Retailers need saleable products from reliable manufacturers. Manufacturers need active retailers to show and sell their products. Neither can survive without the other. Yet the relationship is anything but easy and not always happy.
Retailers complain that manufacturers sell through too many outlets, have unreasonable order expectations, set their wholesales too high and their MSRPs and MAPs too low, don’t offer enough advertising support, and can’t deliver quickly enough. (A partial list, to be sure.)
Manufacturers complain that dealers don’t stock their products adequately, display them improperly, don’t know the products, stock too many competitive products, don’t implement their marketing plans, don’t use their in-store promotional materials, don’t advertise enough, and don’t pay their bills on time. (Our manufacturer friends could extend this list.)
We’re offended when a longtime vendor abandons us for a competitor. We “can’t believe they’d do it to us, especially considering” how many years we’ve been a dealer, what we’ve done to build the line, how long we’ve known them, how hard we’ve worked for them,….
Despite the familiarity that occasionally develops, vendor relationships shouldn’t be mistaken for personal loyalties. (If you doubt this, consider how often you’d get a call or a card from a vendor if either of you changed occupations.)
Ultimately vendors have to do what’s best for their businesses. If a competitor can place bigger orders, in most cases he’ll get the line.
But is that really so different from what we do when a more profitable line becomes available?
As retailers we feel it’s our grass roots efforts that build a brand in our markets. By advertising, promoting, displaying, demonstrating, and talking up a brand we become heavily invested in it; it often becomes part of our identities. When the manufacturer broadens or changes distribution, we feel double-crossed and cheated, as if something we created has been stolen from us.
Building a brand owned by someone else is inherently risky—the brand owner can move it whenever he feels it’s advantageous, transferring all the fruits of our efforts to our new competitor.
As a result some retailers say a store’s advertising and promotion should be focused on the store, not the product.
Consumers are willing to pay more for brands they know and trust. However the beneficiary of the higher price is seldom the retailer; the full value of the brand is usually extracted by the brand’s owner through higher wholesale pricing and broadened distribution.
Some brands have such strong demand that, despite highly saturated distribution, retailers feel they can’t afford to be without them (e.g., Coca-Cola, Canon, Budweiser, Callaway). Wholesale prices are often high but retail pricing is typically too competitive for any but the most efficient retailers to make a profit.
(In these cases many small retailers stock the name brand but promote alternatives. The high-demand products are put on display and priced competitively, and alternative products are attractively displayed and priced nearby with salespeople well trained in explaining their benefits. The scenario is predictable, as is its loathing by name brand manufacturers.)
New salespeople often believe if they had every brand they could make every sale.
Before making a large purchase, shoppers typically visit several stores. Competitive stores naturally show products the other stores don’t have. When a shopper tells us he’s considering a competitive product, it’s usually because a competitive store has shown it to him. If we had that product, the competitor would be showing—and customers would be requesting—another product we don’t have.
If all stores carried all products, all sales would be price wars—no retailer would be profitable and no manufacturer would have focused representation.
Better to choose lines carefully, stock them adequately, learn them thoroughly, and show them well. Then may the best store win—profitably.
How many we can sell is of little interest if they don’t sell at a profit (a net profit, not just a gross profit).
When gross margins are too small or the expenses of the sale too high, selling more isn’t a bonus but a burden. If too many dealers are selling the same products in a market, none of them will make a reasonable return on efforts and investment.
Customers making large purchases often take advantage of a dealer’s showroom, displays, inventory investment, salespeople, and expertise, and then buy from a lower-price dealer whose expenses don’t include these things. (Customers don’t think of this as unethical—they perceive it as a free-market opportunity they have a personal duty to take advantage of.)
A product has potential for a retailer only when pricing and distribution allow a reasonable profit.
Most manufacturers recognize that when they have too many dealers in a market, the dealers stop promoting their products and eventually drop their lines. Consequently manufacturers restrict their distribution to the degree necessary to attract dealers and keep them interested. Carefully managing the balance maximizes a manufacturer’s sales.
Retailers shouldn't interpret a manufacturer’s limited distribution policy as anything but a profit-maximization strategy. Manufacturers run businesses; even when they enjoy business friendships, their ultimate responsibility is to make their businesses survive and prosper.
The frustrations of dealing with independent and often contrary retailers cause many manufacturers to dream of operating their own stores. They would, at last, be able to display, market, and merchandise their products as they feel the products deserve. And if the stores merely break even, they reason, increased product sales would still make the effort worthwhile.
But most manufacturers who have ventured into retailing have found it far more difficult than they expected. They discover that retailing’s many details require dedicated focus and experience—and take time, energy, and resources away from manufacturing.
Most manufacturers who try retailing retreat to what they do well, and leave the retailing to those who specialize in it.
The troubles of a competitive manufacturer are no cause for celebration as the distress is highly contagious.
A manufacturer in crisis must take urgent and sometimes reckless action to save his business, and the fallout is seldom confined to his own company.
Short-term cash needs often force a manufacturer to liquidate inventories, usually by temporarily reducing wholesales or broadening his distribution network. Adding dealers upsets the established distribution, precipitating dealer complaints and setting off brand shifting.
As retailers who buy at the reduced wholesales begin to advertise and sell below previous market prices, dealer complaints accumulate; complaints are especially vehement when the new market price is below the previous wholesale. Dealers who paid the old price feel cheated; the manufacturer either pacifies them with retroactive discounts or risks losing their representation in the future.
Competitive manufacturers, feeling the pinch of both the new lower prices and lost sales to the liquidation, face pressure to maintain production and market share. So they reduce their own pricing, sometimes beyond sustainability.
Customers who bought any of the products at previous prices are unhappy with both manufacturer and retailer. No one is sure what the real value of the products is. The new lower prices become the new standards and both customer and retailer become hesitant to buy at prices that reflect the true costs of production.