Academic journal article The McKinsey Quarterly

Fighting Brawn with Brains

Academic journal article The McKinsey Quarterly

Fighting Brawn with Brains

Article excerpt

Global retailers are flexing their muscles. How should manufacturers respond?

During the 1990s, consumer goods manufacturers had to contend with the growing consolidation of their retail customer base within each national market. As a result, they reorganized their sales forces around major customers rather than geographic regions and began to develop skills in key-account management and trade marketing to supplement their traditional focus on consumer marketing.

But now, at the start of the new millennium, these same manufacturers face a new challenge. Following a wave of cross-border mergers and acquisitions, an increasingly powerful group of international retailers has emerged (Exhibit 1, on the next spread). As opportunities in the domestic markets of retailers diminish and financial markets press retailers to grow, the pace of international consolidation is likely to accelerate. [1]

Manufacturers must decide how to respond. Are these international retailers primarily a threat, likely to use their power to extract ever greater concessions from manufacturers? Or do manufacturers capable of working with new-breed retailers have an opportunity to increase global sales? If so, what new skills will manufacturers need to manage these customers successfully?

To explore such issues, McKinsey conducted a survey of 37 leading consumer goods companies and 8 international grocery and do-it-yourself retailers (see sidebar "About the survey," on the next spread). The survey was conducted largely in Europe, chiefly because it has been the locus of most recent merger and acquisition activity in retail trade. But most of the companies involved are truly global--and all consumer goods manufacturers should heed the survey's warning that few of them are well prepared for what lies ahead.

Big and bad or big and beautiful?

The results of the survey demonstrate that international retailers are becoming more important to manufacturers. Five years ago, the top five international customers accounted for, on average, 21 percent of the business of the manufacturers in our survey. Today, that figure stands at 32 percent and is expected to grow to 45 percent over the next five years.

Moreover, these retailers are increasingly operating on a more international basis. Although manufacturers say that only one-third of their international customers currently negotiate trade terms centrally or with strong central involvement, headquarters are increasingly making decisions on private labels, overriders, [2] and category management (Exhibit 2). An effective relationship with these retailers is therefore essential. "If you do not have business with the top five global retailers today, you will not even be in the game in ten years' time," said one manufacturer.

Clearly, these developments pose threats for manufacturers--in particular, on pricing. Some retailers are already pushing their weight around. "They threaten us with delistings before we've even started talking," complained one manufacturer. "They want 1 percent off for nothing in return," said another. Retailers have also used their global presence to extract concessions and have then embittered manufacturers by failing to deliver globally. One retailer, for example, offered a global promotion that was far costlier than a country-by-country promotion would have been--but then failed to execute that promotion effectively in all of its stores around the globe.

Nevertheless, only 35 percent of the manufacturers see the internationalization of retailers primarily as a threat. Another 35 percent believe it to be more of an opportunity, and 30 percent view it as a threat in the short term but as a long-term growth opportunity if handled properly.

The most optimistic assessments of the new environment come from the biggest manufacturers, perhaps because their strong brands and geographic presence strengthen them in negotiations with retailers. …

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