Retailer Power Surge; Lights out for National Brands

One of the most striking results of the dramatic consolidation in U.S. retailing has been the significant shift in power away from traditionally strong branded consumer products manufacturers. Tensions are rising to unheard of levels in almost all product sectors as manufacturers and large, national, price-obsessed retailers battle fiercely to determine whether retail stores or product brands have the strongest grip on valuable consumer franchises.

Further complicating the manufacturer-retailer relationship is a profound divergence in beliefs about how the marketplace works and where the real basis of power lies. Large, consolidated retailers see their own store-level brand equity as the primary consumer pull lever and increasingly view higher-priced branded products as simply legitimizers of their own private label initiatives. And they worry obsessively about their retail competitors’ price points – with often devastating results as branded product profitability to the retailer drops and lower margins lead to a steady erosion in retailer category support.

Many manufacturers believe there is a significant unmet need for incremental investment in new, hands-on, proactive retailing activity. Retailers, on the other hand, want their vendors to stop pushing for multi-line category expansion and instead to assist them in reaching acceptable GMROI levels. And many home improvement categories present additional complicating characteristics - not only do three or four powerful retailers control a significant share of category volume, but seasonal and year-to-year fluctuations in sales levels makes inventory management difficult and risky, and in-store shelf space requirements expensive.

Of most concern to weaker national brands, these large retailers are taking steps to encourage more compliant behavior from important branded product vendors in key categories by offering them more exclusive and consolidated supply alliances - increasingly resulting in one lead national brand coupled with a strong house line. As a result, second- and third-tier brands are seeing the pace of change increase dramatically as these powerful "big box" retailers pursue new SKU de-listing and line drop initiatives.