In both retail and consumer-product-goods sectors, the gap between winners and losers widens every day. What is it about the winners that make them more and more successful, extending their lead every quarter? What are the dynamics driving this “battlefront” between retailers and their suppliers in the struggle for projects, profits, customers and market share? What can suppliers do to win more exposure and space? To answer these questions, ChainLink Research surveyed more than 130 leading retailers and manufacturers.
The research found that the processes, policies, performance and enablers widen the gap between winners and losers. Top-performing suppliers with high volumes and strong brands are rewarded with more shelf space and increased visibility, which further strengthens their brand and volumes. Marginal performers are “starved” out of the system. This study confirms one of ChainLink Research’s key tenets: Winners and losers are determined by how well each player manages the links with trading partners (see Figure 1). Disconnects in processes, perceptions and dialogues between trading partners are a major cause of problems and competitive disadvantages.
The survey showed that suppliers often underestimate the importance of yield to retailers, while overestimating their own performance. Suppliers that understand and support retailers’ goals and differentiation have a much higher likelihood of success.
Shelf-space and Category Management
Four of the five top criteria used by retailers’ sales volume, individual product’s profit, individual product’s revenue per square foot and brand/category leadership, are directly related to the strength of the supplier’s product performance, value contribution and ultimately customer preference. Top performers get more real estate, while the losers are squeezed out.
Suppliers overestimate the importance of their overall profit contribution. Category managers want to allocate shelf space based on each individual product’s role and contribution in driving profit or driving traffic. This goal is complicated when suppliers price their line as a portfolio. The retailer may want decoupled pricing to give them the flexibility to select an optimum mix.
Suppliers also underestimate the importance of seasonality in shelf-space decisions compared with retailers that ranked it as the third most important factor. This is surprising, given that suppliers must understand as well as anyone the impact of seasonality on the demand for their products. They may view it as just a given–products are either in the assortment or out in a given season.
Interestingly, slotting fees, which have been the subject of much heated debate, were rated as the least important factor in shelf-space decisions, by a large margin.
The research also asked how far the industry has gone in the trend toward suppliers having more responsibility for restocking and replenishment decisions for the shelf space. (Note: chart for this question is not included.) Retailers said they are still responsible for about 85% of replenishment decisions and suppliers are responsible for only about 5% of those decisions, although suppliers estimated slightly higher numbers for their share of the task. Retailers said 6% of replenishment decisions were made collaboratively and 4% by third parties. The survey also asked the same question about responsibility for category management. (See Figure 3.)
The responses reinforced how infrequently suppliers are selected to manage categories. It also uncovers a large difference in perception. Suppliers claim to make about 17% of category management decisions, whereas retailers say the figure is about 3%. This may be due to a difference of interpretation of what is meant by “managing” the category. Retailers, even if they rely heavily on manufacturers for insight and analytics, will still claim they make the final decision.
The responses in Figure 3 mask the degree to which retailers rely on suppliers’ knowledge and input in making category decisions. As shown in Figure 4, supplier knowledge is almost as important as POS information in managing categories and shelf space. Retailers frequently are not willing to hand over the final category management decisions to the supplier, but they do leverage the information and experience of the supplier.
Many suppliers would like to manage categories. A case can be made for it based on the supplier’s depth of knowledge, expertise and brand strength in its category. Figure 5 below illustrates that the No. 1 criterion used by retailers to select a supplier to be category manager is trust. Retailers need to have confidence that the supplier will maximize overall category performance for the retailer and not misuse the position of trust. This trust is gained through a solid trading-partner relationship when the supplier combines:
- Consistent execution excellence (always coming through, keeping promises, rock-solid reliability)
- Integrity (always doing what is in the best interest of the customer)
The second most important factor according to retailers is the strength of the supplier’s brand and its category leadership. Retailers want a category manager who can think about both brand and category to maximize profits. There is a major difference between category management and brand management in most product segments. SWAS (store-within-a-store) practice is an example where the retailer is “renting” real estate to a manufacturer whose brand is the category. Retailers will look for a supplier that gives the supplier’s own brands the appropriate role in a category. The best manufacturers have mastered merchandising principles to create the highest level of turns and profits.
There will always be a tug-of-war between retailers and suppliers in their power struggle for margins, the customer’s loyalty, and market share. To stay on the winning side of the winner-loser divide, companies must take charge of their own destiny by building the strength of their brand and constantly improving their processes, policies and performance. Suppliers need to understand end-consumer identity, behavior, and requirements. Understanding the end customer over a lifetime will give suppliers knowledge and power to decisively design, develop, and deliver the right products and services into real, rewarding markets. At the end of the day, suppliers and retailers gain and maintain their power position in the chain by deeply understanding, focusing on, and connecting with the ultimate end-customer.