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The global retail challenge

With the onward march of globalised retail giants, how can suppliers and retailers come to agreement over pricing and discounting?

By Nirmalya Kumar 01 March 2005

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Nirmalya Kumar believes that a sea-change in retail marketing and internal conflict resolution is needed – made possible by the introduction of global customer teams.


The growth of global retailing has been relentless over the past two decades. Ahold, Carrefour, and Metro each operate in more than 25 countries. Aldi, Auchan, Rewe, Tesco and Wal-Mart operate in 10 or more countries. As Table 1 shows, the worldwide revenues of the largest retailers exceed or compare favourably with those of the leading branded manufacturers.


The rise of global retailers has led to a remarkable shift in power from suppliers to retailers. Historically, power in distribution channels has rested upstream with brand marketers such as Philip Morris, manufacturers like Ford, or franchisers such as McDonald’s and PepsiCo. In contrast to these multinational suppliers, most retailers, dealers, and franchisees were local and fragmented. Retailing, and more generally distribution, acquired an image of being a simple, unsophisticated business, undeserving of attention from academics or MBAs.


In such an environment, supplier organisations were optimised for trade relations with small, vulnerable and local distribution partners. In terms of structure, manufacturer organisations typically coalesced around products and countries. And, in terms of policies and practices, these suppliers utilised their superior coercive power over resellers in order to achieve distribution objectives.


Global retail consolidation means that fewer customers now account for a large proportion of the manufacturers’ sales. On average, the top five international customers accounted for 32 per cent of sales, up from 21 per cent five years ago, and this was expected to increase to 45 per cent over the next five years. When the five largest global retailers account for almost half of a supplier’s business, it gives these customers tremendous negotiating clout, which they are known to exploit rather aggressively.


The most terrifying development for suppliers is the demand by global retailers for uniform worldwide prices. Wal-Mart’s intent to use global sourcing to get worldwide transparent pricing sends shivers up the spine of suppliers.


Under the pretext of local cost or competitive considerations, multinational manufacturer prices for essentially similar products can differ by as much as 60 per cent across countries. This can lead to interesting situations. In 2000, Tesco acquired Hit, a small supermarket chain in Poland. Tesco was shocked to find that Hit was actually obtaining better prices from their suppliers than Tesco had been. Pity the poor supplier representatives who had to justify themselves to Tesco.


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