At the end of March, Walmart announced its intention to recapture and reiterate its position as the low-price leader in retail: Walmart Ratchets Up Pressure on Suppliers to Cut Prices. Although they have always pressured suppliers to cut costs and enable low prices, Walmart is increasing the pressure. Company executives are telling suppliers to lower their spending on promotions, and other marketing initiatives, and pass the savings to Walmart in the form of lower prices to the retailer. Walmart would then pass the savings on to the consumers. Consumer products suppliers have some difficult choices to make, but in the process they can test some concepts that might enable better future decisions.
First, the consumer products (CPG) suppliers all understand there are different segments of customers:
- Customers for whom price is the most important criteria. They decide where to shop and which brands to select based on prices. These customers are often already purchasing the store brands, or buying large quantities in the warehouse stores. Walmart’s move could trigger a price war in this segment.
- Customers for whom there are a few brands that are acceptable and they will switch for some reasonable price differences. These customers usually pick the store that is either most convenient to them or has their preferred mix of service and price, then select from the brands available in their chosen store.
- Customers that decide on the brand they want and have a relatively wide tolerance on prices for their favorite brands. I am a good example of this. I have my favorite brands of razor blades, shaving cream, shampoo, toothpaste and deodorant, and I don’t really compare prices.
- Hybrid customers who are price-sensitive for some things, but less so for others. They may shop at both the convenient or high-service store and for some products at the low-price stores.
When deciding how to respond to Walmart, the CPG suppliers should understand how much of their business falls in the different segments and test the impacts in each. Suppliers can decide to say no to Walmart, but with the risk that they will lose shelf space and positioning within the stores. If much of their existing business comes from Walmart, it could be costly. Alternatively, the suppliers can offer Walmart some price cuts and lower promotion spending and test the results. For example, store brands have slowly but steadily increased market share over the years, primarily from the most price-sensitive customers. If lower prices on the branded CPG items stops the growth of store-brand items, the Walmart approach might be worthwhile. On the other hand, if store brands continue to take share, the brand-name suppliers might have learned they still need to run targeted promotions.
To explore the impact of reduced promotions and marketing, the CPG suppliers could test the opposite at other retailers with an increase in targeted promotion. For example, by working with some of the higher-service retailers’ loyalty programs CPG suppliers could connect more directly with customers and have greater control of their brand messaging. The suppliers could then measure the impact of sales to the targeted customers and the non-targeted customers within those retailers, each compared to the impact in Walmart stores. This would provide more insight into how critical the marketing and promotion activities are, or are not, among different consumer segments.
Another area the CPG manufacturers can test is package sizes. Some CPG companies have found that in some locations price-sensitive customers are most concerned with the price point (how much for the package) rather than the price per ounce (or other unit of measure). However warehouse stores have had success with higher price points, but lower prices per unit. The CPG suppliers can test these different package sizes to determine the most profitable mix.
Walmart has presented their suppliers with a difficult choice. It is always difficult to say no to the world’s largest retailer. Well-known brands have some leverage in that customers ask for their brands and most retailers want to carry them, however the retailers control shelf positioning and space allocations. As these suppliers decide how to respond to Walmart, they can improve their long-term success rates by capturing the learning opportunities that come with their decisions.
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