Postponed – And That’s a Good Thing!

Why would a Chinese fabric supplier buy a downstream furniture manufacturing customer in the U.S.? As a fascinating look at the furniture business in today’s Journal points out, labor costs in China are under $1 an hour whereas they’re closer to $15 in North Carolina. Doesn’t that mean more expense for the furniture supply system, not less? Labor costs do turn out to be part of the answer, but to get at the real answer, you have to read between the lines.

In a word, the answer is what distribution and supply chain academics call “postponement.” Component value added and final assembly activity is delayed longer in the system - typically closer to end consumption points, to reduce the risk (and costs!) of big inventory and availability bets placed long in advance.

In fact, in a under-appreciated shift emerging in global industries and their supply chains, once passive overseas component manufacturers (read: China) are making bolder moves downstream in local market distribution. To get closer to their ultimate end customers.

For good reason in the furniture example: 90% of exported fabric ends up in U.S. homes. Forward-integrating into local market assembly gives the Chinese a much more complete and timely picture of their prize market, reduced inventory carrying costs, improved end product availability, reduced supply chain disruption costs, and smoother production levels and scheduling back in Asia. And that's just a start.

The Chinese benefit from ownership in several other postponement-related ways as well. They shift some of the assembly costs from North Carolina to China, lowering final product costs and raising competitiveness, by shipping to what is now a US "assembler", pre-cut, pre-sewn Chinese fabric “kits” designed to the State-side assembler’s requirements. And a tighter materials/assembler supply chain gooses U.S. demand by helping the assembler assure on-time, to-spec delivery. The local market "assembler" wins new business by impressing retail furniture chains with its ability to develop living room “settings” unexpectedly fast and better than the retailer hoped.

Meanwhile, competing manufacturers in the US, with their arms-length fabric supplier relationships (and tensions) suffer miserably, even as they brag of "lower overseas manufacturing and sourcing costs".

Side note: one unstated moral of the Journal’s story seems to be that if a supplier wants postponement benefits it has to buy its customers, maybe even their customers too. While I don’t think ownership is always required, it certainly helps. It has other risks I'll discuss another time.

You can get postponement other ways. But that’s also another story.

Not Only a Matter of Time

Shipping is the circulatory system of the global economy. And as the economy’s metabolism gets sluggish, it appears that shipping is slowing down with it – quite literally. Freighters and tankers are steaming at reduced knots per hour.

Today’s Wall Street Journal also shows how boats are going the long way round to avoid toll charges at the Suez Canal. Supply chains are affected, all the way down to consumer and business buyers. Channels are feeling the pain.

Cost-cutting is certainly needed. But I hope owners aren’t decreeing half-speed ahead and manaña deliveries across the board. Efficient, long supply chains are fine, but it would be a serious miscalculation to let all their container vessels (read: valuable and costly inventory!) be caught at sea when smart competing skippers are racing into port.

Trade- and end-customers with time-sensitive cargos will defect, and once the economy rebounds they may not come back. Conceptually, these customers might appreciate that providers have to lower their costs to stay solvent. But no customer fully gets it that benefits to them – availability in this case – should have to fall too. And that is why shippers (and buyers?) who figure out how to maintain at least the illusion of a satisfying shipping experience for their customers will come out of this period stronger than ever.

Pricing Wars in Canada Fraying Relationships

Wal-Mart announced today that their stores in Canada will no longer be stocking best-selling LEGO building block products. For some time, Canadian's have been lamenting that retail prices of goods sold in canada have been too high relative to what the canadian dollar can purchase in neighboring US markets. It seems that retail prices have not been adequately correcting for shifts in US dollar-Canadian dollar exchange rates.

With a long legacy of building relationships based on muscular strong-arming of suppliers, it's hardly a surprise to anyone that Wal-Mart is looking outside the company to extract retail price relief from vendors. When that doesn't work, they start looking to boost sales of more vulnerable (and compliant!) second-tier products on their shelves. in LEGO's case, that means Wal-Mart is reallocating it's shelf space to Mega blocks (made by Montreal-based Mega Brands).

Two strategic problems with Wal-Mart's old school strong-arming tactics. First, consumers want LEGO brand products. Does Wal-Mart really have research to the contrary? I wouldn't bet your stock investments on it!

But secondly, LEGO products are euro- (or kroner-) denominated purchases. They're made in Denmark. If you look at what's happened to euro (and kroner) exchange rates, you see that it's US retailers feeling the squeeze in 2008 as their cost of goods sold rise in US dollars. LEGO products selling for $35 (CN) today at a 40% gross margin have COGS of $21 (CN). That $21 (CN) is equivalent to 14 euros. And that same 14 euro wholesale price from Denamrk (with similar mark-up) would be priced at $35 in the US. The same pattern holds for kroners.

So where is the pricing gap? (US and canadian dollars are essentially at parity today) .

We know what's really behind the news, and so does LEGO. Wal-Mart is disingeniously using this exercise as a PR smoke screen to strong-arm LEGO into margin concessions. Not surprising.
The good news for consumers is that LEGO is standing firm. Passing system efficiency gains on to consumers in the form of lower prices is smart retailer-vendor strategy. But unhealthy and unrealistic price pressure to simply grab retail share in a tough market can only lead to cheapened products, cheapened brands, and eventually safety problems as subcontractors make risky cost-cutting decisions.

But then, Mega Brands knows that story well. Remember the toy recalls last year? It seems that price isn't the only concern consumers have.

Brand Buyer, Beware

The much heralded new class of cash-rich, global multinationals emerging from China, India, and other fast developing countries will do well to avoid the biggest mistake of the very companies they are eagerly snapping up to gain stronger positions in lucrative Western markets. Of late, former market leaders in Europe and the U.S. have fixated on driving down to lowest-cost position, moving plants overseas, slashing (and burning) years of brand investment. Ironically, that obsession leads straight to the quagmire old-line brands fear most – commoditization. Surrounded by lower priced alternatives, they’ve shot their horses and hunkered down. At best, this is not a winning strategy.

What might yet save the Boeing’s, the GM’s and the Maytag’s is exactly what earned them brand preeminence in the first place: Give customers greater tangible value. And relentlessly find new ways to do so. Above all, don’t equate value with lowest price. Profitable growth will follow clearly differentiated solutions, as they always have and will.

Ultimately, value has to be tangible, and expand the benefits that your customers receive. Traumatized by new entrants, sagging capitalizations, and thinner margins, more than a few companies have utterly lost sight of this behind their walls of cost accounting, functional specialization, and consulting research. They have mistaken honing the same old business model for getting back to basics. At this stage of the game, the real basic they should be focusing on is rediscovering the verb in market leadership.

The path forward is simplicity itself. Get your own senior executives into the same room with your customers’ executive team to do the hard work of addressing real strategic needs together. In brief, act like your customers’ partner and build true relationships. Nothing mysterious, but it does run counter to executives’ natural impulse to delegate, even though effective relationships between global companies demands regular dialogue at all levels, from chairman and CEO on down.

This is something other than quarterly update meetings, golf outings, or key account tours by new CEOs. It certainly isn’t the typical wrangling over the size of this month’s promotion discounts or who’s responsible for a quality problem. It is face-to-face, structured, periodic, facilitated meetings between your senior management and your customers’, aimed at surfacing and solving their ongoing and very strategic business issues. Most companies just don’t do that.

Sure, manufacturers boast of strong distribution networks and big corporate customers may point to sophisticated supply chains. But at the top, there is almost always a startling disconnect. The leaders don’t hear each other, don’t roll up their sleeves with each other, don’t know how to improve their end-to-end system together.

Several years ago, I met with a large industrial company that was experiencing sustained deterioration in its market share and brand reputation. An outside consultant had done extensive analysis and enthusiastically reported back. Their recommendations were warmly received. Nothing happened. No one knew how to bring the insights to life. Strategically, the company never meshed with its customers in any unique way relative to other alternatives. No one could figure out how to move from the day-to-day reality of tactical supply chain issues and me-too product features to presenting customers with tangible value they would instantly appreciate. Not long after, its stock plunged and its reputation tanked.

Today, a global overseas competitor would probably bid for this fallen star. I would caution it to look first for ominous warning signs like these: a strategy overly reliant on cost reduction, a management that crows about abstract CRM technology, few if any references to solving intractable end-user challenges, a bankrupt brand management organization, an executive team that views its channel partners and major customer accounts with undisguised mistrust. Buyer beware.

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Industrial Products Leader Focuses Distribution on Tangible Value

French aerospace electronics and systems group, Thales, is making a bold strategic statement about its approach to aftermarket parts and services business. The company has taken steps to localize parts distribution support and has employed Web-based technology to boost service levels.

In a trend we're seeing in more and more industrial markets, Thales has moved its aerospace support and distribution activity closer to its end customers. The moves resulted from abroad strategic review which found that fewer and fewer airlines were choosing to repair avionics systems because the total costs of stocking spares combined with test equipment, training and documentation is uneconomic unless the service provider achieved scale and logistics advantages.

Favorable to the OEM, the company also learned that most airlines preferred to subcontract their electronics maintenance to OEMs. This enabled Thales to develop offerings ranging from turnkey services, which include line maintenance at an airline's stations, to new logistics support for spares, repairs and replacements to individual spares or services.

Here's an example of the innovative distribution services that Thales has structured to create tangible value for its customers and partners:

• Repair, distribution, logistics support and "Integrated Supply Services", ranging from repair contracts based on flat-rate, cost-per-hour use to more comprehensive avionics-by-the-hour (ABTH), which includes replacement, repair, overhaul and guaranteed spares availability plus a line maintenance service.


• Repair parts stock has been moved to in-country facilities to support smaller airlines


• Repair operations have been moved to new regional repair facilities


• Set up a centralized center to provide specialist support for every fleet equipped with Thales products


• IT tools are being developed that can integrate with airline operations systems to track each aircraft's location or next destination on an hour-by-hour basis -- thereby providing the center with complete visibility of any IFE problem wherever it occurs.


• For fragmented product markets, such as helicopters, Thales is setting up network solutions with partner OEMs using Web portals.


• Developed an online data interchange to help airlines with their engineering and technical activities: for example, downloadable component maintenance manuals. Ultimately, creating a centralized portal for all services


• Joined together an OEM Services consortium with Diehl Aerospace, Liebherr Aerospace and Zodiac to provide component support on a cost-per-hour basis for a group of parts on major aircraft platforms with large global fleets

Creating tangible value through sophisticated, customer-driven distribution is an astute direction for Thales and one we expect to see players in other tough, global markets employing. An excellent go-to-market case study!

Apple Signals iPhone Retail Strategy

Apple is leveraging it's early iPhone distribution experiences in North America and is quickly finalizing plans for ramping up it's go-to-market model overseas. Early reports suggest the company will continue to exert tight control over the hot new product's retail model and end customer experience.

Speculation in the UK press and online forums suggests that Apple's European iPhone deals will emerge in the next few weeks. According to Planet Retail and other bloggers, the UK-based Carphone Warehouse has already been working with Apple to launch an 'iPod store' within its existing retail locations. In related news, Best Buy is building a bigger stake in Carphone Warehouse (the two companies currently operate a joint venture in the UK and the US).

Overseas Manufacturers Acquire Vulnerable U.S. Brands For Distribution

Acer, the struggling Taiwanese manufacturer of PCs and other computer products, has entered the brand buying spree that's starting to sweep across North America. The company annouced plans to acquire two big western computer brands - Gateway and Packard Bell.

While many strategic and tactical reasons are given for the acquisition, the most striking - and important - is the comment Acer's Chairman J.T. Wang made on a recent conference call: "...the Gateway brand is a very well-recognized brand in the U.S., and we want to continue to leverage on the brand in the U.S. and to expand it outside the U.S..."

Richard Black, a spokesman for Acer America, also reinforced the distribution rationale for the acquisition when he said the company hoped to capitalize on greater access to American retailers; Acer began selling at Best Buy only this year and in Circuit City in 2006, he said.

Best Buy JV Mines Apple Retail for Wireless Reinvention

Best Buy's innovation incubator in the UK, JV partner Carphone Warehouse, has given a nod of respect to Apple Computer's tremendous prowess in retailing. The company's UK organization recently hired away Apple's head of marketing and communications to be responsible for brand positioning, strategy development and cross-group marketing across retail, PR and direct channels.

Combine this solid marketing leadership move with Carphone's impressive use of innovative distribution technology and you have the making of some great retail improvement ideas Best Buy will migrate to the uninspired U.S. consumer electronics retail marketplace. For example, in a drive to capture more of the lucrative and growing fashion-conscious demographic, Carphone Warehouse is taking some radical direct marketing approaches to improve its marketplace segmentation and targeting.

In effect, Carphone Warehouse uses a segmentation solution called Personicx, which attaches a code to every customer at the point of purchase. This enables the company to segment its database according to different criteria such as age, the type of handset purchased, when it was purchased and value. This segmentation is then overlaid with additional data sets - such as the customers' product portfolio and additional geodemographic information. The marketing campaign, aimed at tapping a more emotional purchase experience, allowed customers to mix and match their desired look with each handset.

Watch for big moves in early-2008 as Best Buy's U.S. operations ramp up their retail reinvention aspirations!

Pressures Rise for Overseas Markets to Match New US Distribution Law

A recent US Supreme Court ruling has given manufacturers the right to set minimum prices at which their goods can be sold by retailers. The US decision allows courts to consider the effect of "retail price maintenance" before ruling on legality.The case will likely have major implications for Australian exporters and regulators, writes Marc Moncrief from Australia in The Age.

Meanwhile, in Australia, manufacturers are allowed to set a maximum price at which their goods can be sold but setting a minimum price is illegal, whether the arrangement has competitive benefits or not.

Yet there is evidence that Australian manufacturers will probably agitate for change and that the free trade agreement with the US would militate for the two countries to keep in step

Australian lawyer Bob Baxt goes on to say that: "Lots of agreements are international in scope and businesses operate internationally. Why should they have to have a different set of rules in one country to another.... there will be some interesting pressure from a lot of manufacturers and others who will say 'why shouldn't we be able to impose constraints on the way in which our products are sold?"

In any event, experts acknowledge that businesses exporting to the US will be able to use the decision in negotiations with retailers, and that its most immediate impact is not on the Australian regulatory framework. Its most immediate impact is on the Australian exporters into the US market.

PE Firms to Help China and India Shop for U.S. Brands

As we have been arguing for some time, a new era of leadership by incumbent, branded product manufacturers is emerging in western markets. Not surprisingly, powerful southern hemisphere multinationals and contract manufacturers are themselves no longer content with second-tier positions (and margins). As a reuslt, more and more of these sleeper powerhouses are setting their sites on stronger participation in this new global environment.

Of course, Lenovo's purchase of IBM's PC business has been a classic case study in how not to over-simplify the demands of gaining branded product market share. But a new breed of southern competition is emerging nonetheless, and incumbent western players should take note:

The chairman of India's Tata Group said his company is interested in acquiring the Jaguar and Land Rover units of Ford Motor Company, Chairman Ratan indicates that the Tata Group has been seeking overseas acquisitions to gain global visibility after thriving for decades in a protected home market. Mr. Tata said Jaguar and Land Rover could help expand the Tata Motors unit's world-wide reach and reduce its dependence on the Indian market, which accounts for more than 90% of its sales.

A Chinese technology company has expressed interest in buying Seagate Technology, a U.S. maker of branded computer disk drives in the United States. While Seagate, which is the largest drive maker in the United States, was not for sale, the company also said that if a high enough premium was offered to shareholders it would be difficult to stop.

Watch for more and more cross-border M&A activity as strategic action shifts from low-cost overseas sourcing to marketplace growth - through direct ownership of trusted local brands. And as western debt markets panic into retreat, global Private Equity firms will be tapping their soverign funding sources to get a jump start on this emerging trend!

Wal-Mart Sets Limits on Low Cost Supply Chain

It's the strategic reality quietly lurking in Wal-Mart's closet for many years. Never a matter of if, only a matter of when. It seems we're seeing the beginning of a correction in Wal-Mart's supply chain as the company begins an expensive investment in product assurance activity.

Planet Retail reports that following a series of recalls of Chinese made toys over hazards to children, Wal-Mart Stores has announced that it is stepping up testing and safety reviews of its toy ranges. The retailer will require manufacturers to resubmit testing documentation for toys already on the shelves or in shipment, so that Wal-Mart can double-check the results and is also increasing the number of toys tested at independent labs by about 25% to 50%, or an average of 200 additional items daily. "Reassurance is really our key point," according to Laura Phillips, Wal-Mart's merchandise manager of toys, "We've heard parents' concerns over recent recalls and we're working hard to be their advocate, ensuring everyone involved in the toy business plays their part in improving standards"

Situations like this are on a rampant escalation and it points to a serious flaw in dominant retailers' strategic moves in backward integration. Product manufacturing and sourcing is a very complex and high-cost activity. Retailers are beginning to awaken to the harsh downsides of "buyers gone wild". We'll be seeing far fewer middle-level procurement teams doing their $4 billion buying trips through Asia.

Better that Wal-mart and other dominant retailers get back to the core retailing challenge - Customer Experiences! Let branded product companies deal with the downsides and hassles of supply chain management.

Distribution Key to Capturing Overseas Growth

The Wall Street Journal has confirmed what everyone has known for some time - U.S. brand leaders are getting the bulk of their growth from overseas markets. In fact, in the article, Joseph Quinlan, chief market strategist at Banc of America Capital Management, estimates that U.S. companies' international earnings will grow an additional 15% in the second quarter, compared with a year ago, while domestic earnings will grow in the range of 3% to 5%".

And Robert Barbera, chief economist at brokerage firm ITG Inc. in New York, goes on top say that ..."we do seem to be at an inflection point in terms of domestic economic performance, and it's visible in corporate profits...if you're selling earthmovers or cellphones in Asia, your profits have been growing gangbusters," while companies more reliant on U.S. business face hurdles."

But continuing to realize such rapid growth in the overseas markets, especially in developing and emerging ones, will require significant attention to channels of distribution. Local country mannufacturing operations and warehouse logistics infrastrucuture ventures have been the primary focus of wave one activity by large multinationals expanding into new geographies. But long-term winnersare making pre-emptive moves to lock in critical go-to-market distribution relationships with the best players.

Case Study

Industrial powerhouse Parker-Hanafin has seen exploding sales overseas make up for lackluster results here in the company's traditional U.S. market. Consider the company's moves in Thailand, where revenue increased by 33% in the past year.

Parker put significant emphasis on launching new distribution relationships, and has opened eight locations near major industrial complexes, supplying mainly hydraulic equipment, filters, hoses and fittings, fluid control equipment, seals and pneumatic equipment to the cement, automobile and other heavy industries. They now boast four hubs and four satellite outlets. Prospective hub franchisees are screened to ensure they have warehouses and extensive regional distribution networks and systems to support surrounding satellite outlets.

The hub-satellite model has already been successfully implemented by Parker Hannifin in other Asian markets such as China, Singapore and Malaysia. The model means that a satellite store only requires a modest set-up cost for a four-by-eight-metre shop versus the more subtantial amounts required for a hub, including stock and other costs.

Bottom line? The new distribution outlets are able to dramatically shorten lead times so that customers no longer have to suffer through as long as 24 hours of operations interruption as they wait for critical replacement and repair components.

Step 1: Wal-Mart to Restructure Wholesaling in India

India's local preservation oriented retailing laws currently prevent international behemoth Wal-Mart from opening its own branded stores or even partnering with other retailers to sell its own brand private label products in the country. But in a shrewd move to build a solid foundation for the inevitable change in those laws, Wal-Mart has begun doing what they do best - restructuring the critical back-end retail supply system.

With growth in the US market grinding to a close, the company is successfully exporting its model to new overseas growth markets. Success in Mexico has been stellar. But what's particularly heartening about their India strategy is its ties to the company's strongest core competence: wringing inefficiencies and middlemen out of lengthy, cumbersome, poorly organized supply chains. They then pass the savings from those strategic advantages on to consumers.

In a quiet first step to dominate retailing in India, Wal-Mart has created a carefully structured joint venture with local retail company Bharti Enterprises to start the pincer move that will establish Wal-Mart's future market dominance in India.

Meanwhile, Wal-Mart competitor Metro Cash & Carry continues to focus on "one stop shopping" and traditional "assortment" strategies. The company says it offers commercial customers in numerous countries of the world an assortment competence in food and nonfood products at wholesale prices. The assortment and service portfolio are geared to meeting the special needs of professionals, mainly from the restaurant and retailing sectors.

Nothing wrong with paying attention to assortment of course. But if I were Metro, I'd be picking up the pace and accelerating strategic moves in valuable southern hemisphere growth markets. Wal-Mart's entry will be anything but slow - consider Mexico where the company now accounts for the majority of all retailing.

Wal-Mart Reduces China Sourcing - Branded Product Resurgence Continues

Planet Retail posts that according to local Chinese press reports, Wal-Mart will cut its sourcing from China by USD6 billion because the Chinese currency has been appreciating and some of the sourced products are not selling very well. Wal-Mart China has denied the reports, however. Some local suppliers are reportedly suffering because part or all of their orders from Wal-Mart have been canceled, with some suppliers relying on Wal-Mart for more than 50% of their annual sales.

High Frequency Stores Key to Emerging Markets Distribution

P&G plans to conquer more of the globe.

A recent article in the WSJ (P&G's Global Target:Shelves of Tiny Stores, Ellen Byron, 7/16/07; Page A1) discusses a retail format in critical overseas growth markets that is surviving the rise of mega-chains: so called High Frequency Stores.

Background. In emerging markets, P&G estimates that 80% of people buy their wares from mom-and-pop stores no bigger than a closet. Rather than stock up on full-size goods, which cost more per item, they buy small portions of soap, laundry detergent, and single diapers as they need them -- even though the smaller sizes are usually sold at a premium. P&G calls such locally owned bodegas, stalls and kiosks "high-frequency stores," because of the multiple times shoppers visit them during a single day or week. P&G estimates there to be about 20 million high-frequency stores world-wide.

Survive Dominant Retailer Onslaught. Many industry observers initially believed that these independently owned shops would die out as major retailers expanded their reach into developing markets. Instead, high-frequency stores, considered in aggregate, are P&G's largest customer, with Wal-Mart coming in second. Though Mexico is one of Wal-Mart's most successful markets, high-frequency stores are still regularly visited by 70% of the population, P&G estimates. By the company's count, Mexico has 620,000 high-frequency stores. Annual sales total about $16 billion.

Three Strategic Implications for Branded Product Makers:

1. Product visibility: one of the biggest challenges to selling in high-frequency stores. Shops tend to be poorly lit and in Latin America average just 250 square feet in size, P&G found.

2. Merchandising Support. P&G-employed merchandisers visit the stores about every two weeks to tidy the shelves of their products, post signs with the items' prices and hand out promotional items, including posters. Also, sales representatives deliver inventory to stores themselves, often sparing owners a trip to the local distributor.

3. Salesforce Structure. Initially, P&G had its own exclusive sales force in Mexico to supply store owners with its products. Then, two years ago, the company decided that it lacked the scale and resources to maximize distribution -- especially in far-flung regions. P&G began offering basic sales training to independent agents and encouraged them to build their own teams. Today, the company is experimenting with allowing agents and their workers to earn commissions from markups on products sold to stores. By relying on local agents, P&G is also able to strengthen its ties to store owners. This is especially important, since owners can be very influential in the brands their customers choose.

Read More...

The Battle Rages: Low Cost Supply Chains vs Branded Product Distribution

More and more top branded product manufacturers are finding the penduluim is swinging back in their favor. Most fortunate are those branded product makers that resisted the short-term lure of volume buyers and overseas sourcing. Our mothers always said "if it's too good to be true..."

Low cost overseas "procurement" is no sustitute for the worldclass quality and reassurance that end customers seek from their brands. The editors at the Wall Street Journal are among many sounding the alarm that everyone in the "low prices" systems will be held accountable:

Too many American companies have assumed they can't be held liable because they only import Chinese goods manufactured by someone else. But all bets are off as soon as injured children or sick adults start appearing before juries.

And they go on to highlight the profund strategic implications for U.S. players:

...American companies have not always realized how expensive Chinese-manufactured goods can turn out to be once the cost of low quality is included. Naivete is as much to blame as greed. Western companies sometimes fail to understand how Chinese manufacturers do business -- especially the way many factories outsource some work that has been outsourced to them . . . Importers are also becoming vulnerable on store shelves. Consultants who work with U.S. companies sourcing in China predict a flight to quality as safety fears mount. Brand protection will become more important than ever.

'Chinese Fake Out', WSJ, July 14, 2007; Page A6

It might be time to reign in those world-traveling buyers racking up frequent flyer miles. What might have looked liked brilliant sourcing is beginning to smell a bit in the strategy room.

Western Woes Reach China Marketplace

China's legacy of global low cost prowess seemed destined to launch a new wave of large, emerging chinese companies onto the global scene. With great fanfare, Qingdao Haier - the large PRC appliance maker - has made aggressive moves to acquire ailing US competitor Maytag.

But new Haier earnings announcements coming out of China illustrate that even in that marketplace, an anemic growth strategy overly focused on low prices as the sole differentiator is a no-win treadmill. Indeed, a 32% decline in Haier's net profits is being attributed to intensifying competition among chinese white-goods makers.

Some business truisms are universal. The need to sustain real value added differentiation as a long-term path to earnings growth is apparently one of them!