Do you really want to buy your products from Wal-Mart?
Great article in the spring edition of Marketingpower.com by Andrew R. Thomas and Timothy J. Wilkinson entitled, “The Devolution of Marketing.”
Messrs. Thomas and Wilkinson attribute a large portion of what drove us into the great recession as our dysfunctional pattern of distribution — sell more through a mega-distributor with much of the profit split between the distributors and the overseas manufacturers.
Power has transferred from creators of innovative products and service to mega-distributors who are increasingly in control of the global marketplace.
Many manufacturers and marketing departments see distribution through mega-distributors as the way to boost sales and market share and it is. However, it’s not the way to grow profitably.
Mega-distributors live by high volume and low prices. They use their powerful leverage to demand price cuts and other concessions from suppliers.
And there’s a trickle down effect.
I worked on Volvo Truck in the early-1990’s when one of Wal-Mart’s truckload carriers was negotiating for new Class 8 trucks, engines, transmissions and tires. The carrier brought all of the OEM’s to a hotel and put them each in a separate conference room and negotiated the lowest price from each vendor. Ultimately each OEM took a loss to get the order — about 500 new units I believe. I have to assume the carrier made money on their Wal-Mart contract since I still see their trucks on the road today.
Numerous manufacturers have fallen prey to the profit margin squeeze and brand erosion of the mega-distributor — Vlasic Pickles, Rubbermaid, Levi Strauss, Goodyear and a multitude of less powerful brands — and their relentless pressure to cut prices.
In 2006, Jones Soda Company made $39 million on $406 million in revenue (9.6% margin) from sales made to consumers through tattoo parlors, snowboarding shops and other independent channels where their target audience shopped.
In 2007, Jones Soda began to sell to the mega-distributors, including Wal-Mart, and ended up posting an $11.6 million loss. Jones Soda sold their soul, and brand, and ultimately lost their shirt.
The scope and the magnitude of a mega-distributor can quickly erode the brand equity of products and services. Private labels, discounts, lack of service and mass-market presentation have diluted the value of American brands.
Lakewood Engineering & Manufacturing once sold its 20-inch box fan for $20. Wal-Mart demanded a lower price. Instead of walking away from Wal-Mart in 2000, Lakewood opened a factory in China where labor costs were $0.25 per hour versus $13 per hour in Chicago. By 2003, the fan sold in mega-distributors for $10. In 2008, Lakewood laid off 220 workers.
There is a success story. STIHL, Inc. sells outdoor power equipment through thousands of independently-owned servicing dealers across the U.S. and around the world. STIHL is a global leader in market share and profitability selling only through independently-owned dealers, no mega-distributors.
The authors conclude to avoid the negative outcomes of those manufacturers who have sold through mega-distributors, companies need to maintain control of their distribution. This may mean selling direct to customers online, through company-owned retail stores or striking deals with distributors and avoiding partners who will not accept stringent terms.
By doing so, the manufacturer will have a greater ability to control pricing, customer service and service after the sale thereby building longer-lasting relationships with customers. This will yield more value to both parties over the long-term.
Do you sell your products through a mega-distributor?
Do you still want to?