Coping with consolidation.

Manufacturers work to adapt to changing retail landscape.

For even the casual observer of the food industry, the trend toward grocery retailer consolidation is about as hard to miss as a sprawling supermarket end-aisle display.

Acquisition fever has been running high in recent months, fueled at least in part by supermarkets' need to better position themselves against mass merchandisers and category-killing specialty chains like pet products retailer Petco. And the consolidation craze is far from over, industry watchers agree.

"I think we're going to see a continuation of consolidation in supermarkets," says Edward Jones grocery analyst Patrick Schumann, who is based in St. Louis. "As long as Wal-Mart continues to expand, the grocers are going to be looking in the rear-view mirror. They're going to try to keep pace."

If merger/acquisition activity continues at the current rate, Kroger, Albertson's, Royal Ahold (which owns Pathmark, Stop & Shop, and Giant-Landover outlets, among others) and Wal-Mart - chains that now control more than 30 percent of grocery sales - may double their share by 2005, says Ronald Cotterill, director of the Food Marketing Policy Center at the University of Connecticut, Storrs.

With the balance of power shifting to favor retailers, we asked some industry experts what steps manufacturers should be taking to better position themselves for the years ahead.

One of the recurring themes our experts cited was the need for a more collaborative relationship between retailers and manufacturers. "With the consolidation, it becomes much more important for manufacturers to maintain good working relationships with the large consolidating companies," says Bill Bishop, president of Willard Bishop Consulting, a Barrington, Ill.-based retail-consulting firm.

"Generally, that means manufacturers need to bring even more value to the relationship in two areas," Bishop continues. "One, they need to make sure that they have the logistics and supply chain efficiencies that link up with the large companies and make them efficient to do business with.

Cost-reduction sought

"Secondly," he says, "I think you will find manufacturers being asked to supply products that help retailers...handle the products more efficiently. The bigger companies (retailers) will be looking for ways to reduce the cost of providing full variety in their stores," Bishop adds. "That may mean that manufacturers will have to adjust their case packs or resort to less than full-ease distribution."

On the demand side, the power shift means that manufacturers must take a longer-term view of their relationships with retailers, working with them to develop strategies that position the retailers for long-term success, says Mel Korn, chief executive officer of Saatchi & Saatchi Collaborative Marketing, New York City.

"Now we're seeing a more integrated strategic plan between retailer and manufacturer," says Korn. "[Manufacturers are saying] let's talk about your vision for the next two to three years. How can we use our brands to help you drive the store traffic, to drive the category in which our brand is located?"

Supermarket chains are seeking "innovative, proprietary business-building ideas," stresses Korn. "These retailers don't want to be running the same business-building ideas that their competitor up the street is running."

In the increasingly consolidated retail landscape, the pressure to develop innovative new products has intensified, Bishop says. More than ever, retailers are seeking "new products that bring new users to the category."

The collaborative approach must extend to new product development as well. "To go in to a retailer and say, 'here's the product, we want to put it into distribution"' without advance communication is setting yourself up for a fall, Korn contends.

"My opinion is, you better sit down early on and have confidence in the retailer," notes Korn. "At a certain point, you better discuss this new product with them. [Otherwise] you're liable to get a rude awakening when a company that represents 20 percent of the industry says, 'thanks, but no thanks."'

Another key issues for manufacturers is the already substantial private label threat, which promises to intensify as retailers continue to consolidate.

Store-label products

Store-label products accounted for 19.9 percent of unit volume and 15.6 percent of dollar volume in supermarkets in 1998 - up from 19.8 percent and 15.5 percent, respectively, in the prior year. As retailers gather more critical mass, it will be easier for them to support private label-marketing initiatives and to take store labels into even more product categories.

"If retailers take the next step and merge so that we have truly national chains," says Cotterill, "they will be able to brand the store and advance private label so that it competes in a four-corner-square fashion with brands like Heinz, Campbell's and Kellogg. At that point, food manufacturers will have strategically lost their role as channel captains in the food industry - which they have had for most of the 20th century."

Cotterill hastens to add that such a dramatic transition is unlikely in the short term. "Having said all of this, is it going to happen overnight? Is it going to wipe out leading brands?" he asks rhetorically, then answers his own question. "The answer is no, but the bloom is off their [food manufacturers'] stocks."

One vision of the future

In the constantly shifting manufacturer/retailer relationship, retailers are in the driver's seat right now.

But that can change, points out Ed Tazzia, managing director of Gundersen Partners, a New York City-based consulting and research firm. "These things have a tendency to reach an equilibrium," says Tazzia. "What happens if some smart manufacturer or group of manufacturers says they're going to cut out the retailer?

"Some smart distribution guy is going to leave Fed Ex and go in to Durk Jager [president and CEO] at Procter & Gamble and say, 'How much would you like to front me? I'll put up a warehouse in each major city. All you've got to do is deliver you product, and I'll take it from there.'"

Tazzia contends that such a scenario is unlikely "as long as retailers are a positive addition to the formula, where it's cost-ineffective to look at another channel of distribution."

"But," he continues, "as they continue and start to demand more . . . at some point the pendulum has got to swing." And new manufacturer-driven distribution models may be one of the forces pushing that pendulum - at least for major players with the clout and financial resources to invest in them.