Friday, February 27, 2009

Here Comes The Death Match: CPG Manufacturers Vs Retailers

Way back in college, I spent a lot of time analyzing the cold war, deterrence theory and MAD - Mutually Assured Destruction. The net result being that the interest in status quo between two competing interests outweighed the desire to go to war with them.

CPG brands and their retailers have their own version of MAD, played out in the promotions and profits each exacts upon the other. Today the WSJ wrote about the Safeway earnings call where the Safeway CEO called for CPG manufacturers to reduce their pricing to retailers so they can reduce their costs to consumers. If CPG manufacturers do not comply Safeway use its own private label offerings to target branded products.

While all this sounds quite logical, the experience of the CPG manufacturer is that there is a rarely a direct line between a drop in wholesale pricing and retail pricing. Once the new margin structure is established it is far easier to manage a lower price through Temporary Price Reduction promotions (that can also get end cap displays and in-ad features) rather than hope the retailer does not soak the manufacturer for additional margin.

Thus the standoff is created, and the retailer has its private label as a weapon of last resort.

So, what is the MAD situation? Retailers and manufacturers increasing margins to offset lower volumes, resulting in higher food prices and accelerated inflation. And the winner? Walmart - which has a simple value strategy that has not changed in the down market.

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