5/02

Nostrahoytus AD2002 - Part 1

By Christopher W. Hoyt

One does not have to rely wizards, stargazers or tarot cards for a reasonably accurate prediction of what is going to happen in the U.S. CPG industry over the next few years.  What one has to do is focus on the current (or emerging) demands and business objectives of the industry's mega-retailers in each trade class and the picture becomes quite clear.  The key take-aways, however, are how these changes will affect CPG brand marketers and what CPG brand marketers can do today to ensure that they are positioned properly to take advantage of these changes vs. getting buried by them.  For those of you who think that “Trade Promotion Inefficiency” is your #1 issue, listen up.

There is a LOT going on in the CPG retail community which for most manufacturers could go unnoticed until too late.  This is particularly true of second and third-tier manufacturers who do not have the luxury of top-to-top access to mega-monster account decision-makers and/or who are primarily trade-dependent for brand survival.  Key trends and current priorities you should know about are:

Mega-retailers are changing relationship rules for everyone.  What they do now will eventually filter down in truncated forms to second and third-tier accounts as “policy.”  Current priorities:

Return on Net Assets (RONA) - Not just sales or share growth at any price

100% Vendor-financed inventories - meaning longer terms, shorter lead times, pay-on-scan, etc.

Global sourcing, global contracts and centralized buying - which cut across all geographical boundaries and which leverage lowest production/labor costs on a worldwide basis

Look for additional ways to transfer costs of doing business to the supplier community

Change scorecards to evaluate the entire cost/benefit of a supplier relationship across activities, categories and markets - not just on year ago sales increases or on contribution to overall category growth and profits

De-list suppliers who do not measure up and fill the vacuum with private label

Because consolidation has created a veritable combustion chamber of competition, there is huge pressure among trade class leaders to differentiate in ways that resonate with the consumer.  Critical components:

True, professionally-derived differentiated “positioning”

Total store “themed” promotions requiring the cooperation and coordination of a number of different manufacturers

Entertainment as a key promotion component

Focus on most profitable customers - dramatically improved use of frequent shopper card data and knowledgeable supplier resources to help analyze these data (no more “professors”)

Websites, home delivery and direct mail - anything and everything to help build the most intimate relationship possible with big spenders

Store-specific marketing - defined as targeted distribution and assortment, local tie-ins and local promotions

To do all this - even greater demands on supplier marketing and promotion expertise (co-marketing)

To fund all this - increased pressure on suppliers for more trade promotion dollars

National brands are about to come under even more pressure as retailers adopt different evaluation criteria in the crunch for profitability, efficiency and differentiation:

The key criteria for any new product will be the extent to which it provides a consumer solution and contributes to overall category growth

Redundant brands or SKUs will be de-listed to reduce costs and improve efficiency - a key message for “pay-to-stay” suppliers who now depend solely on trade promotion spending for survival

The totality of the sponsoring manufacturer's contributions or ability to meet mega-retailers' scorecard criteria will play an increasingly important part in the decision process.

Jacks-or-better-to-open will be how well a national brand can perform vs. the account's filling the space with its own private label (especially relevant in current recessionary times)

The entire nature of the current partnership relationship will shift as leading retailers broaden and deepen their demands on the full panoply of supplier resources.  Key elements:

Category management presentations that provide consumer solutions and action steps that the account can implement within the framework of present resources in a timely manner

The supplier's willingness to de-list its own brands on a store-specific basis for the sake of overall category sales and/or profit growth on a total chain basis

Joint planning and forecasting to achieve mutual objectives

Promotions that increase consumption and contribute to image reinforcement

Integrated information flow

Suppliers' willingness to adjust terms to meet the retailer's financial criteria until supplier can improve order turnaround times

Joint opportunity identification and new product ideation

On top of all this, mega-retailers are now becoming their own manufacturers and marketers.  Armed with information and costs provided by suppliers, mega-retailers are not reluctant to invest heavily in their own processing facilities once the volume warrants it.  While this may seem limited to certain retailers at present (A&P, Kroger and Costco come immediately to mind), the safe assumption is that mega-retailers will move quickly to expand this to as many categories and products as possible, not only as a means of increasing profits but as a core strategy for true differentiation.

So how will these changes impact you as a brand marketer?  See Part 2!