Doing Business with the Big Boxes:
For many suppliers and manufacturers, it’s the grand salami…the holy grail…the big enchilada…all rolled into one. We’re talking about a contract with a Big Box retail industry leader, or RIL — truly a supplier’s dream come true.
Think about it: Suddenly your products occupy thousands of feet of new shelf space, face to face with a thundering herd of buyers you could barely imagine before. And the enhanced credibility that comes with your new mass outlet is a force multiplier, building your strength in other markets as well.
The most dominant RIL today, of course, is The Beast from Bentonville: Wal-Mart. The retail giant’s 4,750 stores host 138 million shoppers every week — who spent a total of $245 billion at Wal-Mart stores last year — and Wal-Mart deals with more than 21,000 suppliers. The other major players in the world of RIL’s include names like Target, Kohl’s, Lowe’s, Home Depot and Best Buy, to name just a few.
Benefits and challenges
Clearly, there are tremendous potential benefits to landing a contract with an RIL — primarily, increased sales and market share. And the demands of doing business with an RIL are bound to make any company leaner and able to handle, track and move more merchandise faster and more efficiently. Economies of scale will also likely grow, leading to longer production runs, bulked up ordering from your own vendors and negotiated discounts with shippers.
But with the benefits come unique challenges. Most RILs have built their businesses on their ability to deliver lower prices than their competitors. Wal-Mart’s slogan pretty much sums it up: “Always low prices. Always.” Any company that has done business with Wal-Mart or almost any other RIL quickly learns that this is more than just a slogan — they mean it.
The RIL’s ability to deliver low prices, of course, starts with their ability to get the lowest prices and best terms and conditions from their suppliers. So before you even think about trying to break into the world of the RILs, you should think seriously about your ability to meet their strenuous demands for just-in-time delivery, the latest sophisticated computer and tracking systems, IT upgrades, new packaging and bar-coding, point-of-purchase display and marketing materials, and always low, low prices.
These demands will bring new pressures to bear on most suppliers, especially those new to the world of RILs that aren’t used to them. First, even to get inside a Big Box, a supplier or manufacturer can expect to invest significantly in infrastructure — new production lines and equipment, greater labor requirements, new raw material sources.
Every stage of production, logistical relationship and even front office function must be re-examined. And after you’re in the door, other new tasks may emerge or grow. Just tracking returned items, for instance, can occupy a sizeable team and resources.
What to expect
As a Big Box supplier, you can expect transparency in your dealings with RILs, but not a lot of relief or sympathy with regard to pricing pressure or your own profitability. When one umbrella manufacturer whose biggest customer is an RIL proposed a five percent price increase to help cover its higher costs, the RIL replied that they were looking for a five percent price drop. The manufacturer figured the negotiation was on, sharpening its pencil and coming back with a proposed two percent increase instead. Nice try, said Big Box, but we buy our umbrellas in China now.
A recent Fast Company magazine article tells the story of an RIL that learned of a vendor’s big plans for a nationwide promotion. Save your money, the Big Box ordered, and knock it off your price to us instead. The supplier’s alternative, of course, was to take a hike — and take all of its other products with them.
Where are the major cost stresses?
Before entering the arena of the RILs, manufacturers and suppliers should carefully analyze the areas where they will face the most serious cost stresses. Jennifer Hove, a marketing vice president for The Better Mousetrap People, identifies the following:
Unit price: Your volume discount is the Big Box’s starting point, so set it high enough to accommodate the inevitable pressure for cuts. Specify minimums, and be sure you exactly know what you’re agreeing to provide.
Discounts and deduction: Big buyers may want you to use their own shippers — and lower your price. That’s not necessarily bad, if you’re ready for it and price accordingly. And there may be other required deductions: for “co-marketing” efforts, warranties, grand opening discounts, etc.
POP advertising: If you haven’t tooted your own horn loudly before, RILs will make sure you do now. You’ll likely be asked to produce reams of point-of-purchase materials. Look at this glass half-full: This gives you a great opportunity to create some new and exciting marketing materials for your company.
Adequate inventory: Don’t underestimate this one. For a supplier, the quickest way out of a Big Box is a failure to fill orders on time. Analyze buying patterns and think ahead.
Receivables: Be prepared — 90 days is generally the standard. If that’s too slow, you may be able to speed things up if you’re willing to offer a discount.
Are you ready?
Not every firm is ready to do business with the Big Boxes. Demands for lower prices year after year, forced concessions, rigid schedules and increased production requirements can take their toll in many ways.
But if done right and with the proper planning and analysis, selling to a Big Box can also launch a company to the next level of growth and profitability. “If you’re good with data, are sophisticated, and have scale,” one retired executive told Business Week, “Wal-Mart should be one of your most profitable customers.”
High risk, high reward, in other words — but the risk can be mitigated by a careful analysis of your company’s readiness for the Big Box world. Are you ready? If not, what would it take to get ready? If you’re tempted to approach the retail industry leaders, these are the prime questions you need to ask.
Don Sadler is a freelance writer and editor specializing in issues of interest and relevance to businesses and executives. Reach him at don@media3pub.com.
