NEGOTIATING WITH
POWER BUYERS
By John E. Hogan and Thomas T. Nagle
Big retailers have used the promise of higher
volumes to negotiate better deals since the
early days of the supermarket and the Sears
catalog. However, over the past decade, this
practice has been taken to an entirely new
level of sophistication. Price negotiations
have shifted dramatically in favor of “big
box” retailers (like Wal-Mart, Target, and
Home Depot) who have tripled their total
dollar share of North American retail sales.
Smaller but equally powerful retailers like
CompUSA and Staples dominate access to
particular submarkets. Even historically
fragmented industries (from hospitals to
carpet dealers) have gotten into the act by
forming “buying groups” to pool volumes
and extract discounts from manufacturers.
While the trend began in North America, it
has become a worldwide phenomenon, with
discounters consolidating volume even in
formerly restrictive markets like Germany
and Japan.
Initially, many power buyers gained share
by merging retail and distribution functions
and, by coordinating them better, radically
cutting inventory management and
transportation costs. By passing those
savings on to consumers, they drove volume
for the benefit of everyone but their less-
efficient competitors. As their shares have
grown larger, however, they have gained an
additional advantage—the ability to
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negotiate differentially lower pricing from
manufacturers. As destination stores,
covering an ever-broader range of items,
they are more likely to be the only store that
a consumer will visit. With more customers
shopping at Wal-Mart and Home Depot as
their only store, the power of even a strong
brand to drive store traffic is diminished. A
highly advertised brand will be preferred
once someone is in the Wal-Mart, but as
Wal-Mart carries more and more leading
brands, it becomes less likely that a Wal-
Mart shopper will make a second stop
elsewhere just to pick up a preferred brand
that they do not carry. High-quality brands
still need to bear the cost of advertising to
justify their premium retail prices, but they
cannot automatically expect the “big box”
stores to pay for part of that cost with a
smaller retail margin.
Wal-Mart, Home Depot, and the like know
they have power, and use it in negotiations.
As one supplier reported being told by a
“big box” purchasing agent, “We expect
your price to us to cover your costs. Earn
your profits from somebody else.”
Obviously, with these stores continuing to
broaden their product line and to increase
the number of locations, it will remain
increasingly difficult for manufacturers to
try to grow profitably. So what can and
should they do? First, they should stay
realistic. The effect of “big box” retailers is
SPG Insights
to reduce the value of brands, and nothing
that a manufacturer can do is going to turn
back the clock. The goal is to find the most
viable, profitable strategy for your brand
within a world of bigger customers who can
control more volume. Here are several
examples of how others have made that
choice and still maintained profitability.
Just Say No to Power Buyers
Some companies that were initially seduced
by the volume of power buyers ultimately
found better profits among retailers who
support their differentiation. Timbuk2, a
small manufacturer of unique and well-made
laptop and other shoulder bags, began
selling through big volume computer stores
like CompUSA at lower margins. While
volume increased, it was not enough to
justify the loss of margin and volume from
specialty stores. After just one holiday
season, Timbuk2 withdrew from its mass-
market channels and instead strengthened its
relationships with higher-priced specialty
retailers—Urban Outfitters, the Discovery
Channel Store, REI, and the Apple Store,
where its margins and theirs were much
higher. It then looked elsewhere for growth,
developing line extensions into women’s
specialty fashion stores, sporting goods
stores, and other stores frequented by
fashion conscious, more affluent customers.
Make Power Buyers Compete
Companies with strong brands often miss a
big opportunity by framing the strategic
issue poorly. They ask themselves whether
they should continue with their traditional
retail channel, targeting less price-sensitive
customers, or sell to power buyers with their
high volumes at lower margins. But there is
a third option as well: selling to one power
buyer in a segment and exclusively giving it
a pull advantage over competing power
buyers. Martha Stewart got higher margins
from Kmart with her exclusive contract than
she would have gotten from selling Martha
Stewart products to all big chains.
Quantify the Value of Your Offering
There are many ways that a brand can bring
differential value to a “big box” retailer.
Even if the retailer already has someone as a
customer, the brand can drive store visit
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frequency. For example, disposable diapers
are valuable to Wal-Mart because their bulk
requires frequent visits from a valuable,
high-spending demographic group.
Focus on Your Business and Eliminate
Costs
The most difficult challenge to manage is
serving both high-volume power buyers who
are unwilling to pay for your pull marketing
efforts, and non-power buyers who value
your brand because you support its
marketing. Sometimes, companies must
specialize to profitably serve power buyers,
eliminating costs of marketing and
distribution. Shaw Industries, the largest
carpet supplier in North America, squeezed
costs from fiber production, carpet
manufacture, and distribution by aligning
itself totally to sell massive volume though
Home Depot, Lowes, and large retail carpet
buying groups.
Segment the Product Offering
There is no need to offer exactly the same
product through a power buyer and through
traditional channels where there is a conflict.
Although John Deere sells products through
Home Depot, it does not sell exactly the
same products through distributors. In the
case of some packaged goods, only large
sizes are available through Wal-Mart,
Target, and other “big box” retailers. While
these steps do not entirely prevent the
potential cannibalization, they do reduce it.
Resist “Divide and Conquer” Tactics
Power buyers get their power from their
ability to deny a brand or product line any
volume through their stores or buying group.
The key to their success is to structure price
negotiations on each of the manufacturer’s
products individually. When a large medical
products company was confronted with
these “divide and conquer” tactics, it simply
returned multiple bid forms for each product
with different prices, adding a line
specifying the conditions under which those
prices would apply. The lowest applied only
if all the manufacturer’s products were
approved by the buying group, while the
highest would apply if only a subset were
approved. The buying group hated this
tactic, but the seller maintained its response,
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explaining how the value of the channel to
the seller was vastly reduced without
complete acceptance. Recognizing the cost
of losing all the seller’s products, some of
which had large market share among
members, the buying group approved all the
products.

In Summary
The growing strength of power buyers
creates many challenges for manufacturers.
Surviving in this environment requires
dispassionately evaluating whether the
increased access that power buyers offer is
really consistent with your brand’s value
proposition, and rejecting that path if it is
not, despite the potential higher volume. If
the power buyer channel is compatible with
your brand’s marketing, you must develop a
strategy to preserve profitability, because
without one, you will succumb to the
overwhelming strength of these retailing
superpowers.

Tom Nagle and John Hogan are Partners in the

Cambridge office of Strategic Pricing Group, a
member of Monitor Group. They can be reached at
tom_nagle@monitor.com and
john_hogan@monitor.com.

SPG Insights is a quarterly publication of Strategic Pricing Group, a

member of Monitor Group. In each issue, we take an in-depth look at
current value-based marketing challenges and provide practical
solutions and insights for executives in marketing, sales and
management. To register to receive SPG Insights, visit our website at
www.strategicpricinggroup.com.

Fall 2005 SPG Insights 3