Dec 11, 2007

U.S. Ships Retail Commoditization Strategy Overseas

While U.S. management practices are still widely followed and emulated around the world, there's one era of distribution strategy our international brethren would be wise to reject. Yet evidence is mounting that overseas retail players are nonetheless escalating the commoditization of their market positions.

We're just now emerging from the commoditization funk in domestic U.S. retail sectors. Frank Blake, CEO at The Home Depot, recently spoke for the industry when he publicly pronounces to over 2,000 vendors that the company was misled by conventional management advisers into a myopic and ultimately fatal "squeeze vendors for low prices" strategic obsession. He lamented the loss of basic 'retail 101': delightful consumer experiences.

What's most frustrating, the strategic tragedy of the 1988-2008 retail commoditization era was well anticipated by forward-looking consumer experience advocates. Here's a few excerpts of a definitive 1989 study for Miles Inc. (maker of One-A-Day brand multiple vitamins) and Kellogg Company (maker of cereal and other food products), which warns about the risks of a single-minded search for lower prices and higher Gross Margins at the expense of robust retailing:

Private-label products present a growing danger to the package-goods industry... forcing marketers to compete with price promotion...private-label products drag down category profitability....the study's results fly in the face of conventional reasoning among grocers, who
look at
private-label products as a way to increase margins....Ogilvy Group

When private label gains dominance, other elements start to diminish....unit sales go down, advertising-to-sales ratios go down, volume declines, manufacturer support evaporates and category profits erode...manufacturers, turned off by private label's encroaching share of the
market, tend to surrender the affected category, abandon new-product research, and reduce general marketing and advertising support....most manufacturers are left with no weapon but price
.....John Howell, President, Miles, Inc. (One-A-Day vitamins)

Manufacturers are reacting because a lot of category squeezing is taking place and national manufacturers are "looking for excuses" to abolish private label. Private label now accounts for 12.9% of the dollar volume of all grocery products in the U.S. While private brands could drag down overall category gross profits, that's irrelevant. Retailers are concerned
with "getting customer loyalty to the store with private brands not with national brands... private label is a "loss leader" to draw consumers to a particular store rather than a competitor across the street
....Brian Sharoff, President, Private Label Manufacturers Association

It's disheartening to see that overseas retailers, many in strong emerging markets, are following their U.S. counterparts and repeating the descent into a commoditization void. We would rather they invested in new retailing models that provide incremental value to all - consumers, manufacturers and retailers. For many consumers, it's simply insulting to suggest that all they care about is lowest price (ask the parents buying lead tainted toys).

In a bid to face the slow down in consumption in Spain, where retail banner sales represent about 15% of Carrefour's entire sales worldwide, the retailer is to increase the market share of its private labels currently standing at 25%....Planet Retail, 12/11/07
Is it too late for these retail leaders to see some light? Perhaps a few "fly on the wall" visits to U.S. retail boardrooms are in order. That might just scare them silly and open their eyes. Come on over!

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