Walmart, P&G and the Upheaval of a Decades old Symbiosis Between Retailers and Brands

Walmart & P&G

A few days ago, The Wall Street Journal reported on growing tensions between Wal-Mart and P&G (paywall) as both giants aren’t growing fast anymore:

Although Wal-Mart’s sales rose by nearly 1% in the quarter ended April 30, the company’s annual revenue fell last year for the first time since it went public in 1970. It also closed 154 U.S. stores en masse earlier this year, another company first.

P&G, meanwhile, hasn’t created a blockbuster product with $1 billion in annual sales since 2005. Overall annual sales growth has been stagnant since the recession, hitting a four-year low of $70.7 billion in 2015. The company has also cut more than 20,000 jobs since 2012.

Brick-and-mortar retail chains like Walmart and large consumer packaged goods (CPG) conglomerates like P&G were and still are in a symbiosis:

The pair expanded into behemoths together, leaning on each other’s largesse to sell pallets of everyday items such as detergent and diapers from Wal-Mart’s vast, fast-multiplying stores. Last year alone, P&G sold roughly $10 billion worth of goods through the retailer.

That symbiosis has become strained as shopping shifts online and consumer tastes lean away from some of P&G’s iconic brands to less expensive alternatives.

And this symbiosis is slowly but surely coming to an end as both parties are under pressure by the entrance of online retail with its own set of rules.

No more limited shelf space and instead specific product searches (and subscriptions etc.) means, among other things, that a company like P&G doesn’t need a large amount of brands to occupy the shelf. The shelf at Walmart isn’t the only space were people find one’s product anymore. And even more so, the ongoing change from a world of mass-media (with, after a few decades, a straight-forward way of building a brand) to a world of increasingly less mass-media like channels to build brand awareness with is forcing P&G to change. Stratechery from 2014, when it became public that P&G will be cutting half of its brands:

The first change has been the massive increase in noise. It is so much more difficult today for a brand to break through, especially as compared to the halcyon days of one local newspaper and three broadcast channels. Today there are not only TV channels galore, but display advertising, search advertising, Facebook, Twitter, and more. While it is true that uber-specialized brands can now more easily hone in one specific niches, that takes real money and is much more difficult to pull off across 200 brands. P&G has likely realized that many of its brands were simply getting drowned out, rendering the money spent marketing them effectively worthless. Thus P&G has decided it needs to “go big or go home” – either spend a lot of money to make sure a brand stands out, or simply get rid of the brand. (…)

There are two big challenges when it comes to winning search:

  • Because search is initiated by the customer, you want that customer to not just recognize your brand (which is all that is necessary in a physical store), but to recall your brand (and enter it in the search box). This is a much stiffer challenge and makes the amount of time and money you need to spend on a brand that much greater
  • If prospective customers do not search for your brand name but instead search for a generic term like “laundry detergent” then you need to be at the top of the search results. And, the best way to be at the top is to be the best-seller. In other words, having lots of products in the same space can work against you because you are diluting your own sales and thus hurting your search results

The way to deal with both challenges is the same way you break through the noise: you put more focus on fewer brands.

Back to The Wall Street Journal:

In recent investor presentations to discuss financial results, executives from major Wal-Mart suppliers including snack giant Mondelez International Inc. have said the retailer’s efforts to cull some products from shelves has dented sales.

Thanks to Walmart’s sheer size in the US market, companies like Clorox (26%), Kellogg (21%), Pepsi (13%) or P&G (14%) depend to a large amount on the retail giant’s sales. (numbers for latest fiscal year, source SEC filings via WSJ)

The symbiosis between P&G and Walmart has lead to a combined logistics effort:

[P&G] had invested in a network of “mixing centers,” large distribution centers from which P&G can ship products quickly to a larger number of retail locations, reducing the cost of Wal-Mart’s supply chain(…)

All this is just to show how intertwined the fates of retailers and brands become over time.

This was the brick-and-mortar-edition of this story.

The online edition has just begun. Meaning, we just now see the first glimpses of what this will look like in a pure online retail world.

Look for example at KW-Commerce, a German online retailer operating with private labels only on Amazon (and with a lesser importance to its business on other marketplaces like eBay). KW-Commerce’s growth last year was an astounding 2307%. (German interview with FAZ, translation)

Growth rates like these suggest the beginning of a hockey stick curve for the market as a whole. It suggests the beginning of a new bunch of symbiotic companies getting started.

The new online only brands operate differently than their traditional competitors. They focus on marketplace specific dynamics, the same way P&G et al have to focus on, say, Walmart-specific idiosyncracies.

The bigger picture here is, as I aluded to above, that the Internet is not just changing retail from brick-and-mortar to online. The Internet is changing a whole set of assumptions that were not only true for retailers but also for brands even a few years ago. More and more those assumptions aren’t true anymore.

One example. Let’s stay with brands and brand advertising, so that we don’t go to far off topic here.

A company like P&G is build on these few very basic assumptions:

  • Big supermarkets like Walmarts are ready to negotiate valuable shelf space
  • People own cars to drive to big stores from Walmart and others to do their weekly shopping
  • Mass media like TV offer one efficient way to build brand affinity

But TV, and TV advertising especially, is facing the same existential threat. Ben Thompson at Stratechery a few days ago:

Note, though, that many of the companies on this [list of top TV advertisers] are threatened by the Internet:

CPG companies are threatened on two fronts: on the high end the combination of e-commerce plus highly-targeted and highly-measurable Facebook advertising have given rise to an increasing number of boutique CPG brands that deliver superior products to very targeted groups. On the low end, meanwhile, e-commerce not only reduces the shelf-space advantage but Amazon in particular is moving into private label in a big way.
Relatedly, big box retailers that offer little advantages beyond availability and low prices are being outdone by Amazon on both counts. In the very long run it is hard to see why they will continue to exist.
The automobile companies, meanwhile, are facing three separate challenges: electrification, transportation-as-a-service (i.e. Uber), and self-driving cars. The latter two in particular (and also the first to an extent) point to a world where cars are pure commodities bought by fleets, rendering advertising unnecessary.

It may not look like this now, but sooner rather than later this is going to become a vicious cycle: Struggling (old-school) brands need struggling TV networks to create brand affinity so their products get bought at struggling retailers.

This is an industry-crossing chain that grew up in the industrial 20th century. The chain’s links are getting weaker every day. Because some or all of their attributes are not best in class in an online world anymore. The aspect easily overlooked here is this: This concerns all links of the chain.

Online retailers, then, building platforms and other ways for keeping options open for whatever future partner companies may need from them, will in the long term be in a far better shape than others.

Maybe it is not going to be like a house of cards coming down. We can debate the shape the decline will take. Undebatable however is that the decline is coming. And with it, an immense opportunity for new players.

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