By Benjamin Smith

Hand It Over!

A retailer asking for more margin?  Not shocking – or ridiculous.  It’s a free country – you can decide if you want to offer more, or stare them down.  Unless they have no respect for you or  your brand, in most cases, when they ask for more margin they have a good reason.  At the end of the day, it all goes back to the cost of opening / maintaining all those retail stores.

Credit: Wall Street Journal

You have to have faith in free markets that there are limits to what they can justify asking for – otherwise their competition down the street – or increasingly online – will find a way to do more with less.  This is of course reaching critical mass today as retailers like Best Buy see customers come to their store to get educated, then use smart phone apps and web research to compare prices and buy elsewhere.

How does a retailer asking for more margin tie into Retail Leverage?  I’ll illustrate our ideas and provide some suggestions at the end of this article, but the key perspective is that changes at retail present opportunities for a repositioning.  Whether it is a new buyer at your key retailer, a new entrant in your category, or a seismic shift in terms of where consumers purchase, change means you have a chance to gain leverage.

SOS – “Save Our Stores”

A favorite author of mine, Rafi Mohammed, founder of the Pricing for Profit blog, touched on the disadvantages facing brick and mortar stores and proposed a way to save them.  His proposal is called the “Physical Store Equalizer” aka the “PSE”, where manufacturers help compensate physical retailers for the value they bring to the sales proposition.

I’m linking to Rafi’s article “The Pricing Strategy that Can Save Brick and Mortar Stores”, as well as including the key sections here:

The conventional wisdom is that consumers will pay a premium for the convenience and service provided by brick and mortar stores. But as online retailers’ growing market share attests, that CW isn’t holding up. I went online to buy the TV the Sears associate helped me select, and I saved $150. As the sliding value of Best Buy shares confirm, too many shoppers aren’t willing to pay a premium for sales associates, in-person demonstrations, or the ability to get a product right now. The current retailing model, which expects consumers to pay this premium, is starting to look broken.

It’s time for a new system in which manufacturers help compensate physical retailers for the value they bring to the sales proposition. They can do that by offering brick and mortar retailers lower wholesale prices than their web counterparts. I call this discount the Physical Store Equalizer, or PSE.

Retailers’ pitch to manufacturers to try to gain this discount should be straightforward: “As a brick and mortar retailer, we add value and generate higher sales of your product. Our stores increase your brand awareness, provide a venue for people who want to touch and feel the product before they buy it (whether they buy it from us or online), and our sales staff help educate your buyers. We bear costs for these services, so it’s impossible for us to match online prices of your product. To be fair to us, we require a wholesale price that is 10% less than what you are offering web retailers.”

Retail Leverage Takeaways:

Let’s be realistic – the PSE already exists in many different forms.  Different classes of trade have different margin requirements already, and that is just the cost of entry.  Start layering on paying for circular ads, end caps, slotting fees, in-store tv, staff training / access to staff – it adds up.  What Rafi’s “Physical Store Equalizer” is attempting to capture is payment for the advertising effect some retailers provide, even if the customer purchases elsewhere.

And you know what – participating in these extra “advertising” opportunities is one way to gain retail leverage.  Not to mention that many may be truly advertising and come out of a different budget.  I’m not sure what scorecard they keep internally at retailers but it surely doesn’t hurt your buyer if you belly up to the bar on some of the extra opportunities they ask you to participate in.

However that doesn’t get around the central proposal Rafi made, which is to survive, brick and mortar retailers should be asking for/receiving extra margin, above and beyond whatever has been built into the system today.  An overlay if you will.  While I firmly believe all brick and mortar retailers will be increasing their margin demands (maybe with a copy of Rafi’s article attached), I don’t think all will see equal results.  Increasingly manufacturers are going to have to make tougher choices about where & what they sell.  If you don’t know where your retail bread is buttered you’d better figure out quick.

If you’ve got a big brick & mortar business but have little leverage, you may have tough choices to make in terms of what & where you sell online – from amazon.com to your own direct site.  I know – it’s tough – the whole Internet thing isn’t going away anytime soon.  Or you have to be prepared to sweeten your offering to brick & mortar retailers – from exclusive or protected lines/items, to better terms, to more money for in-store marketing/advertising.

And without getting into all the legal pricing issues, there is always a number you can get to that will justify a business case – offer x retailer increased margin with expectation of a y increase in business (from retailer steering more business your direction).

What Do You Think?

Put up or shut up?  We’d love your perspective on this situation, whether you are from the brand, retailer or agency side of the aisle.  Please share your comments in the section below, or share with us on twitter @retailleverage .

Related Reading:

• WTN: Retail business model innovation prediction easier than Super Bowl bet
• WSJ: Phone Wielding Shoppers Strike Fear Into Retailers

By Ben Smith

Growth makes the world go round.  The market demands it, the CEO and CFO expect it, and the managers chase it.  To provide retail perspective on the old quote  - “if you aren’t growing, you’re dying” – we do believe you are growing in a less desirable sense – that is growing more reliant on your existing customers.

Being realistic, unless you are a start-up or regional player, your brands products are probably already in the expected channels for your category(s).  Of course you could and should be trying to grow in your existing channels – but you’re probably in trench warfare now, fighting over the same turf as your key competitors, not to mention your partner retailer’s private label products.

I don’t know if I’m suggesting something as radical as the authors of the book “Blue Ocean Strategy” would suggest – I’m merely advocating you change the channel by looking beyond your existing business.  That being said, pursuing new channels does have some similarities to the core philosophies shared in “Blue Ocean Strategy”.  Think about your existing retail channels in context of the Red Ocean Strategy below, and then look at the Blue Ocean Strategy.  It makes a Blue Ocean Strategy in retail seem worth a shot.

WHAT ARE ALTERNATIVE CHANNELS:

So a “Blue Ocean Strategy” in retail is what we are affectionately calling here “Alternative Channels”.  What exactly are “Alternative Channels?  I don’t mean alternative channels in the 1990’s or satellite radio sense.  The simplest definition I can offer is that “Alternative Channels” are means of distribution outside of those you’d traditionally expect for a given product / service to reach customers.  This means they probably require modifying how you go to market.  This impacts everything from the margins and programs you offer, to how you reach customers and present yourself at the point of purchase.

Agencies and vendors take note – pursuing sales via alternative channels often creates new growth opportunities for you too. Additional marketing budgets for somebody’s special initiative.  Targeted messaging.  Custom displays.  Special packaging.  New types of promotions.

RECENT EXAMPLES OF ALTERNATIVE CHANNEL PLAYS TO GET YOUR IMAGINATION GOING:

P&G expansion at BabiesRUS

During 2009, P&G moved from Pampers & Dreft at Babies R US to a broader assortment of consumables.  Given that Babies R US tends to be a destination for parents on a mission for diapers or formula, they are providing convenience that perhaps reduces a separate trip to pick up these other essentials.

Nintendo Wii at Sports Authority

Nintendo’s Wii Fit has shown up in other places such as Babies R US, but the biggest example is their showcase in Sports Authority stores.  They have the opportunity to solution sell the wide range of fitness accessories that can go hand in hand with Wii Fit sales.

Dell’s Kiosks at over 140 Malls (RIP 2008)

Note – Dell’s mall kiosks served as a transitional tool for the direct marketer to dip its toes in the retail waters.  In 2008 Dell shuttered its mall kiosks and opened up retail distribution in leading computer retailers such as Best Buy, Walmart and Staples.

Taking OfficeMax Branded Products Outside Their Own Stores

Officemax has been selling branded products at Safeway since 1998 and announced recently they were expanding to Food Lion, as well as other unnamed mass and grocery retailers.

Ultimately, the purpose of growing outside of your existing book of business is to drive growth for your business.  You gain leverage with your existing customers, even if they don’t know it / acknowledge it, by having alternatives.

Key Benefits To Pursuing An “Alternative Channel” Strategy:

1. If you successfully develop new customers, you lessen your dependance on existing customers
2. Experience serves as a “Learning Lab” where you can test new ideas & apply learnings in your existing channels
3. Opportunity to create new demand for your product by positioning it for specific applications / uses
4. Growing sales in new channels may help lessen impact of seasonality in your existing channels
5. Buyers / merchants tend to stay within the retail industry – your new friends may pop up in your existing channels down the road.

CAVEAT:

You always have to be aware of the potential impact to your existing business.  It is much easier to find alternative channel success stories than it is to find people willing to tell you how they got their hands slapped by existing customers, or even worse, lost business as a result.  While your management probably won’t accept a printed copy of this article as a get out of jail free card, you are welcome to try.Take heart though – as the retail market has consolidated, ironically we believe there is less threat to pursuing sales via alternative channels than ever before.  In the past retailers used to obsess that someone else was getting a better deal than they were.  If you were living on the edge, every Sunday you held your breath knowing your buyer was ready to play a game of gotcha / you’re busted with the circulars as evidence.

Perhaps the abundance of price comparison websites/services means that nobody is really going to be able to offer a significantly better deal, so that threat has passed.  Perhaps retailers feel guilty about increasing competing against the brands they built their businesses on with their own private label goods.  The net is we believe the coast is clear as long as you are fair in your offerings.  If there isn’t anything you’d be ashamed of your existing customers to see, no worries.

ADDITIONAL RESOURCES / RELATED READING:

Note –  resources on alternative channels are few and far between.

• Amazon.com book page for “Blue Ocean Strategy”
• Blue Ocean Strategy community at 12Manage.com
• 2005 Article in DSN Retailing Today “Alternative channels gateway to better sales”
• 2003 article about alternate channel sales for furniture

By Vincent Young

Kudos to Wichita, Kansas-based INVISTA who recently announced that Lowe’s will become the only major home improvement retailer to offer STAINMASTER(R) carpet — North America’s most recognized carpet brand. The new deal with Lowe’s gives the STAINMASTER Carpet brand access to Lowe’s nearly 14 million shoppers every week.

While the STAINMASTER brand has considerable equity in the home furnishings and flooring industries, the team at INVISTA was able to gain distribution at the world’s second largest DIY/Hardware chain by thinking like a challenger brand and adopting two key strategies to gain Retail Leverage.

Retail Leverage Principle #1: Bring Pent-up Demand to Stores

Since its introduction in 1986, STAINMASTER(R) carpet has revolutionized the industry with its stain and soil protection technology. Historically, however, STAINMASTER(R) carpet styles have only been offered by local STAINMASTER(R) Flooring Centers and aligned dealers in the U.S. and Canada. As a result of this new arrangement, Lowe’s will now become the exclusive DIY Home Supply Retail Chain to carry STAINMASTER branded carpet.

Retail Leverage Principle #2: Offer Product or Program Exclusivity

Under the multi-year agreement, the strategic alliance with INVISTA will deliver to Lowe’s customers more innovative, stain-resistant flooring options that are both stylish and durable under the STAINMASTER Brand. Quality-conscious, value-seeking consumers looking for the well-known brand will soon find an expanded selection of STAINMASTER(R) carpet in the more than 1,700 Lowe’s stores across the United States and Canada. In today’s economic climate, carpet remains an affordable flooring option, and with 89 percent aided brand awareness, STAINMASTER(R) is the brand most often recognized by consumers.  In addition, INVISTA expects the alliance will continue to enhance the STAINMASTER(R) brand as a result of Lowe’s targeted advertising, merchandising and promotions.

“This is a ‘win-win’ situation for consumers, INVISTA and Lowe’s,” said Steve Griffith, vice president of INVISTA’s residential flooring segment. “Today’s consumers are seeking products and retailers that deliver exceptional value, as well as brands that they know, love and trust. Our high-quality products and trusted STAINMASTER(R) brand is a great fit with Lowe’s commitment to its customers.”

“When shopping for carpet, customers look for products that deliver durability, repellency and soil resistance features,” said Patti Price, Lowe’s senior vice president of merchandising. “When our customers choose STAINMASTER(R) carpet, they know the product will perform in their active household. To further help customers, Lowe’s will feature a STAINMASTER(R) Carpet Gallery to help them choose the right carpet and simplify the shopping experience.”

The STAINMASTER/LOWE’S marriage is a wonderful example of how supplier brands can gain retail leverage by helping the retailer achieve its growth goals (by drawing new, incremental foot traffic into stores that were previously inaccessible by the retailer). Well done INVISTA!

SOURCE:

Press Release on the partnership between Lowes & Invista

By Vincent Young

For more background on Walmart sku reductions and the insight from a valuable community of retail contributors, read the Retail Wire article “Brands Hit By Wal-Mart’s SKU Reductions”. Here is Retail Leverage’s take:

It is extremely rare to find a national brand that actually has leverage at retail. The vast majority are in fact challenger brands and marketers of challenger brands often times fail to realize that FINANCIAL GROWTH POTENTIAL is the great equalizer between the all-powerful retailer and lesser yoked vendors.

In order to effectively compete, challenger brands must learn to package innovative product offerings together with marketing programs designed to represent at least one of the following four forms of retailer financial growth:

FOUR WAYS TO OFFER RETAILERS FINANCIAL GROWTH:

1. Increase overall category demand - Retailers are measured based on year-over-year growth, excluding new store openings. A challenger brand with a plan to increase consumer demand for a good will always have greater leverage than one who simply offers a more robust feature set than the market leader.
2. Increase the attach-rate of high-value complimentary items – Developing a product line and promotional strategy that has the ability to uniquely grow the market basket is sure to maximize the support that challenger brands receive from retailers.
3. Motivate a “trade-up” within the category – What is it about your brand or product line that is sure to entice consumers to give the retailer more of their money? If your answer is “very little,” then remember that retailer margin dollars also serve as trade-up motivation to the retailer when making category assortment decisions!
4. Help a given retailer win the war against another retailer – Successful challenger brands understand the importance of winning with key retailers. Anchoring a new product launch with a sub-set of exclusive products and/or industry-leading, retailer-specific promotions can generate an over-indexing share of category for the challenger brand.

The most difficult thing for brands like Glad and Hefty is viewing themselves as challenger brands when their histories have been more reflective of the rare “power” brand.

FURTHER READING / RESOURCES:

• Carol Spieckerman, of New Market Builders, with an article on “Art of Retail” with an interesting parallel to Glad’s situation (she’s a Retail expert)
• Follow Carol Spieckerman on Twitter, @retailxpert
• Chris Durham’s website, My Private Brand (he’s a Private Label expert).
• Follow Chris Durham on Twitter, @MYprivatebrand
• The ad age article that was sparked all these discussions and was fully discussed on Retail Wire.