Clout!Zachary Schiller and Wendy Zellner
The folks at Totes Inc. thought up a pretty nifty product. They took a heavy pair of socks, stuck rubbery treads on them to provide traction on slippery floors, and called the result slipper socks. High fashion, no. Big business, yes: A year after introducing them in 1988, Totes was selling 14 million pairs a year. Kmart Corp. and Wal-Mart Stores Inc. alone accounted for as many as 1.5 million pairs.
But not for long. Within two years, both giant discounters had found suppliers that made knockoff slipper socks for less. They dropped Totes--and lowered the price of their knockoffs 25% or more, to under $3 a pair.
So Totes is in high dudgeon, right? It's hurling imprecations at Kmart and Wal-Mart and vowing never to deal with them again, isn't it? Not exactly. For this $200 million Cincinnati-based marketer, such reversals are the price of doing business with huge mass merchants. These days, Totes executives figure their new products have a year, at most, before these retailers crowd them out with lower-priced knockoffs. Says President Ronald Best: "You're constantly faced with a decision: Can I afford to deal with these guys?" The brutal truth: "You can't afford not to."
Best and thousands of other suppliers large and small are feeling the effects of a vast consolidation under way in retailing. In category after category, giant "power retailers" are using sophisticated inventory management, finely tuned selections, and, above all, competitive pricing to crowd out weaker players. Consultants Management Horizons predicts that retailers now accounting for half of all sales will disappear by the year 2000 through bankruptcy, mergers, or other reorganizations. Triumphing over them are superpowers including Wal-Mart, Kmart, Toys 'R' Us, Home Depot, Circuit City Stores, Dillard Department Stores, Target Stores, and Costco, among others.
CATEGORY KILLERS. Leading the pack, of course, is Wal-Mart. The key to its clout, says Chief Executive David Glass: "We're probably in a better position to determine specifically what the customer wants to buy than is the manufacturer." The nation's No. 1 retailer is expected to grow 25% this year, to some $55 billion in sales. Retailers as a whole will be lucky to grow 4%.
Consumers are flocking not only to Wal-Mart but to new retailing channels. They now patronize warehouse clubs and tightly focused "category killers," which are taking over sales of everything from toys to tires. Whirlpool Corp. estimates that such specialty stores, along with warehouse clubs, will more than double their current share of appliance sales, to over 25%, in five years. It all adds up to a power shift to a privileged circle of merchants. More and more, they're telling even the mightiest of manufacturers what goods to make, in what colors and sizes, and how much to ship and when. They are forcing suppliers to rethink whom they sell to, how they price and promote their products, and how they structure their own organizations.
From the tiniest of private-label suppliers to giant Procter & Gamble Co., manufacturers are overhauling themselves to cope with the demands of retailing's kingmakers. "They're not difficult to deal with," says Lawrence Zalusky, chairman of Health o meter Products Inc., the leading maker of bathroom scales. "It's very simple. They say, `We want this. Either you do it, or we'll get it from somebody else.' "
At its most basic, of course, the tussle between power retailers and their suppliers is about money. Many manufacturers are drawn to the big retailers in the hopes that huge volumes will offset slender profit margins. "Most suppliers would just do absolutely anything to sell Wal-Mart," says one manufacturers' representative. For their part, the retail giants demand the best price. "They take your guts out," says one small toymaker of Wal-Mart.
BIG SQUEEZE. But that's only the beginning. Some vendors complain--usually off the record--of an unceasing barrage of demands from retailers, who want everything from discounts for new-store openings to payment of fines for shipment errors, to huge numbers of free samples. Vendors to Wal-Mart tell of how niggling some of these practices can be. The Bentonville (Ark.) giant is known for phoning its vendors collect. And forget about buttering up your Wal-Mart buyer over an expense-account lunch. Wal-Mart buyers don't let vendors buy them lunch. Wal-Mart's Glass says the chain's vendors see the giant as "tough--but fair."
Painful as this may be for suppliers, the super-retailers, with their unrelenting focus on efficiency, bring plenty of benefits for U.S. consumers and the economy as a whole. They are continually squeezing excess costs out of the system for distributing consumer goods. Wal-Mart holds its operating and selling expenses to 15% of sales, vs. 28% for Sears, Roebuck & Co. Much of those savings are passed on to consumers in the form of better service or lower prices. The super-efficient warehouse clubs, including those owned by Wal-Mart and Kmart, are a case in point. A recent McKinsey & Co. study found that the clubs offer prices 26% below regular prices at traditional supermarkets.
And the pressure from power retailers is, in turn, forcing manufacturers to become leaner and more nimble. For example, some big retailers demand that Totes put price stickers on individual packages so their stores don't have to do it themselves. And one warned the company it would impose a fine of $30,000 for errors in bar-coding on products Totes shipped. Driven in part by such demands, Totes has automated its bar-coding system and revamped its computer and warehousing systems. Says Best: "You really have to have your act together to deal with these guys."
And there's the rub. The growing clout of big retailers tends to favor big suppliers at the expense of the little guys. It's usually only the largest manufacturers that have the capacity to produce, on time, the huge quantities required by Wal-Mart and its ilk. It takes hefty resources and plenty of sophistication to meet their demands for customized products and packages, computer linkups, or special delivery schedules. And only a supplier with multiple product lines--a Unilever or a P&G--can offer big retailers an efficient way to buy many different products.
In addition, it's typically the bigger suppliers that can form the sort of close partnerships that retailing's behemoths are increasingly demanding. The goal is to boost sales and reduce costs for both sides by slashing inventories, shortening lead times, and eliminating error: "There is a healthy interdependence between us and people like Wal-Mart. We need them; they need us," says Wolfgang R. Schmitt, CEO of Rubbermaid Inc.
Many such partnerships are apt to be more rhetoric than reality, but some sophisticated suppliers have figured out how to forge ties to retailers that go well beyond the traditional contacts between buyer and salesperson. Black & Decker Corp., for example, has divisions with a dozen or so staffers from a variety of functions, from logistics to finance, dedicated to serving such customers as Home Depot. And P&G has placed some 70 employees near Wal-Mart's Arkansas headquarters.
PURE FEAR. Smaller suppliers can sometimes use their nimbleness to match these partnerships. But for others, the choice may be to merge. Take Robert Stein, CEO of housewares maker Ekco Group. He's been making acquisitions, such as his recent purchase of plastic-products maker Frem Corp., "almost as much out of fear as anything else." Says Stein: "You've got to be a broad-based supplier to provide those services."
In some businesses, the emergence of category-killer merchants is forcing a consolidation among manufacturers that mirrors the concentration among retailers. Take the toy industry, where Toys 'R' Us Inc. controls some 20% of the retail market. The manufacturing side today is dominated by just six companies, while a decade ago, no one toymaker controlled more than 5% of the market. "It's becoming harder for small suppliers," says Toys 'R' Us Vice-Chairman Michael Goldstein. "They're up against giants that do things very well."
This isn't the first time that big retailers have flexed their muscles with manufacturers. In its heyday, Sears, Roebuck & Co. even owned several of its biggest suppliers outright or in part. The crucial difference today is that the best retailers are harnessing powerful information systems to stock what customers want, when they want it.
And they expect suppliers to act quickly on that knowledge. At Wal-Mart, for instance, more than half of its 5,000 vendors get point-of-sale data. At Kmart, 2,600 of 3,000 suppliers have some sort of electronic linkup, according to Jim Glime, manager of business development. "The power retailers have figured out a way of converting raw data into insight," says Gary M. Stibel, a principal of New England Consulting Group. Jeans and lingerie maker VF Corp., for example, worked with Wal-Mart's buyers to create model assortments of its wares for each store. VF's new artificial intelligence system can automatically adjust the models. So if a particular outlet sells more large sizes than the norm, VF changes the assortment accordingly.
The most agile suppliers tailor their products and packaging to please individual power retailers. Rubbermaid Inc., for one, works carefully to adjust its product assortments and promotions. Wal-Mart, for example, likes to offer "everyday low prices" and avoid price promotions. But sometimes Rubbermaid wants to attract Wal-Mart shoppers with something extra. No problem: It just packages free Kool-Aid or Tang with its plastic pitchers.
In fact, Wal-Mart's distaste for price promotions is having a growing impact throughout the marketplace. Procter & Gamble, for one, is slashing the special low-price deals it offers to supermarkets for use in temporary promotions. P&G has also reduced the coupons it issues by a third. Such coupons and discounts often don't pay off, says one P&G source, and "the Wal-Marts are saying: 'We don't want that.' " Nor do power retailers want all the items packaged-goods marketers pump out. Unilever's Thomas J. Lipton unit discontinued 19 soups between 1988 and 1991, adding just one.
Increasingly, manufacturers are seeking input from retailers at the earliest stages of product development. Black & Decker got help from several giant home-improvement chains, including 205-store Home Depot and 305-store Lowe's Companies Inc., almost nine months before it introduced its new DeWalt line of power tools last February. "We talked to them about the name," says Gary T. DiCamillo, president of Black & Decker's U.S. power tools group. "We talked to them about the color. We talked to them about the warranty." Based on what it heard from the retailers, B&D launched the line with a 30-day no-questions-asked return policy. DeWalt, DiCamillo says, will do well over $100 million in sales in its first 10 months.
FEWER SALESPEOPLE. Power retailers are getting more professional with their advice. Target has its own 11-person "trend merchandising" group that travels the world in search of the next hit products, from neon-colored clothing for teenagers to troll dolls. While most of that work is for its own private-label goods, the retailer also uses its research to shape name-brand products. Regal Ware Inc. of Kewaskum, Wis., for example, modified the hue of blue in one cookware set to match Target's palette.
Similarly, Dallas-based Haggar Corp., a $381 million apparel maker, listens closely to buyers at Dillard Department Stores. Dillard helps choose the fabric and designs for the "Brickerton by Haggar" label, a line of men's slacks made by Haggar but sold only by Dillard.
To better serve their retailer customers, other consumer-goods giants are revamping not just their product lines but their very organizational structures. Consider Borden Inc., which found itself with a hodgepodge of snack-food brands and overlapping sales forces after a series of acquisitions. "We had 28 different people dealing with Wal-Mart," says Chairman Anthony S. D'Amato. "It was astounding to me." The fragmentation meant that Borden had little muscle in the marketplace. Now, besides eliminating or combining some brands and items, Borden will meld its eight sales organizations, six distribution operations, and five information systems into one to deal with big customers.
But size alone won't secure a supplier's position: Manufacturers must also nurture their brand names, because the more a product is a commodity, the more easily it can be replaced. "Your biggest insurance policy is having consumers coming into the store asking for your product," says Frank D. Bracken, Haggar's executive vice-president for marketing. Valvoline Inc., for example, is increasing ad spending on its motor oils by 40% this fiscal year, says Jan R. Horsfall, national brand manager. Others, from Frito-Lay to Goodyear, are hiking their budgets, too.
DELICATE BALANCE. Of course, it's usually the bigger manufacturers who have the budgets to keep brands strong. For smaller companies, the extra advertising is just one more burden. John A. Balch, CEO of Royal Appliance Manufacturing Co., the maker of Dirt Devil vacuums, is a firm believer in advertising. He looked golden when sales soared last year as Wal-Mart, Kmart, and others sold scads of Royal's bright-red vacuums. Trying to keep sales growth going, Balch doubled Royal's ad spending in the first half of 1992. The ad boost contributed to an earnings drop of 79% in the second quarter, and Royal's stock plunged.
Many small suppliers can't count on their brand names to provide clout. Instead, they emphasize quality and speed. Tiny lollipop maker Quick's Candy Inc., for example, is one of only 250 suppliers that automatically replenish inventories for Kmart (box).
The most successful retailer-supplier relationships involve compromise and a delicate balancing of interests. Many point to Gitano Group Inc. as a supplier that lost its balance. The trendy apparel maker watched its revenues soar from $30 million in 1980 to $780 million in 1991. A good share of that growth came from Wal-Mart, which last year accounted for 26% of the company's sales.
In fact, Gitano sells too much to Wal-Mart, say former Gitano executives, retailers, and rival suppliers. As a result, other retailers have started to shy away from Gitano as an overexposed and underpriced brand. "It used to be that the customer responded to Gitano," says Maxine Clark, an apparel expert who is now president of Payless ShoeSource. "But in the last few years, that hasn't happened."
In addition, former Gitano executives say, Wal-Mart set high standards for on-time delivery of defect-free merchandise--standards the apparel-maker failed to meet, despite mighty efforts. This year, the company has recorded over $90 million in losses from painful restructurings and inventory write-downs, and the stock, at 3, is far below its $18-a-share price of a year ago. The relationship with Wal-Mart, says one former high-ranking executive, is "what killed the brand." Working with the chain, he says, was like "dancing with a gorilla, and suddenly you're married to it."
INDIE ANGST. Current Gitano executives deny that their brand is overexposed at Wal-Mart. And Wal-Mart's Glass doesn't accept blame for injuring the brand: "They're the ones that sold to everyone in America in an attempt to grow their sales." He does say Wal-Mart pushed Gitano to improve its 80%-plus score for on-time and defect-free deliveries: "That's way below the industry." Wal-Mart, Glass says, continues to work with Gitano, whose executives maintain that their performance is as good as any major supplier's.
Even more vulnerable are those vendors without any brand cachet. Murray Becker Industries, a supplier of framed pictures, thought it had a dandy relationship with Kmart. When the retailer increased the number of outlets it supplied from 450 to 650 in October, 1990, MBI says, it hired new staff and invested in additional hardware.
Too bad: The following March, Kmart dropped the Twinsburg (Ohio) company, a move MBI alleges came without warning and forced it into insolvency, since Kmart accounted for 80% of its business. MBI is now suing Kmart for breach of contract in federal court and seeking more than $2 million in damages. Kmart denies that it wrongfully terminated MBI, contending that MBI lost an announced 1991 competition among vendors and that its contract with the supplier allowed it to terminate with 60 days' notice.
Such tales make the small fry shudder. Adding to their worries is Wal-Mart's edict a year ago that it would no longer deal with most independent brokers and manufacturers' representatives. Wal-Mart says that it needs direct communication with its vendors. Many smaller suppliers fear that other retailers will copy the move, making it even harder for those who can't afford sales forces of their own to break in.
The rise of the power retailer doesn't mean that manufacturers have abandoned less-than-powerful retailers. Indeed, cherishing smaller retailers may become a key strategy for a supplier aiming to keep some clout for itself. In 1989, for example, General Electric Co. reintroduced RCA as a lower-priced appliance brand specifically for smaller retailers. Whirlpool, too, is trying to help the little guy. Its new quick delivery system, similar to GE's, ships appliances fast to its power-retailer accounts. But the system also helps small retailers reduce inventory costs by delivering on orders within 48 hours.
Still, consolidation among retailers and their suppliers seems to be inexorable. Says Jeffrey A. Reigle, president and CEO of Regal Ware: "The base of retailers in this country is shrinking, and the base of manufacturers is shrinking. We become more and more important to each other."
For a glimpse of what the future might hold, take a look at the toy industry, where just five retailers now control half the market. That concentration has already reduced the number and variety of toys brought to market, says Merrill Lynch & Co. analyst Harold L. Vogel: "The manufacturers are playing it safe. There are fewer new products but more efficient manufacturing of the products out there."
Fewer new toys doesn't sound like much cause for panic. But what if the growing clout of power retailers stifles too many small companies and forces too many large ones to dodge risks? The close ties between retailers and their surviving suppliers could ultimately end up raising consumer prices and reducing innovation. It's not time to sound the alarm yet. But there's clearly danger abroad in the new land of the giants--for retailers, suppliers, and consumers alike.