Channeling Big Stores' Awesome Clout

With enormous marketplace power, a small circle of merchants is determining more and more how consumer products are made and sold in the U.S. They're telling even the mightiest of manufacturers what goods to make, in what colors and sizes, how much to ship, and when. They are forcing suppliers to rethink whom they sell to, how they price and promote products, and how they structure their own organizations.

A vast consolidation in U.S. retailing has produced giant "power retailers" that use sophisticated inventory management, finely tuned selections, and, above all, competitive pricing to crowd out weaker players and attract more of the shopper's dollar. The top tier of superpowers includes Kmart, Target, Toys 'R' Us, Home Depot, Circuit City, Dillard, and a few others. Leading the pack, of course, is Wal-Mart Stores. The nation's No.1 retailer is expected to grow 25% this year, to some $55 billion in sales, at a time when retailers as a whole will be lucky to grow 4%.

The increasing influence of these retailers has obvious benefits for consumers. For starters, the stores are continually wringing excess costs out of the U.S. distribution system while squeezing price concessions out of suppliers. Many shun the constant promotions, coupons, and "sales" that introduce big inefficiencies. Much of the savings gets passed along to consumers in the form of lower prices. And because these retailers use sophisticated information technology to keep close tabs on what's selling and what's not, consumers are likelier to find what they want in the stores.

The risk is that small manufacturers, who lack the resources or savvy to cope with the inherent bias toward large manufacturers, won't be able to compete. Innovation and risk-taking could also be diminished. Those dangers must be monitored vigilantly by federal and state antitrust authorities. But pressure from the power retailers also benefits manufacturers by forcing them to become leaner and more nimble themselves. They're becoming more competitive with each other--and with overseas rivals. Some have wrested U.S. markets away from foreign manufacturers by cutting costs or reducing cycle time, and some have even been able to penetrate overseas markets, thanks to their new efficiency.

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