Conventional wisdom often holds that major retailers in developed markets will increasingly use their growing power to demand more from manufacturers, especially in making demands like slotting fees or trade discounts. These will then be used to fund profit-boosting investments. But Unilever Chaired Professor of Marketing, Marcel Corstjens, and co-authors Tim Johnson and Richard Steele reveal that for the 50 largest publicly traded retailers in North America and the EU, the balance of power is, if anything, getting steadily worse.
The authors offer a more comprehensive performance analysis than conventional data tend to provide. This was done by considering two essential variables: operating performance of the leading retailers, and returns for shareholders over time. For many industry analysts, these findings may be quite remarkable.
The analytical model employed indicates how changes in the balance of power that often impact operating performance will subsequently impact returns for shareholders. This significantly helps to explain why power has so consistently not translated into performance by evaluating the relative importance of structural and strategic factors.
The findings suggest that, although the retail sector in these markets is still structurally immature compared to the environment enjoyed by manufacturers, other strategic factors are needed to explain better why retailers have yet to translate power into performance. Retailers are largely stuck in an equilibrium favouring price-based competition, which the authors' findings indicate looks set to be long lasting.
The analysis use the so-called "prisoner's dilemma" model in an attempt to understand why retailers do not act more on their built-in incentives to increase EP margins on behalf of their shareholders. Why do they instead tend to cut prices to inspire sales growth?
Corstjens, Johnson and Steele conclude by suggesting two new avenues for further research. First, retailers are competing in a world where, increasingly, differentiation is of secondary importance to price. The authors highlight the importance of research into the many and varied cultural factors that enable retailers to gain cost and execution advantages over competitors.
They note that leading North American and European players, (e.g. Wal-Mart, Tesco, Aldi) have chosen to focus on creating cultures that enable continuous performance improvements, mainly by being able to consistently lower prices. However, there has been remarkably little academic research in this area.
Second, they suggest that more research is also needed into "smart differentiation" and pricing techniques that could enable retailers to discriminate price-wise between customers. They note that players in other low-margin sectors (e.g., airlines) have found ways to maximise profitable sales and loyalty through non-price differentiation. Strangely enough, retailers have not yet really done so.
The authors also propose that, for players that are not cost-advantaged, innovative use of customer technology may have the potential to create low-cost, non-price differentiation. In fact, the ultimate alternative for non-innovators might well be being forced into smaller niche markets by low-cost rivals.
The working paper concludes with a comprehensive review of recent literature on manufacturer-retailer relationships, their relative performance rates, and suggested directions for future research.