Customer service gives niche players needed edge

Drug Store News, July 14, 1997 by Liz Parks

As the chain drug industry consolidates, it is becoming harder and harder for niche manufacturers, particularly the small- to mid-sized companies, to compete with the biggest companies.

Yet, despite all the economic pressures that many small companies encounter, niche brands are prospering, primarily, category managers say, because they bring innovation and excitement to a retail industry that often lacks marketing points of distinction.

Some of the strongest growth in the past several years has come from small brands, particularly Sarah Michaels competing in the fragranced bath and body category and in fragranced gift sets; Orly and Wet `n' Wild competing nail color; Cosmar, Pacific World, Fing'rs, Sally Hansen and Kiss competing in artificial nails; Nat Robbins, Prestige and Lord & Berry competing in the eye and lip color pencil categories; and Bonne Bell, Jane, M and Naturistics competing in the youth segments of color cosmetics.

To get to where they are today, these small brands had to come up with new ways for category managers to create incremental sales in their cosmetics departments, and to do that they have developed innovative formulations, exciting shade stories and products designed to appeal to neglected niches, such as the youth market or the value-conscious consumer.

But, the chain drug retail category managers of today are the first to point out that it has not been easy for these companies to come as far as they have, and that it may be harder for niche brands to compete as the industry undergoes further consolidation.

"The shift to industry consolidation and category management could theoretically stifle the development of niche brands," said the cosmetics category manager for a large drug chain.

"The major retailers and the major manufacturers are partnering more and more with each other to gain marketing efficiencies and economics of scale through consolidation and one-stop shopping, and there have been, and will continue to be, times when the smaller manufacturer companies ill not be able to compete.

And, if that happens, in a major way, it will be a shame because it will simply mean that the drug stores of tomorrow will all be cookie cutter versions of one another, all selling the same major brands and all looking alike with no points of distinction," said the category manager.

The trend to focus on the major brands at the expense of the smaller brands, one buyer said, is an inevitable result of the current management emphasis on efficiency. "The retail category buyers and the major cosmetics manufacturers for many of the biggest companies are focusing on streamlining their respective distribution and supply systems, trying to weed out inefficient practices," this source said.

Three chain drug cosmetics buyers at fairly large chains said they are being urged by upper management concerned with bottom line productivity to focus on "the major players who drive the business" and to focus most of their marketing initiatives on these dominant brands "with the power to give us the highest possible return on our investment," according to one buyer.

Some large chains are now asking manufacturers to accept payment on scanned sales, which means that a manufacturer will not get paid until its products are scanned through the retail system, a form of consignment that many smaller manufacturers say they cannot afford to accept, and that many large manufacturers say they will never accept.

In some instances, the smaller manufacturers are being asked to pay an allowance for display space, lasting for a period of about six months or until their products prove to be financially productive. One small manufacturer, with a new brand just introduced this year in the nail care category, said he does not expect to be paid for the product he recently shipped for at least three months, and in a number of instances, his wait will be closer to six months.

Another leading retailer has just told one vendor that the chain's new payment policy is to round off three digit wholesale prices, such as 0.875 cents, downward, meaning the vendor will now be paid 87 cents in stead of 88 cents per item ordered.

The vendor called this unacceptable, saying it would cost his company tens of thousands of dollars, but he also described the retailer's request as "just the latest in an increasing series of new demands from the bigger chains."

Niche players prevail

How then, in this tough economic climate, can you account for all the successful activity from established or emerging niche players?

"It's simple," said the buyer for one large chain with a reputation for being fair and receptive to smaller niche brand manufacturers. "The niche manufacturers are much more flexible to work with," this source said. "If they can find a way to accommodate you, they will. It is not like dealing with P&G or Revlon. Second, they can innovate faster than the big players. Third, they can give us a point of difference, something that not all of our competitors have. That's important because today you can find the big brands in every mass market trade class from food stores through Kmarts and Wal-Marts. We need something to make our stores unique, to make them destination stops for consumers."