June 12, 2012
The 800-Pound Gorilla is a Retail Myth
A new study by supply-chain researchers at the University of Arkansas shows relationships between major big box stores and their suppliers are collaborative in nature, rather than adversarial. Further, suppliers that actively participate in supply chain processes with these major customers are wielding considerable leverage and perform better financially.
The researchers said the study’s findings debunk perceptions that the leverage has noticeably shifted from suppliers and manufacturers due to retail consolidation.
"In this vision of the retail industry, large powerful retailers are eight-hundred-pound gorillas demanding concessions and squeezing every last drop of profit from suppliers," said Matt Waller, professor of logistics and supply chain management in the Sam M. Walton College of Business, in a statement. "The general assumption — and existing academic literature supports this — is that this concentration has allowed the powerful retailers to exploit their weaker suppliers, which in turn has caused the suppliers’ performance to suffer. But our study found that this isn’t necessarily the case. The dynamic between the two is a little more complex."
Researchers analyzed financial statements from Walmart, Target and more than 3,400 firms that sell their products to the two major retailers, particularly looking at how market share — both suppliers’ and retailers’ — influence suppliers’ financial performance. They found that the shift in power from supplier to retailer and the consequent dependence of the former on the latter have not necessarily led to adversarial relationships between the two.
Due in large part to the rapid adoption of innovative supply chain processes, such as retailers sharing point-of-sale data with suppliers, collaboration
and cooperation between the two groups have enhanced financial performance throughout the supply chain.
"It’s true that suppliers that depend on these key retail accounts for a significant share of their total revenues relinquish some of their leverage in the marketplace," Mr. Waller said. "But we found that as these powerful retailers gain market share, their suppliers’ performance tends to increase. So suppliers may actually benefit from this dependence, and it could reflect successful strategic coordination rather than power struggles."
The researchers’ findings were published in the Journal of Retailing.
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Discussion Questions
Discussion Questions: Are relationships between suppliers and big box retailers much more collaborative than generally assumed? Should the 800-pound retail gorilla term be retired?
Poll
I think it’s worth considering the source of these findings: The Sam Walton College of Business at the University of Arkansas. There is some validity to the idea that supply chain efficiency benefits the supplier as well as the retailer, but it’s disingenuous to suggest that big box stores have less leverage than their vendors. It’s well known that Walmart, in particular, has pushed its vendors hard to take costs out of the product and the “process” for many years. Nothing wrong with that, but let’s be realistic about who is driving the cost savings.
You’re kidding, right? We have a study done by the Sam Walton College of Business that declares “the relationship between suppliers and retailers isn’t really so adversarial” and we take it as Gospel?
Perhaps ‘adversarial’ is not the right word. Maybe “master” and “serf” is closer to the truth. Have the researchers talked to any other suppliers beyond P&G? Or to the small manufacturer who opted to declare bankruptcy and close his doors rather than pay the markdown money demanded by a very large retailer? (Not this one).
I’m not retiring the term any time soon.
The answer to the first question is, “Yes,” for two reasons. As noted in the article, in order to stay competitive all supply chain partners have had to learn how to leverage information and exploit vehicles for logistical efficiency.
The answer to the second question is, “No,” provided one is flexible in assigning an identity to that gorilla.
The truth is, online retailers are the new, “800-pound gorillas,” and brick and mortar retailers have no choice but to work more closely with suppliers if they hope to be competitive.
I don’t know of many suppliers who aren’t just dying to get into Walmart. I also don’t know of many suppliers who don’t complain loudly about how Walmart beats them up on price and other demands. There are more things that go on — big supplier to big retailer — that are seemingly collaborative, but may in fact be done under duress. Lately, when I think of Walmart or other “800-pound gorillas” I tend to think of their gorilla-like impact on traditional competitors, rather than their impact on the supplier base.
Two other variables affect this relationship, from my experience. When retailers demand that suppliers use POS data to determine how customers shop and when retailers use their data to determine their most valuable consumers the dialogue between the two becomes more collaborative with consumers as the focal point of their strategies.
The report rightly points out that the relationship between suppliers and major retailers is definitely more complex. The idiom used to describe this relationship, an “800-pound gorilla,” demonstrates this precisely for in nature an 800-pound gorilla rarely uses brute force directly and more often uses its commanding size in bluffs and mock charges, stopping short of physical contact.
It is without a doubt that major retailers tip the scale in their favor when it comes to influence in the relationship between them and their suppliers. In the case of some major retailers, their idea on collaboration is somewhat one-sided, with collaboration misinterpreted as simply another way of more closely managing and communicating their expectations of suppliers.
In other cases the more progressive of the major retailers have learned that there is potential for increased performance in a true collaboration and have implemented processes to insure that there is a corporate structure in place to schedule, capture, execute and measure progress.
Having seen this “dance” for many years, there has been a change in attitude and a greater spirit of cooperation. At same time, there is no doubt that the power of the gorilla as king of the jungle is unchanged. When needed, the pressure is applied and a “take it or leave it” position is presented; it is ultimately up to the supplier to shake hands or walk. The bottom-line results are tantamount to any spirit of cooperation.
Insight from loyalty programs and sharing of the information at the macro (not individual) level has contributed to a greater spirit of cooperation. The supplier gains “more” than they have in the past which can inform future plans in terms of new product development, packaging and pricing.
I wouldn’t retire it just yet. The retailer still holds most of the negotiating power. If it is collaborative, usually it’s only an opportunity for both supplier and retailer to steal share, or go after a common goal.
I would say the source of the data has a tendency of bias due to where the study is conducted. The reality of day to day negotiation between manufacturer and retailer is always adversarial. There is some level improvement in collaboration due to improvement in technology to allow for faster information exchange. Overall, I believe the relationship between manufacturer and retailer will always be adversarial since it is viewed as a “zero sum” game.
As you know, I work with numerous brands mostly in HBC and OTC, and with every FDM retailer in the United States, and I will tell you that by far the easiest and most user-friendly retailer to work with is Walmart. Granted, so much depends on the category manager, as well as the supplier personnel, but overall suppliers will find Walmart to be fair and direct, communicative, systematic, and the easiest partner in the industry for forecasting, planning, and above all, budgeting. There are very few fees to pay, very few allowances and funds, and hardly any surprises. A lot has to do with their commitment and true dedication to EDLP and EDLC.
By the way, both Paula and Warren are right. Walmart — and any institution dependent on its largess — may not be the best sources on this topic although I prefer to think of Walmart as a, “1,600-pound gorilla.” My observations were more about the endangered 800-pounders.
This study seems to have missed two key points. First, you do not have collaboration when all the supplier does is follow directions (demands) of the retailer. The large retailers set the rules, if that is not shifting of power I don’t know what is. Second the study does not appear to see the difference between servicing a number of smaller distributors and the economies of scale for the larger. As the larger have pushed many smaller out of business the consolidation of the same volume to fewer distributors automatically creates supply chain economies of scale.
Relationships are collaborative BECAUSE the 800 lb gorilla is in the room. Suppliers, like retailers, want what they want when they want it. They come out best if they can find ways to use their products to help the retailer exceed his objectives. I worked for Coke for years and never sold a bottle or can. Our objective was to sell brand exposure by using marketing partners to drive traffic to the retailer. The more traffic you drive the greater opportunity the retailer has to sell everything in the store.
Many retailers don’t have the sense to utilize marketing approaches that engage the consumer and their business will suffer in the long run. It is quite gratifying to see retailers grow their market share by marketing rather than just beating price. It is also quite gratifying to see the price beaters lose market share. Of course, they always blame it on unfair competition!
I laughed out loud when I saw the college that did the research! I would say the balance of power will get more balanced as hubris continues to evaporate. It led to Walmart releasing sales data again and will also lead to a less primal relationship with manufacturers as they realize that they are subject to the disruptive power of Amazon.
Why don’t we get China to do a research project on how we should treat workers more humanely, and believe everything they tell us? Give me a break! All of us in the Real Business World know what Walmart has done to small business. We have subsidized the major Food Manufacturers for years, paying higher costs for goods, so Walmart can bully them into paying what they want.
That is THE problem for us in business, and it isn’t ever going to change. The truth sucks, and it is NO fun trying to negotiate for deals on center-store items today, because we have a zero chance of being treated fairly.
The availability of data and insights may have created a new language and framework for collaboration, but they are retailer-led (as the retailer is the data owner). As “knowledge is power” (as well as scale), this has benefited retailers who have access to this kind of knowledge more than others and more than individual manufacturers.
However, this data space is evolving fast. Retailers can benefit further from opportunities to connect “retail media” and digital channels, but are also threatened by new technologies and models that could disintermediate.
“It’s true that suppliers that depend on these key retail accounts… relinquish some of their leverage in the marketplace … So suppliers MAY actually benefit from this dependence, and it COULD reflect successful strategic coordination rather than power struggles.” (Emphasis added.) So if the POW finds a way to keep his cell clean, is that “collaboration”?
Is this related to the story where Sterling Cooper Draper Pryce (the Ad Agency in Mad Men) ran a study that found that 3 martini lunches are an important part of the creative process?
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I think it’s worth considering the source of these findings: The Sam Walton College of Business at the University of Arkansas. There is some validity to the idea that supply chain efficiency benefits the supplier as well as the retailer, but it’s disingenuous to suggest that big box stores have less leverage than their vendors. It’s well known that Walmart, in particular, has pushed its vendors hard to take costs out of the product and the “process” for many years. Nothing wrong with that, but let’s be realistic about who is driving the cost savings.
You’re kidding, right? We have a study done by the Sam Walton College of Business that declares “the relationship between suppliers and retailers isn’t really so adversarial” and we take it as Gospel?
Perhaps ‘adversarial’ is not the right word. Maybe “master” and “serf” is closer to the truth. Have the researchers talked to any other suppliers beyond P&G? Or to the small manufacturer who opted to declare bankruptcy and close his doors rather than pay the markdown money demanded by a very large retailer? (Not this one).
I’m not retiring the term any time soon.
The answer to the first question is, “Yes,” for two reasons. As noted in the article, in order to stay competitive all supply chain partners have had to learn how to leverage information and exploit vehicles for logistical efficiency.
The answer to the second question is, “No,” provided one is flexible in assigning an identity to that gorilla.
The truth is, online retailers are the new, “800-pound gorillas,” and brick and mortar retailers have no choice but to work more closely with suppliers if they hope to be competitive.
I don’t know of many suppliers who aren’t just dying to get into Walmart. I also don’t know of many suppliers who don’t complain loudly about how Walmart beats them up on price and other demands. There are more things that go on — big supplier to big retailer — that are seemingly collaborative, but may in fact be done under duress. Lately, when I think of Walmart or other “800-pound gorillas” I tend to think of their gorilla-like impact on traditional competitors, rather than their impact on the supplier base.
Two other variables affect this relationship, from my experience. When retailers demand that suppliers use POS data to determine how customers shop and when retailers use their data to determine their most valuable consumers the dialogue between the two becomes more collaborative with consumers as the focal point of their strategies.
The report rightly points out that the relationship between suppliers and major retailers is definitely more complex. The idiom used to describe this relationship, an “800-pound gorilla,” demonstrates this precisely for in nature an 800-pound gorilla rarely uses brute force directly and more often uses its commanding size in bluffs and mock charges, stopping short of physical contact.
It is without a doubt that major retailers tip the scale in their favor when it comes to influence in the relationship between them and their suppliers. In the case of some major retailers, their idea on collaboration is somewhat one-sided, with collaboration misinterpreted as simply another way of more closely managing and communicating their expectations of suppliers.
In other cases the more progressive of the major retailers have learned that there is potential for increased performance in a true collaboration and have implemented processes to insure that there is a corporate structure in place to schedule, capture, execute and measure progress.
Having seen this “dance” for many years, there has been a change in attitude and a greater spirit of cooperation. At same time, there is no doubt that the power of the gorilla as king of the jungle is unchanged. When needed, the pressure is applied and a “take it or leave it” position is presented; it is ultimately up to the supplier to shake hands or walk. The bottom-line results are tantamount to any spirit of cooperation.
Insight from loyalty programs and sharing of the information at the macro (not individual) level has contributed to a greater spirit of cooperation. The supplier gains “more” than they have in the past which can inform future plans in terms of new product development, packaging and pricing.
I wouldn’t retire it just yet. The retailer still holds most of the negotiating power. If it is collaborative, usually it’s only an opportunity for both supplier and retailer to steal share, or go after a common goal.
I would say the source of the data has a tendency of bias due to where the study is conducted. The reality of day to day negotiation between manufacturer and retailer is always adversarial. There is some level improvement in collaboration due to improvement in technology to allow for faster information exchange. Overall, I believe the relationship between manufacturer and retailer will always be adversarial since it is viewed as a “zero sum” game.
As you know, I work with numerous brands mostly in HBC and OTC, and with every FDM retailer in the United States, and I will tell you that by far the easiest and most user-friendly retailer to work with is Walmart. Granted, so much depends on the category manager, as well as the supplier personnel, but overall suppliers will find Walmart to be fair and direct, communicative, systematic, and the easiest partner in the industry for forecasting, planning, and above all, budgeting. There are very few fees to pay, very few allowances and funds, and hardly any surprises. A lot has to do with their commitment and true dedication to EDLP and EDLC.
By the way, both Paula and Warren are right. Walmart — and any institution dependent on its largess — may not be the best sources on this topic although I prefer to think of Walmart as a, “1,600-pound gorilla.” My observations were more about the endangered 800-pounders.
This study seems to have missed two key points. First, you do not have collaboration when all the supplier does is follow directions (demands) of the retailer. The large retailers set the rules, if that is not shifting of power I don’t know what is. Second the study does not appear to see the difference between servicing a number of smaller distributors and the economies of scale for the larger. As the larger have pushed many smaller out of business the consolidation of the same volume to fewer distributors automatically creates supply chain economies of scale.
Relationships are collaborative BECAUSE the 800 lb gorilla is in the room. Suppliers, like retailers, want what they want when they want it. They come out best if they can find ways to use their products to help the retailer exceed his objectives. I worked for Coke for years and never sold a bottle or can. Our objective was to sell brand exposure by using marketing partners to drive traffic to the retailer. The more traffic you drive the greater opportunity the retailer has to sell everything in the store.
Many retailers don’t have the sense to utilize marketing approaches that engage the consumer and their business will suffer in the long run. It is quite gratifying to see retailers grow their market share by marketing rather than just beating price. It is also quite gratifying to see the price beaters lose market share. Of course, they always blame it on unfair competition!
I laughed out loud when I saw the college that did the research! I would say the balance of power will get more balanced as hubris continues to evaporate. It led to Walmart releasing sales data again and will also lead to a less primal relationship with manufacturers as they realize that they are subject to the disruptive power of Amazon.
Why don’t we get China to do a research project on how we should treat workers more humanely, and believe everything they tell us? Give me a break! All of us in the Real Business World know what Walmart has done to small business. We have subsidized the major Food Manufacturers for years, paying higher costs for goods, so Walmart can bully them into paying what they want.
That is THE problem for us in business, and it isn’t ever going to change. The truth sucks, and it is NO fun trying to negotiate for deals on center-store items today, because we have a zero chance of being treated fairly.
The availability of data and insights may have created a new language and framework for collaboration, but they are retailer-led (as the retailer is the data owner). As “knowledge is power” (as well as scale), this has benefited retailers who have access to this kind of knowledge more than others and more than individual manufacturers.
However, this data space is evolving fast. Retailers can benefit further from opportunities to connect “retail media” and digital channels, but are also threatened by new technologies and models that could disintermediate.
“It’s true that suppliers that depend on these key retail accounts… relinquish some of their leverage in the marketplace … So suppliers MAY actually benefit from this dependence, and it COULD reflect successful strategic coordination rather than power struggles.” (Emphasis added.) So if the POW finds a way to keep his cell clean, is that “collaboration”?
Is this related to the story where Sterling Cooper Draper Pryce (the Ad Agency in Mad Men) ran a study that found that 3 martini lunches are an important part of the creative process?