Mar 4, 2012

Brands, Take That Olive Branch and Run with It

 Greg Steinhafel, the CEO of Target Corporation, and Ron Johnson, the head of JC Penney, have both made very public appeals to branded manufacturers: We need your help as our suppliers to fight back against consumer showrooming.

 Showrooming is something most of us do, at least occasionally. Whether it’s at a mass merchant giant like Target or my little book store in town, we walk in, check out the merchandise, ask questions, and leave this “showroom” to buy at a lower price somewhere else, most likely on-line. The spread of mobile-shopping apps makes showrooming brick-and-mortar stores even easier, and even more prevalent.

In a recent Bloomberg article I made the same plea as Messrs. Steinhafel and Johnson but with this difference: Please, I asked the brand makers, do this for your own good. If you don’t, if you let your best distribution partners be killed off, your business will eventually die too. Quality producers need high-touch retail in order for customers to experience and understand their superiority. On-line can be good in its way, but it is not the way consumers most need. Seeing, touching, trying on in person, we need these means of evaluating before we buy. Or we don’t buy. Or we buy something that in the thin experiential world of the internet seems about just as good, only cheaper and made by someone else.

Brands seem to view this situation with more schadenfreude than urgency. And maybe some crocodile tears may be excused. Over the last couple decades, brands’ channel relationships with retailers have grown prickly, to say the least. As the balance of market power has shifted to the Wal-Marts and The Home Depots, mega-retailers have roughed up manufacturers pretty good. They’ve contracted for off-price me-too’s from China. National chains have also backward integrated into private label house brands of their own, in direct competition – I mean adjacent on the shelf – with their main suppliers. And most damaging to all concerned, they’ve dropped their service levels. What kind of partnership is this?

But now the chains are hurting, and they’ve extended the olive branch. Brands would do well to take it.

When Target and Penney’s cry Help! here’s what they mean:
·       Stop being so passive about distribution. Do your whole job, part of which is down here at our level working to reach customers through experiences.
·       Make your channels distinct. Make sure consumers can easily appreciate that they get something very different when they buy a product in a high-value store and when they buy it on line or from a discounter.
·       Compensate each channel for what it does. Stores provide showrooms (for themselves, not for others). They inventory and display. They advise. They repair. They promote. Online retailers can be good too. They offer astonishing convenience. Abundant information. They’re getting better at returns. Etc., etc. Just be sure each channel’s compensation what it actually does.
·       Ensure that prices to consumers reflect these cost and value differences.  Manufacturers don’t do this! They’re afraid they’d be breaching antitrust laws about fair and equal pricing. So long as they go about it in certain, well understood ways, they would not be breaking the law. Indeed, recent court rulings encourage “resale price maintenance” if it promotes vigorous competition and consumer welfare.

It’s time for brands to stop viewing retail chains as the enemy. That war is over. Brands’ challenge for the next decade, at minimum, is to stop channel-to-channel conflict, while allowing healthy rivalries between similar competitors within each channel. May the best man win. And may all channels coexist. We need every one of them.

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