The year 2002 marks the 75th anniversary of what the Baseball Writers of America in 1969 voted as the "Greatest Baseball Team of All Time" -- the 1927 Yankees.
 Much of the credit for the Yankee Dynasty of the '20s goes to the Boston Red Sox, who in 1919 and 1920 traded a handful of players (among them Babe Ruth) to the Yankees for a short-term infusion of cash. What Boston got for this was a few bucks and a permanent place in Baseball's Hall of Shame for the Worst Trade Ever...while the Yankees got the House That Ruth Built.
Isn't it convenient when your competitors shoot themselves in the foot?
Well, if you are a CPG national brand manufacturer, your dynasty is about to begin. The foot-shooters this time around are retailers who have embraced the Red Sox' "save a penny, lose a dollar" philosophy with respect to their store brands.
The foot-shooters' weapons of choice: Reverse Internet Auctions and "on-premise shootouts."
In the auctions, retailers post their private label product specifications on the Internet and set a time limit for the bidding. Potential suppliers -- including their current supplier -- are asked to sharpen their pencils and participate. The retailer starts the bidding about 10 percent below what it is currently paying for the product and then sits back to watch suppliers successively drop their prices in a frantic, time-compressed effort to win the business.
The lowest bidder gets to manufacture the retailer's private label products. It is via this method that Kroger reportedly purchased $500 million of products and services last year, saving about 6 percent.
If you are a CPG national brand manufacturer, your dynasty is about to begin.
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"On-premise shootouts" work much the same way. Suppliers are called in to the retailer's offices and put in little "shoot-out rooms," just like the criminal investigations, where suspects are put in separate interrogation rooms and relentlessly pummeled until one of them "breaks" and rats-out the others. Shoot-out rooms differ primarily in that -- instead of a cop -- it is the buyer who shuttles back and forth, asking each potential supplier to go lower and lower to beat their competitors' bids (or worse -- what they buyer says are their competitors' bids). That’s the "saving a penny" part of the equation.
The "losing a dollar" part is that the sole consideration in these types of "transactions" is price. Completely ignored are all of the other considerations that national brand marketers know are a necessary part of building and securing one's brand equity -- quality control, consistency, service levels and marketing support. It is the same retailers who subscribe to this "price is all that matters" methodology who say they want to build "equity" in their store brands and offer their customers a viable quality alternative to national brands. Clearly, they don't "get it."
Consider the following: A supplier who had been supplying the store brand for a key account for the past five years was asked to participate in an Internet auction. When the supplier asked if the account was unhappy with their quality or service, the account said "no," that they just wanted a better price.
By the time the bidding was done, the supplier retained the business, but at a price that required it to shave every bit of service, support (and profit) out of the price. After the auction was over, the buyer asked this supplier to provide 5,000 free samples for promotional activity.
When the supplier told the account that he was "tapped out" and could no longer afford to provide such samples, the buyer was genuinely surprised. The buyer will probably be equally surprised when out-of-stocks become a problem, when sales fall off because the supplier's quality control standards have to be reduced or when the buyer loses the supplier altogether because he's out of business.
The growing popularity of Internet auctions and shoot-out rooms suggest that this retailer is not alone in understanding the "saving a penny" part while at the same time totally missing the "losing a dollar" part.
The irony is that retailers know that their store brand is their Babe Ruth. Every recent survey puts "grow store brands" at the top of retailers’ priority lists.
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Why? There is this belief among retailers that suppliers have a hidden cache of money stowed away that retailers have failed to excavate. We call this the "Scrooge McDuck Syndrome." Retailers salivate over an imagined Scrooge McDuck's Closet, tucked away somewhere in suppliers' headquarters, filled to overflowing with profit that the retailer could tap into if only it had the key.
Retailers see Internet auctions and shoot-outs as one way to access this money closet, believing that every penny they wrest from suppliers comes from old McDuck's closet of profit. In their minds, quality, service levels and marketing support won't change a bit.
The irony is that retailers know that their store brand is their Babe Ruth. Every recent survey puts "grow store brands" at the top of retailers’ priority lists. Their store brands are their names and reputations. Their store brands cross hundreds of categories in the average store. For the past ten years, retailers have focused on improving the quality of their store brands to make them reflect the image they want their names to convey.
On some level, there is even a dim awareness that degrading one's store brand in any one category dampens or even extinguishes the consumer's desire to buy that same brand in any other category. Some even recognize that store brands hold the greatest potential for consumer differentiation, improved profitability and, quite possibly, long-term survival.
However, these same retailers don't understand that they're even making a trade – much less that they're trading away The Babe. Where national brand marketers know that enhancing and protecting The Brand is their most important function, retailers are choosing to sell it out to the lowest bidder -- trading away the equity it takes years to build for what may well be illusory savings and efficiency.
Move over, Red Sox -- your "Worst Trade" title has been taken.
Let the brand dynasty begin.
(Editor's Note: The author is the son of Hall of Fame pitcher, Waite Hoyt, whom the Red Sox traded to the Yankees along with Babe Ruth and Herb Pennock in 1920. Waite Hoyt was 22-7 and led the league in pitching with a 2.63 ERA in 1927, and repeated as the league leader with a 23-7 won-lost record in 1928.)
Chris Hoyt is President of Hoyt & Company LLC, a packaged goods training and consulting organization based in Scottsdale, AZ. He may be reached via his web site at www.hoytnet.com
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