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January 25, 2006The Two-Per-Channel TheoryThe last few weeks have been pretty interesting if you're into leveraged buyouts, mergers and acquisitions, and all that stuff (which I'm not). In addition to Federated putting Lord & Taylor on the block and Saks doing the same with Parisian, we've seen Albertson's, after being up for sale and then not up for sale, suddenly sold. Sports Authority went private. And, slightly off the selling topic, Toys R Us announced they were closing a slew of stores (no buyer, apparently) and Office Max is closing another slew (on top of the slew they announced last fall). How does all this tie together? In my not-so-humble opinion, the common theme is that the US is moving toward a two-player-per-channel universe. The theory, which I thought I came up with on my own, but it seems others have been pushing, probably before me, is that pretty soon there will be only two retail chains in each category. A corollary (I think it's my own) is that there will be only two suppliers in each product category. According to this theory, we will end up with the following: Electronics : Best Buy/Circuit City Another version of this, slightly more radical, is that the two in each category will be: Electronics : Best Buy/Wal-Mart The toy biz, where FAO Schwartz and Kaybee have gone through bankruptcies and shrunk to near nothingness, with Toys R Us apparently following suit (at least in the shrinking part), raises the question of whether a channel can disappear entirely. One result of this channel consolidation is that suppliers, to have the size to deal with giant retailers, have to merge - thus fulfilling the corollary mentioned above. As consumers we should be concerned about this. We've all been spoiled by amazingly low prices in recent years, but numerous studies (and common sense) tell us that when the number of sellers in any category drops to too low a level, prices inevitably increase. But as trade marketers, we have different concerns. The level of concentration (which, to me at least, appears to be accelerating) will cause suppliers to lose control of how their brands are presented. If you have only two possible outlets, you dare not do anything to cause one of them to drop or even de-emphasize your product line. Ten or more years ago, I recall that I was recommending to clients that they use their trade promotion programs to more aggressively support their smaller accounts. This recommendation was based on the possibility that these smaller accounts provided better margins (though neither I nor my clients had much in the way of numbers to support this idea), and also because I believed suppliers needed to protect the independents as a hedge against the growing power of the giants. It is very possible that my advice even then was too little and too late (or, more simply, unrealistic), but there's no longer any question that the process has gone too far to be reversed. It's difficult (perhaps impossible) to offer advice on this point now. The only suggestion is to collect as much data as possible so that you can analyze it and intelligently present information on what works for both of you, rather than simply doing whatever the retailer asks and/or being caught in the pricing game. And that's what you should be doing anyway, regardless of retail consolidation. For more news and comment on a (nearly) daily basis visit our blog, TPMtoday. Among the topics in the past few days: Coupon wars: Valassis suing News AmericaStates enacting RFID legislation |
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