The alternative to the discount default (59.373Kb) - DOWNLOAD

Suppliers who lack proper, well-thought through strategies will and do waste millions when they sell through retail" commented Michael White, director of VIA International, in his presentation at the RTMA conference.

"Typically 5-15% of the retail price of any product is spent by the supplier on selling to the retailer and on various in-store promotions.  Much is spent on short-term programmes which are rarely properly evaluated and which are created on the spur of the moment.  So I would argue that between a quarter and a half of this money is wasted."  That means wastage on $1 billion dollars of sales is anything between $12 million to $75 million.  And White says he has seen higher rates. 

The alternative approach to a discount is to work with specific retailers to build joint ventures which develop value in the eyes of specific consumer segments.  This is hard to do.  However, White argues that, ultimately, it will achieve far more at a lower price.  White spelt out what such a win-win strategy looks like, and how to overcome the hurdles to its implementation.

“Wastage on $1 billion dollars of sales is anything between $12 million to $75 million.”

But perhaps it is first worth looking at the likely situation today. The retailer and supplier are likely to be in an adversorial, buyer/seller relationship. If this isn’t enough, they are likely to be constrained from entering any deeper dialogue by the need to hit quarterly sales targets and to move products by their sell-by date. The retailer is likely to only understand promotions which involve discounting. Frequently, the retailer will also expect to make a substantial margin on the supplier’s brochures, advertising and in-store placement!

Under these circumstances, wastage of the kind outlined above is perhaps inevitable.

To shift away from this situation calls for major internal change within the supplier.

Crucially, senior management has to be willing to invest time and money in building long-term relationships with retailers. "To go beyond buy-sell you have to understand each retailer, you have to understand what is driving consumer demand and you have to be willing to look beyond the quarter," argues White. He also argues that senior managers also have to be willing to personally engage with the retailers in order to avoid a situation where the only link between the two organisations is a game of "beat you up" between the buyer and the supplier account manager.

So how do you build an alternative strategy to discounting and what does it look like?

Firstly, White says that suppliers have to understand the retail landscape and the business models of the different retailers. This knowledge has to be deep and detailed to prove useful. There are several reasons why such knowledge is essential. At a basic level, it avoids suppliers wasting time. For instance, White recognises that many retailers only ever want a confrontational buy-sell relationship with suppliers.  There is no point trying to build far beyond this. Instead, perhaps the supplier should focus his efforts here on improved efficiency. However, increasingly, retailers are prepared to go beyond this. And it is only by having an intimate understanding of the retailers financial drivers and corporate goals that the supplier can take the conversation forwards. "If you know who the retailer wants to reach and you understand his cost model, then you can engage in a much more detailed discussion."

“Suppliers have to build strategies based on what the consumer really wants.”

White also argues that it is vital that any such analysis involves all sides inside the supplier. "The accounts department may think only in terms of credit days, sales may only think in terms of the size of revenue and product management may think purely in terms of profitability."  He argues that all this data can be brought together and discussed in its totality.

Secondly, White argues that to do all this,  suppliers have to build strategies based on what the consumer really wants. He argues that, all too often, suppliers come up with strategies which are dictated blindly either by their products or by unrealistic missives from head office. "Tell your retailers that you want to start a dialogue between your brand and individual consumers in order that you can then launch a new generation of products and they will be unimpressed. At one level, the message is not credible. Do consumers really want a relationship with your brand? At another, it is deeply selfish and doesn’t acknowledge the retailer." Better, he argues is to explain where the market is going and how your product set combined with the retailer’s skills will enable you to both grow sales by appealing to specific groups of consumers.

The next and possibly worse step is differentiation through product. Suppliers are forced to produce "unique" products for particular retailers. White says: "This tends to be extremely expensive with little or no measurement of the results. Often it is a case of ‘let’s knock something together or we will lose the business.’"

The alternative is a plan which shows why and how you will reach segment A by working closely with office products retailer B using selected stores and formats.

“Do consumers really want a relationship with your brand?”

Fourthly, White suggests that suppliers’ need to take a long hard look at account management.  An audit in which both sides score different aspects of their relationship can be immensely useful. White says: "You often find huge disparities. The retailer may think the supplier’s product strategy sucks and the supplier may be blissfully ignorant of this."  Such "misalignments" need to be spotted and acted upon if the relationship is to progress.  Above all, White reckons that such relationships have to be multi-layered. "Pushing everything through a single point of contact is inefficient and risky."

Summing up, White acknowledges that "No one is saying this approach is easy." He adds: "You have to accept that cultures do not change overnight and that you are operating on a live patient. You have to set the pace but not force it. Above all, executive level involvement is essential."

However, the benefits to companies who have followed this route have been immense: "I know of companies who have cut their instore promotion costs, built long-term relationships which protect their investment and grown sales and profitability by adopting this approach."

Michael White is responsible for VIA’s retail channels practice. He has worked extensively in this area for a decade with clients such as Nokia, Group SEB, Electrolux, Kimberley-Clark, Microsoft and Hewlett-Packard.  If you would like to follow up on any of the issues raised in this article you can contact him on +44 20 7585 3399.