When A "Win" Is A Loss
By Steve Smith -- TWICE, 7/21/2003
Often times you have read about how major manufacturers should spend more money to support regional retailers, to provide sales training, good co-op advertising and all the rest. These pleas usually come from regional retailers who don't get the support from major vendors and are then blamed when sales don't meet expectations.
But what happens when the tables are turned? What happens when a small or mid-sized CE manufacturer wants to sell to a national chain? Of course predatory pricing demands by the national retailers has always been the rule, but many smaller vendors over the years were willing to risk that initial deal to get some shelf space and establish a good, working relationship with a national retailer or two.
Things have changed. National retailers have begun to require that smaller CE suppliers undergo an "auction" or "shootout" to get their wares onto national retail shelves. We began to hear about the practice about a year or so ago. Executives involved are about as ready to talk about the practice on the record as if they were caught by their wives coming out of a strip club. Recently a couple of manufacturers have begun to provide details about the practice to TWICE, off the record.
Here's what these vendors had to say: If you want to sell a national chain, or if such a retailer deigns that you are worthy of consideration, you are invited to "bid" to become a CE supplier. The retailer sets up how many units it needs, when it needs them and requires guaranteed sales, namely whatever doesn't sell gets returned to the supplier with no charge to the retailer. (Oh, did I forget to mention that the "winning" vendors have to provide non-refundable advertising funds.)
The bottom line is, for the "winning" vendors, there is no bottom line. Manufacturers assume all the risks. "Winning" bids usually consist of products selling at right around cost, or worse. Some vendors have lost bids because, literally, their price was 5 cents to 10 cents higher per unit than a competing bid, and the "winning" bid was below cost.
So why do these suppliers continue to subject themselves to these indignities? Some don't think that they could survive by selling only to smaller retailers. Others still hope to go through an auction once and "establish a relationship" with the big, national retailer. (Wrong.) One vendor sadly related, "We found out that even if you win an auction with a national retailer and sell out all your products, six months later you still have to bid. They only look for short-term promotions."
You'd think that major CE manufacturers would be immune to this system, and supposedly many don't participate. But some do in hopes of increasing short-term unit sales, or to keep factories running.
So what happens if this new practice becomes the established way of doing business? To "win" bids vendors will have to take more cost out, so product reliability goes down. There will be fewer vendors in the CE business because they would not be able to survive. And those who do survive will have less and less available cash to fund new, cutting-edge product development. And CE margins would become worse, if that's possible, and that affects everyone.
Soon we'd be back in the glorious days of the late '80s when everyone was looking for the "next VCR" because CE retailers were desperate to "sell up." They couldn't because just about everything in CE became a commodity. I love nostalgia as much as the next guy, but nobody, not even national retailers, would want to go back to those bad old days.
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