By Stew Bishop, President and CEO
The biggest concern I heard expressed from clients and friends at Natural Products Expo West is the trade fund pressure they are facing from large retailers.
Walmart got into the grocery business due to their belief that store traffic in lower margin consumables would drive consumers to higher margin hard goods and healthcare products. But the grocery business is not easy. Continuous painstaking, marginal labor is required to turn a profit. Because of this difficulty, the retail giant has historically applied pricing pressure on not just food, but all consumer goods manufacturers.
Facing declining profits in recent periods, Walmart moved away from rumblings of a lifestyle brand to again be clearly known as the low price leader. However, this is difficult in today’s connected environment where consumers can access competitive pricing on their smartphones and order elsewhere in as little as one click.
In response, WalMart is now calling on large manufacturers to ask for 15% reductions in acquisition costs and price matching in select retail markets, on skus they deem critically competitive. Manufacturers both large and small are concerned about the consequent margin improvement requests that are bound to come. While it remains unclear how the retailer will deal with potential pushback, one consequence is undoubtedly clear. Profit margins for the manufacturer that does not have a sound pricing and trade fund management strategy will be unavoidably blunted.
Manufacturers’ list prices now have little to no relationship with their effective retail shelf prices, with 50-70% of trade budgets being spent to manage everyday price. CPG brand marketers have been taking list price increases while their selling organizations keep shelf prices stable by spending trade funds to manage retailers’ margins and/or introducing special packs, sometimes pre-priced. As a result there is no longer enough trade budget left to run previously successful “big events.”
Walmart has been focused on the emergence of Aldi on the traditional retail side, but Aldi is implementing a more effective and efficient retail strategy; that is, a limited selection of skus and high quality private label offerings (like Trader Joe’s), which in turn enables lower pricing and a more pleasurable and convenient shopping experience.
The evolution of ecommerce is also having a huge impact on Walmart and consequently its suppliers. One is hard-pressed to find a product that cannot be ordered on Amazon and other “retail.com” sites, with the exception of perishable items in some locations, that are not priced competitively with a traditional Walmart store. How can this be? Anyone who knows the basics of supply chain realizes that delivery mechanisms like that of Amazon cannot possibly be profitably sustained without zealous market investment and the financial support of the very same consumer packaged goods manufacturers who are struggling with Walmart’s current pricing and margin challenges.
While Walmart and any retailer know that it is not the role of a consumer goods manufacturer to help one retailer compete with another (and as a matter of fact could be considered illegal), it is worth noting that most manufacturers behave in this manner while dealing with “retail.coms.” CPGs are now spending at a high rate on various Amazon programs due to the belief that “this is where the future of shopping is headed.” If that is where all the organic growth is going, why drive prices lower by spending at a high rate?
Manufacturers only have themselves to blame when they end up in such difficult positions as trade budgets are an expense they can control. There is no overwhelmingly good reason for firms to behave in this manner; but they nearly religiously do, presumably to chase topline volume at the expense of their strategic profit potential.
So what can be done about it? Stay tuned for my next series of posts as I continue to unpack the problem and present reasonable distribution, pricing, promotion and inventory management solutions that can enhance brand and category profitability moving forward. Or contact us if you would like to discuss any specific business needs that may be recognizable here.