Retailer-supplier dynamics: Radical changes underway?

Driven by expanded purchase options for shoppers, retailer-supplier relationships are changing radically. How will this play out within and between channels?

Growing shopper use of technology is changing the relationship between buyers and sellers in the same marketing channel. It’s also allowing innovators to test new business models. Increased competition within and among channels is likely to be one of the most profound effects that the technological revolution will have on retailing. How do you see changing retailer-supplier relationships playing out in the following areas?

Conflict between suppliers and retailers

Target is demanding that their suppliers provide unique products that can’t be compared directly with those sold by online retailers, and plenty of retailers are looking at this type of insulation if they can get it.

Competition between channels

Amazon’s move into book publishing directly challenges the publishing industry. They want to cut out the middleman entirely by changing the revenue split

  • From 50% to publishers, 20% to authors, and 30% to retailers
  • To 55% to retailers/publishers (Amazon) and 45% to the author.

Interestingly, this is exactly Walmart’s vision for working directly with some of the best produce suppliers, making them the single connection between farmer and consumer.

Shopper options for purchasing similar/identical products

TrueCar is just the latest price comparison tool for shoppers, there are many, many more. How will shopper options for purchasing similar items change? How will shopper behavior evolve?

This discussion is now closed.

Special thanks to participants: Dave Carlson, Mike Buege, Dan Raftery, Tom Lemke, Paul Sabuttus, Bobby Martyna, Mike Spindler, Dave Bishop, and Larry Mortimer.

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BlackBeltDave Carlson said:
Disintermediation of the retailer is one question raised. Producers can sell directly to customers when the product is a commodity, needn’t be seen or touched directly and the cost and timing of delivery meets the shopper’s needs. Retailers, in either storefront or online channels, must add value to prevent this erosion. Value derives from any combination of convenience, related service and shopping experience. As the world moves to all purchase options being instantly available in detail, the value add challenge increases commensurately.

Storefront vs. online shopping is another question raised. The challenge points out that Amazon seeks to absorb publishing. I’ll use Amazon as a solid example on this question. As a retailer, Amazon adds great value: to find, compare, purchase and receive a book is incredibly easy and fast on their site. What they can’t do is provide a coffee shop, with comfortable seating to sit, sip and read. The financials must, of course, support the latter.

A clear example of the value in retailer/supplier collaboration comes in fast moving consumer goods, where purchases are shopper-identified. Each customer shops with a unique set of needs, wants, biases and loyalty levels (to national and private label brands, and the retail brand overall). Using prior behavior to deeply understand each customer’s interests enables both the retailer and its suppliers to serve each customer well by presenting their value proposition collectively, tailored to each shopper.

Emerging digital channels make targeted communication convenient and effective. When well executed, all 3 constituents in the process come out ahead: the retailer and all collaborating suppliers’ marketing dollars are spent efficiently and the shopper is served better, improving the experience and in turn, building loyalty. While this model has been well described for at least 2 decades, there are few showcase examples of its operation in place today.
BlackBeltMike Buege said:
I am going to come at this question from the supplier side which has been where I have spent most of my packaged goods career. It is becoming obvious that every retailer of consequence no longer wants to have just the “lowest” cost from the branded vendor but now wants a “unique” product version that is difficult to compare “shop” with that same manufacturers product carried at its brick and mortar and online competitors.
I can assure you that the last couple of years have been a challenge for all manufactures to manage dramatically rising product input costs. When you transfer today's branded manufacturing environment into an arena that starts to look all too much like a private brand model, you are faced with even more financial challenges.
Quite frankly the process is already starting but at some point manufactures of all sizes and types are going to start looking at more aggressively pursuing a direct to consumer model…perhaps in some instances just to survive…
BlackBeltDan Raftery said:
Whether viewed from the supplier or the retailer perspective in the total market picture, this conversation boils down to risk and reward management. At the total market level, the risk is cannibalization of sales - shoppers shifting among source options for products readily available to them in the marketplace. We used to call this competition when the source options were only the various stores in the area. Technology has certainly made this more scary for retailers, as the main deterrent - physical separation - dwindles in importance. Price is (pretty much always has been) a major factor, so the total market risk is margin loss.
The reward, which gets far less play, is sales growth, again at the total market level. Both suppliers and retailers can benefit from exposing shoppers to products not readily available in the marketplace.
I believe we are on the cusp of some major shifts in supplier/distributor partnerships geared toward managing the risk/reward details underlying my over-simplification. The Target request for unique products is just tactical one example, which by the way has been going on in the non-food parts of several major chains for years.
BlackBeltTom Lemke said:
All great comments. Early in my career, I worked in the consumer electronics and photography industries. We worked with most of the major national retailers and were asked to create unique models for each of them, which we did. We also created other models only available for direct to consumer. It wasn't a limitless series of changes, but for the committment of certain volumes we would modify product. It may have been black front panel vs silver, etc. The goal clearly was to help both the retailer and us as manufacturer to sell more goods. And, it worked pretty well. That was a simpler time with less products, choices and options available to consumers. With today's proliferation of choices of the same products being sold by the same manufacturers, we perhaps unintentionally drifted away from that type of strategy. Price is the great equalizer and once everyone is at within a certain tolerance on price, how does one differentiate. In the research work that I have done, price always shows up as important to the customer, but then things like service, convenience, trust in the brand, etc. come into play. In the non-grocery space, retailers are working toward getting 10, 20 and 30% or more of their sales from their on-line stores. This may becoming to grocery as least in some categories. As someone already commented, the world is changing rapidly and in my opinion, we are on the cusp of a "brave new world."
BlackBeltPaul Sabattus said:
When the big box stores plowed in to the supermarket space a lot of nice chains were scuttled. They were having the same problems that Target has now; trying to compete on price with a new and different business model. In the years that ensued, some chains moved to get scale through acquisitions to lower COGs and some had success with this. Unfortunately some did not. Other chains pursued a path to get better, strengthen the value proposition in other ways and differentiate themselves with product. In almost every case, the chains that did well became what we routinely call today, “regional powerhouses”.

Today, the superstores that were once the “teacher” must now become the “student” and look to the very chains they wreaked havoc on to learn from and succeed. One of the paths to success for the regional chains is they put tremendous resources into sourcing unique products outside of the typical supplier channel. They sourced these products from anywhere they could and took the same thinking to creating dynamite private brand programs. Not good private label programs mind you, GREAT ones! Then they built a marketing acumen – and this is a huge key— and created demand for their portfolio of unique products. They were and are relentless as this.

One path to success may be rather than have “conflict” with suppliers, what is needed is to build relationships with new suppliers that give them a competitive edge. A case in point: I spoke with a chain last month that is embarking on a new strategy they are calling; “Products of Difference”. They are looking for suppliers outside of normal channels in each category to find products that will be unique to them. The retailer in turn will create demand for these products. This is a great model for a win-win partnership. In doing this, the margin that will be created from these “new” products will be reinvested in multiple ways to further enhance their value proposition.
BlackBeltBobby Martyna said:
It's not a big stretch to see a world 10 to 15 years hence where the retail landscape as we know it has all but disintegrated. The lone exceptions would be retailers serving up convenience items for immediate consumption (e.g. fuel, snacks) and product showrooms (run by manufacturers for the most part, not retailers).

The demise of today's boxes will be accelerated by massive improvements in supply chain (especially low cost, same day courier services), the cost of gasoline and changing demographics.

With that premise, the only question is which retailers will understand this -- and survive.
BlackBeltMike Spindler said:
As I recall the electronics business Tom speaks of the stated purpose for product differentiation was to meet customer unique needs, the underlying murmur was about having products that cannot be compared easily to the competitor's flyer.

Where there is a true differential as Paul was describing, there is hope for survival. Many of the more savvy independents at NGA last week spoke about being where the "bigs" are not. finding the niches that allow them to survive. However, with the long-tail model that has been so well discussed and practiced how long will this niche business last?

To Bobby's point some retailers are embracing the change. Cabala's just announced "showroom" stores in mid-markets that will carry seasonal merchandise but rely on online, mobile and in-store kiosks to carry the bulk of the sales load for the majority of their items.
BlackBeltDavid Bishop said:
Where and how shoppers purchase various products will continue to shift based on the concept of "better, cheaper, faster."

Better is where consumer can get exactly what they want. The ability to customize, personalize, or find the right item because of broader selections will drive this element.

Cheaper...enough said here.

Faster relates to saying time, i.e., it's faster to order a pair of shoes online for delivery than it is to drive to a store, shop, and drive home.

Where online technology can't deliver against at least one of these areas is where brick and mortar stores have a chance to win. And, to Bobby's point on immediate consumption, this may explain partially why the foodservice and convenience channels have been less impacted by this trend.
BlackBeltLarry Mortimer said:
I like to think Technology has created an atmosphere for both suppliers and retailers like the Old Wild Wild West.Anything goes! The saavy and strong survive.
Amazon is an aggressive predator. Those that can ,do. When you own more distrbution than your competitors you can change the way the game is played. Walmart is not any different.
The suppliers that are first in after the new ground rules are explained can still win if they are smart. In some instances suppliers may even have to pool their resources ,so they can do business profitably with their retail and distribution partners and level the playing field. There were instances in the old west where Indian tribes joined together to fight the evil white man for their land.
I am a believer that shopper options for purchasing are a plus for all concerned. Out of the competition the shopper will gravitate to what works best for them. However I do believe as technology continues to evolve the the retail marketplace will become more fragmented as shoppers create new habits based on where they feel comfortable.