In the '90s, collaboration is essential to growth

Drug Store News, Dec 9, 1991

In the '90s, collaboration is essential to growth

In the 1990s we can expect retailer power to continue to grow, with the shift toward retailers slowing. Whether retailers have more or less power than vendors depends on individual situations, which are influenced by clout factors such as company size, market share and category segmentation.

As we look at this decade, the 1990s, the issue is not going to be who has the power, or which way it's trending. The issue is going to be how to leverage resources to achieve a balance between trade and consumer marketing. This will require significant changes in behavior, changes by both retailers and vendors. This urgent need for interactive balance is predicated on two irrefutable truths: retailers have specific needs that can only be met by working more closely with vendors, and vendors must have retailer support to build brand shares and category consumption.

Let's begin by looking at the retailers side of the equation. The need to heighten productivity and lower costs of operations is greater today than at any time in recent history. This is due to overstoring of the industry, intense competition within trade classes and growing competition between trade classes. It's also due to consumers, who are demanding more service, quality and value.

Add to this the extremely tight margins retailers have to work with, and it's an extremely tough environment in which to compete, let alone survive.

In such an environment, the key to success is going to be how well retailers can leverage their resources to build sales, and build store image. To do so will require considerable financial resources, funding that can only be generated by lowering costs.

The emphasis on lowering costs is no longer going to be the driving motivation of a few every-day-low-price chains. It is now an industry-wide mandate for survival.

Retailers will drive costs down by using effective buying, inventory management and marketing, and they will allocate those savings to generate growth.

Based on experiences with our retailer clients, the savings generated by focusing on lowering costs can be in the tens of millions of dollars.

We are seeing retailers using those vast resources to invest in areas that will lead to increased unit volume, sales revenue, profit and market share growth. Importantly, they are allocating their resources toward areas that will better meet the needs of customers, and give them a competitive advantage in the marketplace.

What does this emphasis on lowering costs mean to vendors? It is a mixed situation. Some retailers are so focused on lowering costs that they fail to recognize the value of collaborative relationships on the cost of goods. They try to squeeze every last dime out of their vendors by demanding slotting allowances, failure fees, special warehousing allowances, policy exceptions, etc. They use whatever clout they have to achieve self-serving ends, and they are less inclined to engage in partnering activities that bring added value to the retailer/vendor relationship.

With these retailers, vendors are usually placed in "win/lose" situations.

On the positive side, an increasing number of retailers are recognizing that if they are to achieve their objectives, they must use their own resources as well as those of vendors. They know that they are unable to unilaterally maximize efficiencies in the procurement and distribution systems, nor can they achieve optimum category performance without close working relationships with vendors, relationships which are structured to accommodate their individual needs.

This gives vendors a unique opportunity. By taking advantage of the opportunity to work more closely with retailers, vendors are better positioned to accomplish their own objectives. This includes pursuing opportunities that will maximize manufacturing and distribution efficiencies, reduce deductions, achieve a higher return on trade promotions, and receive better support for marketing programs aimed at higher brand and category consumption.

What is Partnering?

Whether we call them collaborative relationships, partnerships, or strategic alliances, the most important issue is that retailers and vendors are beginning to work more closely together... for mutual benefit.

What is partnering? In its broadest sense, partnering is any situation where retailers and vendors step back from the adversarial relationship and move to one of cooperation, where there is agreement to leverage combined resources to achieve competitive advantage.

As part of the process, both retailers and vendors must accept the fact that mutual benefit is an essential consideration in any partnership. Without mutual benefit, or a win/win relationship, there is no partnership.

Each must also be willing to share knowledge and information, and be totally committed to the concept.

The ideal partnership will leverage combined resources to the fullest extent possible by concentrating on aligning logistical and ordering systems, reducing warehousing and transportation costs, improving service levels, and structuring promotional programs to achieve maximum efficiency and effectiveness. It also provides the framework for testing new ways to grow the respective businesses, outside of conventional thinking, which is commonly based on past experiences.