Modern and organized sales channels
With large clients key account management with a formalized negotiation process is usually established, often annually for the joint strategic objectives and during the year for tactical matters. That process varies depending on the status or importance of the products and services within the category and the retail chain. The retail chains often appoint category captains to develop the category' using the classical category' management process. More recently, with a deeper understanding of how the buying process works, a more shopper centric process is being used. Normally, the key account manager will be facing the purchasing managers of the key account to negotiate the brands, products and sendees within the category.
It is important to understand the role and functioning of retail chains, as having an agreement and a contract does not always ensure their implementation. This depends on the ability to ensure in-store activation. For this, it is key to understand the buying processes of the different retail chains. In some cases, the retail chains are fully centralized and manufacturers cannot influence implementation at any other level and the success of implementation depends on the trade terms, their monitoring and control. In other cases, the retail chains give higher levels of implementation responsibility to their regional teams or
Figure 4.21 Retailer buying organization
Example of the buying organization of alcoholic beverages of a leading retailer in the UK.
Source: Author individual stores, even letting the manufacturers handle the shelves and point of purchase activation, e.g. through merchandising agencies. For manufacturers this implies an opportunity to influence the activation better, but at the same time, it implies an increased complexity and a higher cost.
With the complexity of large customer management to ensure activation in line with the strategy and the negotiated agreements, the different contact points with the client need to be managed on all levels and across functions.
The retail industry has undergone big changes over the last decades and is continuing to do so. During this development the importance and role of retailers has changed, from pure distribution at its beginnings to shapers of how and what shoppers buy.
The first retail chain was founded in the early 1920s in the United States as a franchise business - the novelty being that shoppers themselves could select the goods on the shelves, put them in a shopping basket and pay at the cashier. Not only did this change the business model of retail to become more efficient and to start thinking in terms of sales by square meter (or foot), but it changed the way manufacturers had to market their products in terms of packaging, pricing and in-store activation.
In addition, it gradually changed the relationship between manufacturer and retailer. This relationship has become more and more complex, with power moving from being more in the hands of manufacturers to increasingly move to the hands of retailers. Not only has the power relationship changed but also the role of retailers, from just being efficient distribution
Figure 4.22 Structure of different retail chains in Germany
Example of the differences in the structure of retail chains in Germany in tenns of the typical buying process, the format focus and the different levels of centralization of decisions.
The route to market 101 channels to becoming marketing channels, and re-shaping the shopping landscape, with players like Amazon and Alibaba being at the helm.
As the negotiating power of retailers has increased and their role has changed, the relationship between manufacturer and retailer has had to change and become more professional in terms of the buying organizations of the retailers and the key account management approach of the manufacturers. The retailer is not the end point in the commercial value chain, but an intermediary to reach shoppers and ultimately consumers. Manufacturers and retailers therefore have, in some aspects, similar objectives. To focus on the joint objectives, rather than on the power straggle, the initiative of ECR started during the 1990s. Additionally, following the development in other industries in the 1980s, spearheaded by companies like Xerox or IBM, manufacturers started to develop their key account management capabilities to better manage the growing power and developing role of retailers.
Since the emergence of the first supermarket chain in the United States 100 years ago, modem retail has totally reshaped the distribution structure and re-defined the classical role between manufacturers and retailers. Traditionally, the role of manufacturers has been to develop products, brand these, communicate to, and activate consumers, normally through advertising and promotions using main media channels. The theory' being that this would result in a pull effect, i.e. consumers demanding the products at stores. The role of retailers was to provide these products and brands as efficiently as possible. The metrics of this business model are relatively clear. It is about margins, and sales/margins per store square foot/ meter, per employee, and levels of inventory.
As retailers have grown in importance and consolidated, they have developed into a marketing channel themselves, introducing a new perspective on the market, and a new focus, the shopper. Retailers have understood that their customers were not the same as the consumers of the manufacturers and that their focus is on increasing sales per shopper by' driving traffic to the store, focusing on the size of the shopping basket, not on specific products or brands, and on building loyalty of the shopper to ensure re-purchase in the same store and/or chain. In this reality, manufacturers have the task to develop a pull effect and to support the marketing effort of retailers to attain a push effect in the store. New shopper-oriented metrics have been added, such as traffic, basket size and loyalty.
The focus on the shopper vs. the consumer has led to disparate views between manufacturers and retailers. The consumer is the responsibility of the manufacturer, while the shopper is the responsibility of the retailer, giving the retailer important marketing clout. The business models of retailers have developed from focusing on margins and costs to including shopper data and loyalty initiatives. The classical example being Tesco, a British multinational grocery and general merchandise retailer, acquiring the shopper consultancy Dunnhumby.
The shopper focus and information advantage of retailers has made many of them take the step from only distributing and marketing products and brands to becoming brand owners themselves, competing directly with their suppliers. Today retailer brands not only exist in the price-fighter segment, but are also offered across different price and quality segments. In some instances, retailer brands have even opened up new categories, such as Ja! Natürlich in Austria in the 1990s, specialized in ecological products.
The retail industry has been successfill in adapting to shopper trends and is continuing to do so, often being one step ahead of manufacturers.
The success of modem retail is shown through its domination of the distribution channel, especially in more developed markets where not only up to 70 percent of sales goes through this distribution channel but also where a few top players consolidate most of the sales.
Until the 1980s and 1990s, the focus was on big box retailing. Due to increasing income disparity, lower income shoppers are driving the growth of the discounter segment and retail brand offering. In parallel, the shopping experience, as well as shopping convenience, is becoming more important. Retailers are moving into the convenience store segment and developing new formats, like mixing discount and convenience stores, as done by the retailers Lidl and Aldi, or combining different formats, for example, retail and gas stations. In a stagnant market environment, moving into the convenience segment offers pockets of growth for retailers.
The biggest changes during the last decade have been the emergence of online and the mix of online and offline shopping. Amazon and Alibaba have developed into world leading retailers. The fastest growing chains are online retailers. Tire changes go beyond the division of offline and online to integrated solutions, like Amazon with Whole Foods, or Alibaba with Hema supermarkets, to align with the real shopping behavior of customers. Even further, companies like Alibaba, with their concept of New Retail that includes traditional channels, are targeting to meet the holistic service needs of shoppers.
Technology plays a vital role and is becoming more and more integrated into the service offerings of retailers through hyper connectivity solutions. Examples are Amazon and its cashless shopping solution, and Alibaba with the concept of the 11.11 shopping festival.
With the continuous change in the power relationship between retailers and manufacturers, the gatekeeper role of retailers has been accentuated. In the physical business model, space is a key scarce resource. One of the key metrics in retail has been and still is sales per square foot/meter. For retailers one of the key metrics is thus to maximize the sales per square foot/ meter at the highest possible margin and optimum cost. While the manufacturer is focusing on brands, the retailer is focusing on attracting shoppers and making them fill their shopping baskets. Different brands or products can play different roles: as traffic builder, i.e. attracting shoppers to the store; as margin drivers; or as destination products, i.e. products for which the store or chain is a reference. The roles of different products for the retailer can be in stark contrast to the intended long-term brand positioning of manufacturers.
Shoppers make many final decisions on products in the store. This makes in-store marketing and activation a key success factor for both products and brands. It is not enough to be listed by a retailer; the products need to be on the shelf, on the right shelf, in the right position and with sufficient space to be encountered by the shopper and preferred over competing products and brands. To really have the attention of shoppers, additional placements and/or space can have a big impact. However, the manufacturer does not manage the space in the store. It is under the control of the retailer, who seeks to maximize its sales or margins by square foot/meter by offering the best combination of products and brands that will drive traffic and increase the value of the shopping basket.
The shift in the power relationship between manufacturers and retailers, plus the conflicting views of consumer vs. shopper and brand vs. shopping basket, has made it necessary to find a common language. In the 1980s, common ground was found in using categories. Category management was developed by the Partnering Gr oup as a basis for the cooperation between retailers and manufacturers to better meet the needs of shoppers and ultimately consumers. Not the brand or specific products were to be the basis for discussions, but the category, and within the category, the different brands. Through the definition of categories, then role can be established, and within each category, the role of the different brands, of innovations and promotions can be defined. Categories are assigned space within the store, and within that space, each brand is allocated its rightfill place, depending on its market position. To
The route to market 103 facilitate the cooperation, each category is assigned a category captain, normally the leading manufacturer, to cooperate with the retailer.
The category management approach addresses what is normally denominated the demand side of the relationship between manufacturers and retailers. The key advantage of big retailers is their ability to provide a wider and more attractive offer in a more efficient maimer. Retailers have developed into veiy efficient supply chain operators. The supply chain is the second key part of the cooperation between manufacturers and retailers.
Optimizing the supply chain can result in some conflicts between manufacturer and supplier but in general, different from the demand side, it is driven by a common objective to improve cost efficiency. Conflicts occur from such things as minimizing inventory levels at retailers that can increase inventory levels of low rotation products at manufacturers, or specific needs from some retailers in terms of supply windows or type of pallets. Improvements such as electronic data interchange have been beneficial for both parties. Ar eas of discussion between manufacturers and retailers are often about which supply-chain solutions are most beneficial, and for whom, and how the potential benefits should be calculated, allocated and considered in trade terms.
The management of order taking and the supply chain is often part of ECR-type cooperation, which is positioning itself as a common standard. Modem retail is adapting its operational strategies to be able to optimize efficiencies.23
Managing the demand and supply side in a cooperative way has led to the development of ECR approaches. The idea is that the shared goal of both manufacturers and retailers is to develop consumer demand at the highest possible cost efficiency. The approach started in the United States with more focus on the supply chain, while in Europe there was a strong focus on the demand side. The JAG concept is one of the newer developments looking into cooperation to grow the market in the interest of both retailers and manufacturers.
As in any cooperation between buyer and supplier, the rules of the game need to come together in an agreement over financial mechanics, normally referred to as trade terms. The financial part of the agreement is the key source of many of the conflicts between retailers and manufacturers. In addition to shopper data and information, the price margin, listing fees and payment terms are the key determinants of financial success for retailers. Trade terms formalize the amount and type of activities that are to drive demand, such as promotions, launches, in-store and other activations. With price and logistics discounts and payment terms, these trade terms help to finance the inventory of retailers. They also include rales addressing shelf space, presentation, stock unavailability, sales material and in some cases the implications if one of the parties does not fillfill its responsibilities.
Due to the breadth of the relationship between manufacturer and retailer, ranging from marketing, trade marketing, supply chain and finance and spanning across the organizational complexity of the different retailers, the success of key account management has been mostly about the ability of key account managers to coordinate different departments. While the buying organization is the key department for retailers, as it is their main source of business success, this is often not the case with manufacturers, whose success is based more on product development, marketing, production and sales activation, rather than managing a specific retail account. At times, this leads to an imbalance between retailers and manufacturers in resources, expertise and preparation in the negotiation process.
One further key challenge for manufacturers is ensuring that the negotiated terms are in fact implemented by the retailer. Retailers have a multitude of individual stores, so the negotiated terms and shopper activations are not always correctly implemented. This can range from specific products being out of stock or not present on the shelves, to planograms,
104 The route to market
Table 4.1 Examples of cooperation concepts between manufacturers and retailers
Table 4.1 Cont.
Table 4.2 Ten steps of strategic account management of organized retail
Source: Authoradditional placements, promotions or other activations not being correctly implemented. In other instances, central negotiations only cover certain aspects, so other aspects need to be negotiated on a regional, format or store level. In both cases, either sales may be lost or sales potential may not be frilly captured.
The challenge that manufacturers face is how to cover the different aspects of managing a variety of categories, as well as functional-, fonnat- and store-level aspects.
Successfill key account management in the organized retail sphere is much about understanding how to align strategic objectives and success metrics. Due to the importance of individual retailers and the accelerating development of the industry, each retailer is in many cases an entire market in itself. In some cases, due to the international reach of both retailers and manufacturers, there is a need for global account management approaches.24 Successfill strategic account management needs a structured approach, ranging from a categorization of the accounts to the activation and control of the same. Below are ten steps of such a structured approach and key aspects to be considered in the management of strategic accounts.
1. Retailer portfolio analysis
Retailers differ in terms of then importance to the manufacturer in developing its business. Understanding the role the retailer plays for the manufacturer defines the priorities not only in terms of resource allocation but also in terms of strategic challenges. Analyzing the profit situation and strategic challenges of each retailer and assigning a strategic role to each one helps to build a differentiated strategic approach to optimize the market development effort, resource allocation and profit situation.25
2. Role alignment between manufacturer and retailer
Retailers are not only distributors per se. They differentiate themselves and target not only specific shopper segments but specific shopping missions as well. The offer needs to be aligned with the strategic profile of each retailer and its different formats as well as regional situation. Due to legal restrictions, manufacturers camiot decide on pricing levels or exclusively sell specific products to certain retailers. Therefore, the target shoppers of retailers need to be understood, and the offer (products, services, packaging, price, activation, promotions) attuned to fit with the need of the retailer to serve these shoppers.26
3. Shopper-centric activation
Since the introduction of category management, the focus of activation has been on categories. The initial eight steps of category management were built around this concept. As shoppers have evolved and retailers have differentiated into various formats and become more elaborate in meeting shopper needs, category management has had to develop into shopper management. In shopper management, the focus is the shopper and how the strategies of retailers and manufacturers can be aligned to best activate the shopper.27
4. Micro offering
The big promise of selling to big retailers, to be able to reach numerous shoppers through only one point of negotiation is only partly attainable. Retailers are continuously trying to expand and reach new shopper groups or serve new shopping missions. Expansion is about opening new stores in new territories, as well as entering into new formats. It is not sufficient simply to understand the strategy of the retailer and align, as far as possible, with it. Retailers optimize their offering by format and by outlet. Through increasing data density and data availability, retailers have access to more information on how to better tune the offering toward specific shopper needs. Manufacturers need to fine tune the offering by type of store by studying shopping behavior across chains and store types, thereby optimizing sales and margins to the mutual benefit of manufacturer and retailer.28
5. Category invigoration
To stay a leader and relevant to retailers continuing to innovate and bringing new products to the market, based on an in-depth understanding of the shopper, are of the essence. For retailers, new products not only invigorate specific categories and build traffic, but also support the building of credibility around specific topics to connect shoppers with gr oups of adjacent categories to enlarge the shopping basket.29
6. Contracting for joint business development
At times, the conditions agreed in the trading terms are poorly executed. This can include availability of products, shelf space, position in the store, second placements, implementation of promotions, etc. This can lead to losses in sales and market share. To directly penalize retailers can be difficult, as well as detrimental to joint business development. Under these circumstances negotiations centered around problem solving, additional measures, and joint implementation plans to make up for the potential losses can be more fruitful.30
7. Relevant metrics
Detailed metrics from retailers can be difficult to obtain, as they normally do not share information on sales per format/banner or store, nor other detailed information. Nevertheless, it is crucial to have an understanding of retailer performance on a more detailed level as an input to product and service, as well as retail management strategies. Leading manufacturers develop sets of proxy information to substitute detailed data. These proxies are normally collected through the sales force, auditing companies and through connecting different information sources.
With the support of the proxies a more detailed understanding is attained and cooperation with the retailers becomes more fact based.31
8. Activation implementation
Manufacturers and retailers normally agree on shopper activation plans. These shopper activations can include different aspects, such as advertisements, catalogs, flyers, gondolas, second placements, tastings, in-store promotions, etc. Planning and designing these are a big challenge in itself. The hidden, and often forgotten, challenge, though, is to ensure the implementation on all levels. The level of centralization in terms of decision making and in-store implementation differs by chain. As a result, many actions are not correctly implemented or even not implemented at all.
Retail chains have different levels of freedom when it comes to store-level negotiations and activation. Dependent on the level of centralization and freedom in decision making at the store level, manufacturers need to adapt their organization to optimize the impact they have at the point of purchase and shopper activation..32
9. Operational efficiency
As pointed out previously, in the area of operations, especially supply chain, where there is a clear alignment of interests between retailer and manufacturer, cooperation is often quite advanced. It often includes cooperating to improve the efficiency of the supply chain end-to-end from transportation, to central warehousing, to the delivery and placement in the store. One key dispute can be the level of discounts expected by the retailer for different supply chain services, and if these discounts are higher than the potential cost for the manufacturer.33
10. Premium customer management
The buying organizations of the leading retailers are often quite sophisticated. Category management, trade marketing and sales force resources need to be aligned to professionally meet the needs of retail customers and improve the position of the manufacturer. Challenges facing key account organizations are often unclear processes, straggles for resources and a lack of clarity over ownership of customer issues.34
The retail market is in the midst of important changes. E-commerce is already established and is continuing to develop. New shopping behaviors are emerging, like webrooming and showrooming, and shopper journeys are becoming longer and more complex. Retailers like Amazon and Alibaba are at the forefront of omnichannel strategies by integrating the physical and digital retail environments. Alibaba is launching its idea of the “new retail”, integrating traditional channels into its system, developing a true shopper ecosystem transcending the classical idea of the dyadic customer-retailer relationship. Customer centricity becomes about the ecosystem and less about the sole interrelationship between shopper and retailer, and retailer and manufacturer. This development has and will have implications on how key account managers collaborate with and manage retailers, as the success metrics will evolve from focusing on margins and sales per square foot or meter to focusing more on shopper metrics. Metrics, like revenue growth, margins, return on capital employed (due to changes in store and technological investments) and basket size will grow in importance.35 As key metrics change, the expectations of retailers will change, and there will be implications for how these expectations are managed..