ROUNDTABLE

Why do so many marketers apparently lack a strategy at retail?

BILL BEAN: Most of the reason manufacturers don't have a retail strategy is that they react to each retailer as an individual customer. They are so reliant on that individual customer to gain access to their consumers that the process and practice is pretty reactionary.

That's not necessarily a bad thing. Many marketing strategists say the best thing a marketing company can do is to have the kind of organization that can react to rapid change in the marketplace. It's getting harder and harder to anticipate what the exact nature of those changes will be. So, the best you can do is to react to the changes very quickly. Also, depending on the business you're in, the channels in which you operate have been changing fairly rapidly over the last decade. There are lots of emerging channels -- a lot of existing channels doing really new things -- and it's all driven by fragmentation and competition.

For instance, in the soft drink business, a certain portion of the business is composed of single-serve drinks --- years ago, the convenience store sold mostly single-serve drinks. Now you can get them at Wal-Mart, at any supermarket, at drug stores, and of course from vending machines. They're all over the place. So, every retailer -- regardless of its channel -- has to compete with all these other channels. They're all trying to do their best to steal customers from each other, to provide solutions in one -- or many -- contexts. It's all about fragmentation and competition within our customers, as well as among our competitors.

DENNIS PODLESAK: Part of the problem is that packaged-goods companies traditionally haven't been run by marketing executives. Even well-regarded companies are very insular and internally focused, and the marketers tend not to really understand what's happening in the retail stores. Oddly enough, the sales force is the contact that really understands what's happening at retail. But the problem is, that data is typically communicated in a very anecdotal way and it doesn't resonate with marketing executives and general managers who are basically running a P&L.

So, you have a situation where there's a knowledge base in the sales force in these "category marketing" groups. But they lack the authority and the P&L responsibility to really drive overall investment decisions and to affect the total marketing mix of the company. Where they have the authority to modify or manage the marketing mix, they do not have the in-depth understanding of the significance of the retail trade as it relates to how to effectively integrate their marketing strategy along with the retailers.

PEGGY McDONALD: There is such a lack of retail strategy because of all of the consolidation that's going on in the retail industry. Tons of consolidation is going on, and because of that, there's a lot of uncertainty at those retailers -- not at Wal-Mart, however, which has already consolidated and has a clearly stated retail strategy. But there are so many questions at other retailers as they are consolidating and reorganizing. It leaves everybody sort of scratching their heads.

"Part of the problem is that packaged goods companies haven't been run by marketing executives." DENNIS PODLESAK

That said, there are certainly organizations that in the past have come out with very, very clear go-to-market strategies -- be it EDLP or Hi-Lo, or just different ways that they've gone to market.

Unfortunately, they have not always stuck with it. The frustrating thing to most manufacturers is that you think you've got the game plan, and then it changes. You think, "Okay, we are all EDLP, put it all in price." But then the retailers come knocking on your door again, saying, "Well, we are EDLP, but now we need some promotions, now we need some displays, ads, monies." That gets frustrating, and I think we've all been through these cycles.

MEL KORN: Tradition has kept the supermarket end of the retail business pretty much where it is. A lot of that has to do with retailers' inability to listen to what manufacturers have to say. By comparison, Wal-Mart has always had open ears. They have always listened to manufacturers who brought them ideas, had their homework done and who brought them information about the consumer.

Wal-Mart also has a very disciplined approach to what they're doing, and don't get into the shakedown jobs that go on in the supermarket business, such as slotting allowances, and so forth. Instead, they committed to one thing -- the consumer. That's what their focus has been ever since Sam Walton opened his first store. Target is in the same league and Costco tries to do the same thing. But at the supermarkets, you have a situation where it's all about "price" instead of listening to advice from their marketing partners. Price is all the supermarkets want to talk about.

Meanwhile, the manufacturers -- I'm going to be very frank here and put it right on the table -- are constantly reacting to what the supermarket operator is demanding of them. They are tactically reacting to what the supermarket operator is demanding of them. They are tactically reactive instead of strategically proactive. That's because if you teach a dog a few tricks, after a while it just keeps performing the same tricks all the time.

What is the proper role of the retailer, relative to the manufacturer, in developing a marketing strategy at retail?

McDonald: It's pretty disheartening when certain retailers stress that the only thing they want is price, because that comes at a cost. There are proven ways to reach our targets that are not just based on price, that are more profitable for the retailer as well as for us, and more long-lasting for the retailer, as well as for us.

There are those who are working to develop programs that go beyond price -- be it loyalty card programs or other incentives -- when they're actually using their databases to target consumers.

They are also using some of their ancillary programs, like pharmacy or gas programs. They have many different ways of getting at different consumer groups. That is smart, because everybody is out there saying, "low-price leader, low-price leader," but I don't think consumers believe it anymore.

Korn: The retailers and manufacturers have to gain insights as to how consumers behave as shoppers because there are two key moments of truth; the purchasing moment and the consumption moment.

Consequently, supermarkets must be more than procurers and merchandisers of product. They have to be marketers, too. However, they do not have the depth of marketing talent and expertise that resides within a manufacturer's organization. This is why they need to open up their minds and listen to the manufacturer who can bring that expertise to them.

Once both parties are on that page, they are ready to approach developing retail strategy as collaborators. The retailer's brand is its banner -- its positioning, the shopping experience and so forth. The manufacturers, of course, have their brands. The key to success is how well they collaborate to arrive at a strategy that integrates and serves both sets of business and branding objectives.

Podlesak: The real art form occurs when the manufacturer and retailers integrate -- almost like a well-conducted orchestra -- to deliver a differentiated and targeted message to a distinct consumer base, to drive category profits. The reality is that it happens in only a small minority of cases as it relates to retailers and manufacturers.

For the most part -- despite efforts by both the retailers and manufacturers -- they tend to follow separate processes. The retailer understands the importance of growing the overall category and increasing their share of strategically significant categories. But the reality is they don't have the infrastructure, training, or skill-level to pull that off.

The same applies if you flip it around. Manufacturers understand the overall thrust of category management. However, when you step back from it, other than the handful that do it really well, manufacturers are still basically trying to use their brands to drive category sales and profits, versus first focusing on the overall category.

Bean: When I've seen it work best -- although I will say it is rare -- is when the manufacturer and the retailer can partner in such a way that they both can get what they want from the consumer. The manufacturer typically cannot reach the consumer without the retailer. The retailer typically is not structured to best market to their consumer.

So, by working together, the manufacturer and the retailer can complement each other to make money for each other, leveraging the strengths that each partner has vis-a-vis the consumer. But I don't know of any manufacturer or retailer that does that consistently well. They recognize a success when it happens, but then they move on to the next crisis and forget the benefits gained from their partnership.

The benefits of partnership are also always clouded by the game of competition. Everybody wants an advantage, everybody wants to withhold information, everybody wants to spin information, everybody wants to negotiate around a particular thing that gives them power in the relationship. Often those power relationships get in the way of doing business well.

The Reveries study also found that only 3 percent said most marketers view retail as a marketing medium. How do you view the role of the store in terms of marketing communications strategies and programs?

Bean: It's a changing landscape. I talk to our Pepsi marketing people about how the retailers need to fit into their marketing plans in a way that they traditionally -- by training or by inclination -- haven't thought about. Specifically, when brand managers think about marketing their products, they typically think about advertising as the push strategy and the retailer is only just a real estate location -- it's just where you put the product so a consumer can find it.

What they don't think about -- either instinctively or by training -- is that by placing Pepsi at Wal-Mart or Safeway or Kroger, that placement acts as a filter on all of their marketing messages, and that the retailers themselves are sending marketing messages that evolve their products.

"The benefits of partnership are always clouded by the game of competition." BILL BEAN

The word "channel" itself takes on a new marketing meaning. It is a metaphor. In the same way that we talk about NBC and CBS and ESPN or MTV, as channels in which a marketing message is sent, there is emerging such a thing as the Wal-Mart channel, the Target channel, and the Safeway channel. This is a marketing message, not a sales function. It's not about dropping your price, putting up displays or getting distribution. It's about what being in that outlet says about reaching your consumer with the message that you want to send. And it's becoming every bit as important in how consumers make decisions about the products they buy.

I came to Pepsi most immediately from the battery category, having worked for Rayovac Batteries. We were one of the pioneers in buying advertising time on a television network that broadcasts only in Wal-Mart. They broadcast live concerts, they broadcast content, they do ads -- but you can only see them on TV screens in the store. It is completely analogous to sending it out on MSNBC except it's on Wal-Mart.

McDonald: If I were Pepsi and had deep, deep pockets and could run marketing programs all day long, I still would not hit everybody, or all the people I wanted to. But everybody who picks up my product in the store is automatically having an interaction with my product, which is a marketing experience. I think we often miss that point. We get so excited about this cool promotion, or this cool ad, when in fact it's probably hitting a relatively small percentage of our consumers.

And yet, the whole shelf experience of walking into the category, being surrounded by your competitors as well as your own brand -- who is that consumer going to pick at that moment? It is a moment of truth. That's a marketing experience that we ignore sometimes. Be it packaging changes, at-shelf vehicles, I think the retail experience, as a marketing medium is critical. I don't know why 97 percent of marketers would have said it isn't.

Korn: The reality is the store is a primary marketing medium. It's just that it has not been seen as such by the retailers who own it. At the same time, because manufacturers have been tactically reactive rather than strategically proactive, the opportunity to use the store as a marketing medium has not been exploited.

Now, just as you have to understand the consumer if you're going to build a brand in the general marketplace, using the store as a marketing medium requires an understanding of the shopper's mindset and all the aspects of what drives the shopper, particularly emotionally.

"It's pretty disheartening when certain retailers stress price, because that comes at a cost." PEGGY McDONALD

If you want to connect with a consumer at home, in a 30-second TV commercial, you focus on making an emotional connection between that consumer and your product. That same issue has to be explored and put in place in-store. Similarly, there's an emotional connection between the shopper, a category and the aisle of brands in that category. So far, those emotions have remained untapped.

All you've got to do is walk through a store and look at the signage. All you see is price points, end-aisle displays with markdowns -- where's the emotional communication? Just the way you storyboard a TV commercial, the store should be approached -- both by the retailer and the manufacturer -- by storyboarding the communication. The retail store is the most powerful medium that exists. It sits there every day, 24-hours-a-day. All you have to do is be smart enough to put it to work for your brand.

Podlesak: In earlier times, you could communicate your differentiated message by different media types -- television, radio and print. That strategy no longer works because of media fragmentation. So, as it relates back to the store, in terms of developing a communication and a strategy program, the store as a marketing medium has become integrally important.

However, despite a lot of effort and a lot of talk, you've only really got five or six manufacturers that are integrating their communications programs with retailers -- and you've only got about five or six trade party players that are really doing it well. The rest are talking about it, hoping to do it -- "wannabes." Even though retailers understand the importance of changing this, they lack the sophistication, the infrastructure, and the skill levels in their organizations required to do anything about it.

HEB is one retailer that's an exception. They have a very expensive, extensive category management -- category marketing -- training program. They recruit from the top business schools. Probably about half of them have come out of business school with MBAs. They've been at it for a while, so the people who have been successful have ratcheted up and now you're starting to get these more sophisticated MBA types actually running these category businesses. And you'll see more of that in the future.

What is your view of the importance of driving consumption -- versus driving shipments -- at retail? Can it be accomplished?

Korn: They both go together. However, it depends where you put the emphasis and what your goal is. If you're driving consumption, you concern yourself with the end user, the shopper who goes home and uses a product.

However, most of the supermarket activities over the years have been shipment-driven -- drive it into the store, stack them high, sell it low -- and that's where it would end. Retailers didn't concern themselves about what happened at home, how shoppers consumed what they bought.

If you're truly consumption-driven, both manufacturer and retailer must reward the system on consumption and not shipments. So if you offer incentives to your sales people to beat last month's figures, then there's no incentive to driving consumption. That goes for the retailer too. So if you're going to buy into consumption, you've got to put teeth into it. And part of that, beyond your strategy and programming, is rewarding the system on consumption, no longer just on shipments.

Bean: Driving consumption or driving shipments varies at any given time by the business needs on either side of the equation and it varies by retailer. It's based on the history of the retailer, how strategically-oriented they are, versus tactically-oriented. Each engagement is different. The retailer, I'm sure, feels the same way about the manufacturer. Their needs -- and mine -- change from time to time, and each engagement in this partnership is an independent negotiation to get something done.

Some of them work really well and some of them don't work really well. But at the end of the day, the retailer and the manufacturer absolutely need each other to be successful. So, if at any given engagement, if somebody gets gored, or an arm gets broken, you're back the next day to still work on it. The relationship still exists and you both still need each other to do the best job you can.

The landscape of the relationship changes all the time, but the relationship itself does not. So everybody keeps plugging away to do the best they can in an environment that has its own rules, strengths and weaknesses, and limitations.

McDonald: In every company that I've been at, internally, there's always the push for shipments. It doesn't matter if it's not shipping out the door -- we don't care what's coming off the shelf. That never works in the long-term. But there are always short-term pushes for shipments, and you can't ignore that, as that's the vehicle for the company's growth. But we all know that if you don't get the consumption, you're dead in the water anyway.

At Tree Top, we certainly measure both. On many, many products we look at that pattern of consumption and lagged shipments to see that we're getting both. If we see that we're not getting the consumption, we put programs in place to drive it.

For example, we use lots of on-shelf vehicles. Quite frankly, on bottled products like juice, we use a lot of neck-hangers and on-shelf promotions that speak directly to a consumer. So, right there at the point of purchase, the consumer has a reason to purchase our product versus someone else's -- and it's not just a price incentive, but rather usage ideas, loyalty, building programs. We can reach our consumer and speak to the purity of Tree Top, and speak to quality, in a way that perhaps our competitors are not.

Podlesak: At Allergan, we found that we could grow Wal-Mart's business by almost 40 percent -- four times faster than the category -- just by coming back to the consumer insights. We started looking at when people were purchasing these categories. Dry eye tends to be a greater factor in the 50-plus consumer demographic. So, obviously our advertising, in terms of delivering a differentiated message, was against media that would appeal to a 50-plus target consumer.

"Retailers really need to listen. Manufacturers can bring them some very good insights." MEL KORN

Working with Wal-Mart, we realized that the 50-plus target consumer tended to shop two times during the month -- as you might guess it's when the Social Security checks are received. We started putting Refresh Eye Drops up on display sometime around the two times each month that the 50-plus, dry-eyed shopper had disposable income. We found it dramatically accelerated category sales and profits -- and our Refresh Eye Drops were the beneficiary.

We worked very hard to educate our marketing group to really understand the retailer. Successful organizations are those where they've gotten away from the silos where marketing works on consumption, while sales works on selling or pushing products. Marketing and sales and category management have all been integrated and they've got cross-functional account teams that are working with the retailers to help build category sales and profits. To do that, you've got to start training the marketing organization. Allergan, for example, used Hoyt & Company's "Trade Smart" as the solution to closing the knowledge gap, to enable real world MBAs to develop and exploit a successful retail strategy.

Are manufacturers and retailers truly collaborating in any facet of their relationship? If yes or no, how and why?

Podlesak: Yes. But it's important to note that a large percentage of control of grocery dollar sales is not necessarily a prerequisite of high sophistication. Allergan, for example, is now the number one eyedrop company in the United States -- in the world. Five years ago, that wasn't the case. They were a "number three" player in a category that has a very high margin. It's also a category that is growing about five or six percent a year, which is obviously outpacing 90 percent of food store items in terms of category growth levels.

Back in 1998, Allergan hired Saatchi & Saatchi and started doing print and TV advertising. We doubled the category growth rates to ten percent compounded annual growth rate for the next three years and we grew it to about a 22 percent compounded annual growth rate. So we were growing more than twice as fast as the category and ended up overtaking Pfizer to become the number one player in the world with Refresh Eyedrops.

We did it by going to the retailers and saying, "We know you don't have a lot of time to spend in this category, but we have done the most extensive amount of consumer research and our ability to help you leverage the consumer insights that we have acquired will enable you to gain a disproportionately large share of a very fast-growing, dynamic category."

Bean: I frequently call it a nervous collaboration -- it's nervous and evolving. Each party has a stake, each party has strengths, and each party -- sometimes by necessity and sometimes by history -- fundamentally doesn't trust the partner. What has developed is this uneasy partnership where the retailer relies on the manufacturer for certain kinds of information, and for money.

It's changed a little bit since Wal-Mart pulled out of providing scanner data, but one of the largest profit centers in a supermarket -- or food retailing -- environment in the United States is selling data to Nielsen and IRI, so that manufacturers can use it to help in the partnership. What they do is give data back to the retailer to help manage their products.

Ten years ago, the whole category management movement started as an attempt, mostly by the retailers, to leverage category information with the manufacturer. When I play that game with a retailer, I have to do analyses in the category, I have to sell what their category is, and I have to sell Pepsi at the same time. The good relationship with the retailer will recognize that I'm honestly, sincerely and honorably working to drive both their business and mine.

McDonald: Retail collaboration is something that we talk about a lot, because we'd like to see it be a lot better and deliver more. You hear a lot of people talk about account-specific programs and yet they are incredibly difficult to actually execute because of chaos on one end or the other. To make it more than a buzzword is a very difficult thing.

"The real art form occurs when the manufacturers and the retailers integrate." DENNIS PODLESAK

Also, with more and more consolidation in the grocery business -- we're a regional brand in the Western U.S. -- and it becomes more and more difficult for regional brands to compete in more and more national chains. And yet the consumer, in the region in which you are, highly prizes different regional brands, and so it's a real kind of a dance there to make that work.

Recently I was in Texas, at HEB. Have you seen their Central Market stores? I just want to live in the parking lot there! It's the most extraordinary store I've ever visited. It's so upscale, organic, gourmet, and convenient. Visually, it's the neatest store I've ever seen. They have these bar sections with industrial-looking trays and there are 20 types of olives and five kinds of capers, 30 prepared sauces. It's exhausting just looking at it. It's just beautiful, though. Here's a retailer who has clearly worked very closely with suppliers to deliver an incredible experience to the consumer that I'm incredibly jealous of.

You'd be crazy not to walk out of there spending five times what you intended to spend walking in. I heard a statistic that, in the Dallas/Fort Worth area, Central Market was the second-biggest restaurant business. People are just buying the prepared foods and eating there. There is even a wine bar at the grocery store. There was a place for kids to pull down butcher paper and draw on the walls. It is so beautifully done that you just would never want to leave.

Korn: Several supermarket operators are showing signs of getting it. Stop & Shop is one. They're seeing the ability to use their store as a marketing medium. You can go into any of their stores and you'll see progress in certain areas. They're setting up store-within-the-store concepts. They're even bringing in Toys R' Us and Office Max. Their deli is taking on a strong branding positioning. The interesting thing is that Mark Smith , who runs the Stop & Shop, came up through marketing.

Retailers really need to "listen." Manufacturers can bring them some very good insights. The only thing I would caution here to manufacturers, is that retailers have been loaded with consumer insights and information. What the retailer wants to know more about is the shopper, their shopper. Just as the retailer has to begin to listen to the collaborative effort between two of them, the manufacturer has to learn to be more tuned in to shopper behavior than they have been.

Supermarkets are constantly worried about Wal-Mart. If they want to be proactive, they must settle down and realize that the manufacturer can be a very valuable marketing resource to them. Then they need to commit to themselves -- not to the next 24- or 48-hour horizon -- but to look at the next 24-month horizon as to where they can build their position and begin collaborating with the manufacturer using the store as a marketing medium to make it a reality.