Why do we invest in retailers? This simple question is often asked by naïve consumer marketers as they see their advertising budgets whittled away by the “profligate guys” on the sales team. And retailers have a clear, simple answer to this—retailers own the shopper. After all, the retailer invested in the real estate and marketing to draw shoppers to its stores. Retailers have invested in the infrastructure to supply the stores, putting the products to be bought by shoppers on their shelves. It’s the retailers’ real estate assets that are used to market products in the stores, so why shouldn’t manufacturers invest in them to get shoppers to buy? So the argument goes.
One can go on to assert that without the retailer’s support, little can be done to conclude the sale. All the essential decisions that lead to a purchase are made by retailers: they decide which products to stock, how and where products will be merchandised, what promotions to run, what advertising will be run in-store, and the final price a shopper will pay. Given that retailers control these decisions, if a manufacturer wishes to influence these decisions, part of the equation must be the level of investment the company is willing to make.
This is a simple, strong argument for investing in retailers, right? Wrong!
This simple rationale, while factually accurate in all its key points, misses the major point entirely. This argument makes a case for treating the funds offered to retailers as a cost. It simply says that to get things done in a retail environment, the manufacturer must pay. This is as close to the definition of a cost that one can get.
The five-step approach enables marketers to navigate this logic. Let’s take, for instance, the kids’ milk case discussed in our courses. The company involved stood to gain significant sales and profits by ensuring that consumers continued to use its more expensive brand in favor of the cheaper one. In order to do this, the company sought to prevent shoppers from switching to a cheaper brand. The outcome of this change in behavior is a quantifiable increase in profits. Since shoppers in hypermarkets regularly compared brands, reducing the level of comparison in this channel was important. So in these large format stores, changing the merchandising of the shelf was a great marketing strategy to prevent switching. Since the costs associated with re-merchandising were relatively low and the potential to create incremental profit was high, it made sense. Invest in retailers who owned hypermarket stores.If this is all a manufacturer’s funds achieve, then money spent on retail is merely cost. But with so much being spent, surely brand owners should aspire to more: aspire to make some return on all this expenditure. The financial laws that govern return on investment dictate that one must make more profit than was spent to deliver a positive financial return. Most vendors have an ongoing relationship with a retailer—they have a relatively stable base of sales that will continue. This relationship includes a built-in assumption that, all other things being equal, costs should remain static too. So, to justify an investment in retail, the investment must create incremental profit. This can only come from changing the sales base or reducing costs overall. Logically, one would only invest in a retailer if either of these outcomes were possible.
So, why invest in retail? To implement activities in priority channels where influencing shoppers’ behavior is likely to increase consumption. This rationale turns the simple answer companies often offer on its head. It forces teams to make a clear distinction between cost and investment, but it can also have a dramatic impact on a company’s P&L. However, this can only happen if retail investment is the last decision marketers make in the five-step process.
This blog found in Course 26: Investments in the Total Marketing Process.