When I worked at P&G, a big part of my job was understanding the dynamic between retailers and manufacturers. Retailers hold a lot of power over manufacturers like P&G. A company like Walmart can make or break the success of a product depending on where they stock a product (eye level vs. back corner where no one goes). My job at P&G was to figure out how to get retailers to put P&G products front and center in store. But we were also in the awkward position of balancing the interests of different retailers. When P&G creates a special low cost/large size of Bounty paper towels for Costco, you can bet they get a ‘WTF?’ note from WalMart demanding similar (if not better) pricing.
At the same time, retailers have created their own brands that compete directly with manufacturers. Private labels started as near-copies of branded products.
Now, private label brands have evolved to look and feel like national brands. Target’s Archer Farms is a prime example of a store brand that’s become a desired staple. Strong private labels tilt the power dynamic further in favor of retailers. Who needs P&G if you produce better brands in house?
I should note that P&G refuses to produce private labels for retailers. That doesn’t stop retailers from asking (or rather, demanding). Costco went so far as to drop Pampers diapers from stores after P&G refused to produce a private label version. Huggies later took up Costco on the offer.
While retailers still hold a lot of power, the pendulum has been shifting back to manufacturers (and their branded products).
A retailer’s source of power is their access to customers. For most big retailers, this means physical stores. With the internet, anyone can be a retailer. The only infrastructure you need to invest in is shipping. And Amazon has that covered better than anyone. P&G knows this, and has been getting closer with Amazon. In 2010, P&G gave Amazon access to its warehouses for faster shipping. Target deemed this unfair, and retaliated by taking P&G brands off of endcaps (among other things). Target can fight all they want, but P&G is betting longterm on the power of Amazon.
Taking it a step further, if P&G has multiple shipping partners (ie DHL/UPS/Fedex), does it even need Amazon? Or, could P&G go direct to consumer and force shippers to compete for their business?
P&G does have a direct website (http://www.pgshop.com/). But they currently price items higher than they are priced on Amazon/Walmart/etc. I assume this is to protect the relationship with retailers. But it gives P&G the future option of operating as a retailer itself.
Other brands are already doing this. Take Casper, the mattress startup funded by celebrities such as Leonardo DiCaprio and Adam Levine. Casper has built a strong brand. They have a fabulous website. Casper does not need to be on Amazon (but they are). In my opinion, the shopping experience on Casper.com is much better than the Casper shopping experience on Amazon.com. They even manage to sell a product online that traditionally people prefer to experience in person. The quick success of Casper reveals that a strong brand can out-power retailers (and operate as a retailer itself). This isn’t necessarily a new strategy, but its something that I think will become more common.
What does this mean for the future of retail (and brands?)
Traditional retailers still hold many cards. For one, people shop brick and mortar much more than they shop online, which means that retailers still hold access to customers. Just not exclusive access. But there are other cards for retailers to play. If I am undecided on brands (say, Nike or Adidas), then I would prefer going to a retailer site (Zappos) than going to a brand site (Nike.com). Retailers can grow their relationship with customers by acting as this decision engine – helping people decide what branded products they want.
Retail value adds:
- Discovery – Show me small, unknown brands and products (ie, Etsy)
- Curation – Distill the large selection for me (ie, Intermix)
- Experiential/entertainment – I like this store best. They have the best service/product experience (ie, Nordstrom)
- Price hunting – I want to see all my options and choose the cheapest one (ie, Amazon)
- Bundling – I want to get it all in one place (ie, grocery store)
- Shipping – I need it now, who can ship it fastest? (ie, Amazon)
- Validation – I want to shop products that have been vetted by someone (ie, Whole Foods)
- Exclusive brands – vertically integrated retailers or exclusive products (ie Lululemon, store brands like Archer Farms at Target)
Notice that Amazon.com hits on most of these. They have some of the fastest shipping at the best prices. They bundle lots of products. They validate with customer reviews. Amazon’s filtering and ‘suggested products’ add to the experience. What Amazon doesn’t deliver on (for me) is curation and discovery – both of which they do pretty well with Canopy. Canopy is Amazon, curated.
The cool thing about the top 3 strategies (discovery, curation, and experience) is that they allow room for lots of retailers to operate. The product curation provided by Anthropologie is different than the product curation at J Crew (and both JCrew and Anthro can survive at the same time, because I go to them for different things). The key for retailers who aren’t Amazon is to understand your customers better than anyone else. What product selection (curation/discovery) do shoppers really want, and what experience will differentiate my store? A misstep here and the retailer will quickly fall (as J Crew has).
What about the brands? How can they strategize?
As brands regain power from retailers, the competition intensifies between brands. It’s not enough to convince a retailer to give you space on the shelf. The most successful brands will have their own retail experience, and they will convince customers to shop directly with them (like Casper). Brands who do not have their own experience will struggle. It’s much harder to get customers back if they get used to shopping on a competitor’s platform.