Independents Losing Ground
By Tom Ryan, managing editor, RetailWire
According to an article in USA Today, independent retailers are fairing worse in the recession than larger chains due to a litany of reasons, from buying clout to lack of management smarts. According to Sageworks, a financial analysis company, sales at private retailers slid two percent so far in 2010 after tumbling eight percent in 2009. For publicly traded retailers, sales are up 0.5 percent in 2010 on top of a 0.4 percent gain in 2009.
One major issue is real estate. Independents often get priced out of the most heavily trafficked locations. But beyond price, independents don't have an in-house expert to guide real estate decisions. Jim Bieri, CEO of the Bieri Co., a retail real estate consulting firm, told the newspaper, "Many local merchants don't have the experience or the tools to pick real estate that's best for them."
Another core problem is that many independents focus on boutique items. Recession-constrained consumers are more likely to favor low prices over "value" as well as lean toward more non-discretionary purchases. Said Drew White, CFO of Sageworks, "When times are tough, people are laid off and the consumer confidence isn't high, people are probably going to go with the needs first."
Dan Butler, vice president for merchandising and retail at the National Retail Federation, told USA Today that larger companies are also more adept at planning to mitigate a downturn's impact.
"Larger companies are just more nimble in some of these circumstances because they've got a larger staff to deploy," he said.
Other disadvantages falling to independents:
- Limited advertising budgets
- Less "muscle" in dealing with suppliers.
- More challenges capitalizing on the internet and emerging social-media tools.
- Fewer cross-promotion opportunities, such as tying deals to credit cards.
On the somewhat brighter side, independents were said to often have a better opportunity to tap into local community causes and can benefit from local support around neighborhood shopping districts. Moreover, consumers are expected to be more willing to pay up for the service many independents are known for once the economy improves.
"When people are feeling more confident and have more money, they're willing to go to a higher-service, privately held retail establishment to get exactly what they want and get treated well," said Mr. White.
Discussion Questions: What are the major challenges independents face when going up against chain stores? Where are the greatest opportunities for success?
RetailWire Instant Poll Results:
RetailWire BrainTrust Comments:
As the daughter of a life-long independent retailer, I hate to see it happen, but I think mid-sized and large chains are about to encroach even further on the independent retailer's turf.
Technology is helping chains eliminate the sense of a "sea of sameness" and the buying power of those same chains allows them to continue pushing costs down and margin up. Plus, private label really only pays off for chains -- it doesn't help the independents much at all.
Paula Rosenblum, Managing Partner, RSR Research
Independents have less room to buy market share and to keep it, as the big guys make grabs. For example, if Walmart wants to temporarily hobble Target in food, they can blast rollbacks all over the grocery area. If Target wants to ding department stores in beauty, they can snatch a European beauty brand (a la Boots) and run with it. In other words, the wounds inflicted on independents aren't usually intentional; however, when the big guys throw bombs at one another, the shrapnel hits independents just as hard if not harder.
It's even more important for independents to carry differentiated brands and products for this reason; however, with mass retailers breaking down brand barriers right and left, that's getting harder to do.
Carol Spieckerman, President, newmarketbuilders
I'm going to totally disagree that independents are at a disadvantage. Oh sure, they might not have some of the financial muscle that a chain has, but they have other advantages. Independents can react to market changes faster and change policies almost instantly. I've got one client that kisses and hugs all his female customers. I'd like to see a Wal-Mart manager do that. Another has the local police and fire departments in his back pocket to help out in an instant. One visits his best customers when they are in the hospital or attends their funerals. One grocer I know of carries a loaded weapon on him at all time. He can keep his shrink down compared to the chain store across the street. Independents can hire and fire at will and get away with discrimination. They can retain employees better because they can treat them like family rather than a number. The list goes on.
David Livingston, Principal, DJL Research
Thinking primarily of supermarkets and their typical top 4 sources of profits:
#1 - brand supplier funds: trade allowances, rebates, promotional fees, etc.;
#2 - float on cash: interest on money collected from shoppers before it is dispersed to suppliers and on operations;
#3 - real estate: buying, developing and managing property;
#4 - margin on sales: profits from actually selling something to shoppers.
I don't see any possibility of an independent with even 5-50 stores competing with a chain with 500-5000 stores on the top three of these sources of profits. Their best chance is on margin, which will most readily come from the service departments -- deli, bakery, meat, floral and the like. Tapping into the entrepreneurial spirit of managers for these departments is the best shot, assuming the chain is small enough to have good entrepreneurial spirit in its top management. Any chain with 500-5000 stores simply cannot find the 1000-10,000+ entrepreneurs for these departments.
Herb Sorensen, ScientificAdvisor, TNS Global Retail & Shopper Practice
The reason that independent businesses are hurting more in the recession than chains are many fold, but one reason is that independent businesses tend to be situated in neighborhoods where the recession has hit hardest. That said, many independent businesses also tend to be improperly managed, especially for economics and financial considerations.
David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates
The debate about independents vs. chains, big box, category killers, etc. continues, as it has for several decades and economic cycles now. Clearly larger retailers have greater economies of scale, and purchasing/pricing leverage, which serves them well, particularly when shoppers are bargain hunting as they do in downturns. However, independents can more easily differentiate on service, variety, in-store experience, community relations, and a host of other ways. Consumers don't want to live and shop in "anytown/everytown USA," which unfortunately appears to be the direction we are headed!
Mark Baum, Partner, MARCAT Group LLC
Looking at this question from strictly a technical perspective, I am expecting a real renaissance for independent retailers.
As technology becomes more "Cloud"-oriented, allowing users to plug into service providers as necessary, the advantage large retailers have had by maintaining their own services is disappearing. The challenge for the independent retailer will be making the difficult personnel choices that reduce their payroll expenses.
Especially for family businesses, it is going to be difficult to tell Aunt Sally that her services have been replaced by a computer. While the profits for the remaining workers may remain satisfying, there will no longer be enough margin to support the whole family. Time for second store, but until demand picks up that is not an option.
Bill Bittner, President, BWH Consulting
Independent retailers are going to continue to lose ground to the national chains as long as we, the buying public, are focused on price first.
I too come from a family of independent retailers and have seen their demise because of the lack of buying power and skill sets the national chains have in their corporate offices. Independents spend most of their working hours actually on their sales floors doing what national chains hire managers to do. Independents know their customers personally. Nationals know their buying habits and are better prepared to meet those needs. I wish it were not so, but it is.
Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions
With millions of people out of work today and the general public concerned about their finances, the main focus is on price. That becomes a magnet for Wal-Mart Supercenters even though their prices aren't always better than those that prevail in many marketplaces.
Beyond the dynamics in price-persuasion, convenient locations have lots of appeal...and I agree with David Livingston that many independent have secured excellent locations via their wholesalers. (In my days at Supervalu we also made many independent zillionaires, a condition that leads one far away from a 7-day business along with their children.)
So unless a new breed of imaginative, aggressive, competitive retailers with showmanship, originality and inventiveness arises within the independent ranks, we will see only large lumbering elephants in the food retailing jungle. But don't bet against the independent just yet.
Gene Hoffman, President, Corporate Strategies International
I thought this article used way to broad of a brush on the independents. I can tell you that the independents we work with and have built long-term relationships with are not hurting at all. They are some of the brightest businesspeople I know, and are not at all like this article painted them to be.
These independents know they can't win going up against the big box and online retailers, but instead are incredible at winning and keeping their core customers. They drive traffic with social media and events, they deliver an incredible customer experience, and they keep their products fresh and exciting.
I do believe that the future is bleak for the average or mediocre independent, but that's probably true for the national chains as well.
Doug Fleener, President and Managing Partner, Dynamic Experiences Group
What independents have to offer is personal service and customer service -- treating each customer as special and then "going beyond the call of duty" to delight those customers on each and every transaction. What that means, though, is for independents to survive they have to change their business from a cost + model to a high-value add model, with staff training and owner support to add value to customers in ways that cannot be easily matched by the national competitors.
Same day delivery, free installation, opening the store off-hours for specific customers, limited run items and proactive PERSONAL contact to customers are all things that the large national chains struggle with. Independents, with their flexibility, must capitalize on that aspect and lock in their customers with unmatched service and convenience.
Mark Price, Managing Partner, M Squared Group, Inc.
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AUGUST 2010
Trader Joe's Has Transparency Issues
By Tom Ryan, managing editor, RetailWire
Writing for The Faster Times, the online investigative website, Amy Westervelt said private label food items have a "transparency" problem because consumers aren't told what firm is actually doing the manufacturing. As part of an ongoing "Generic Foods Investigation," she has launched a probe to find out who produces many of Trader Joe's popular items.
For instance, she has so far found, partly through reader's responses, that Trader Joe's Green Goddess Dressing is made by Annie's; Trader Joe's organic yogurt by Straus Creamery; and Trader Joe's Spinach and Cheese Frozen Pizza by Amy's Kitchen. (Trader Joe's didn't confirm the findings.) She also identified the consumer's cost-savings for a Trader Joe's item versus each manufacturer's comparable item. For instance, Trader Joe's organic yogurt is 80 cents cheaper than Straus Organic Yogurt.
The problem, according to Ms. Westervelt, is that private label food products at food retailers are tough to track.
"If you discovered, for example, that there was a meat by-product in the food, your only recourse really would be to take it up with Trader Joe's -- the manufacturer remains obscured," wrote Ms. Westervelt.
Ms. Westervelt also said consumers should be aware of Trader Joe's connection to German supermarket giant Aldi. The chain is owned by a family trust set up by Theo Albrecht, one of the two brothers behind Aldi.
"What doesn't sit quite right is the lack of transparency -- the fact that it's next to impossible for consumers to figure out where their food is coming from," wrote Ms. Westervelt.
She promised information on Wal-Mart's and Costco's private label lines in future installments.
Many online responses to the series praised the reporter's efforts at revealing Trader Joe's manufacturing sources. But a few were sympathetic to the retailer.
One respondent, Jeanne, who worked in an industry related to private label products, remarked that she didn't think it was fair to compare a manufacturer's flagship product to their private label efforts. Recipes/formulas are changed to "personalize" the final private label offering for each chain.
Another responder, Daniel B., who said he worked in advertising for many years, said that while the investigation was said to be about supply chain transparency, the biggest benefit is "giving the consumers the heads up about which brands can be purchased for less at Trader Joe's."
Still, he believes retailers who put their name on private label items they didn't produce "need to be more vigilant" than if they were just stocking shelves with national brands.
"By putting their own name on a package, if something goes wrong, it is the retailer whose reputation is tarnished. And I do believe that is a strong incentive for keeping things on the up and up," he wrote.
Discussion Question: Should retailers provide the names of manufacturers that produce their private label products?
RetailWire Instant Poll Results:
RetailWire BrainTrust Comments:
Often retailers go to well-known manufacturers to produce their private label brand. Requiring the retailer to disclose their manufacturer reduces their competitive edge and will snowball into companies developing subsidiaries, etc, to hide the data. What difference does it make? As long as the retailer puts the information about the product required -- and possibly country of origin. Companies stand behind their private labels. Much ado about nothing!
Susan Rider, President, Rider and Associates, LLC
Private label has never had much transparency at the retail store level for consumers. However in most instances, the actual manufacturers take most of the legal and ethical responsibility and carry most of the liability for products sold to the consumer. I do believe that for certain foods and drugs that there needs to be
a user friendly way for consumers and public officials to immediately identify the actual manufacturer of
the product.
David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates
I'm having a hard time figuring out the utility of all this "transparency." Did the blogger think that the retailers were building farming and manufacturing facilities to produce private label cans of peas or spinach dip? Upon finding out that this was not the case, how did this turn into something that needs to be "investigated" at Walmart? Hey, why stop at the manufacturing segment? How about transportation? Maybe the trucks that delivered the goods were, gasp, using diesel from BP.
Private label is a strategy that works for retailers and manufacturers in providing alternatives to the consumer, typically at a lower price. What insidious plot are we uncovering here?
Bill Emerson, President, Emerson Advisors
Private Label means that the retailer has assumed the Brand responsibility for the product. By doing so, Trader Joe's can offer items at lower prices, by eliminating the trade fees, promotions and coupons, media advertising, customer service functions, etc. that a national marketer might offer.
Well-known food manufacturers sometimes make Private Brand products, but usually on a contract basis, and the item may or not be the same as the national brand. Sometimes a different or unique formula is developed by a retailer, who then has it manufactured in an inspected, licensed facility. There are also companies who are contract manufacturers, and provide both private label and national brand products.
At the end of the day, the food product responsibility lies with the brand owner, whether retailer or national brand, who are required to have company name, address, and phone number on the package, and the UPC code which includes manufacturing information for traceability.
Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions
One thing the Pet Food melamine disaster brought to the forefront is that even national brands don't necessarily make their own food. "Premium" brand IAMS had the same problem, and was made in the same factory as Publix store brand (among others). So where do we stop and where do we start?
Paula Rosenblum, Managing Partner, RSR Research
I have to agree with the above "Who cares?" comments. I remember in college (as an agriculture and food economics major) learning during a factory tour that the difference between the name brand product and the PL was a change in the shape of the container and the label.
This promoted a great discussion about PL products from point of view of the manufacturer, retailer, and customer. Our conclusions -- the manufacturer wanted to maximize the return on their investment in their plant. The retailer wanted to be able to offer a low cost alternative to its customers. The customers wanted choices and a variety of price points. Seemed like a triple win then and still does.
Steven Montgomery, President, b2b Solutions, LLC
Don't you get it? Trader Joe's IS the brand. Knowing the name of the manufacturer is meaningless to most consumers. What counts is the product, its quality and clear labeling. Trader Joe's has developed unique private label products that are promoted in store through tasting demos and enticing signs and displays. Just last week they were sampling a new product -- frozen mahi mahi burgers with their own wasabi mayonnaise. It tasted good so I bought it knowing that Trader Joe's stands behind their brands.
Odonna Mathews, President, Odonna Mathews Consulting
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