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For years Walmart [www.walmart.com] and other mass merchandisers relied on manufacturers of branded products to use their ad dollars to deliver consumers to their doorstep.  Traditionally manufacturers need a convincing story about their advertising and media commitment just to gain entry to the shelf.  Then once on the shelf brands that don't sell through are at risk of removal, or destocking.   Walmart and others, parlay the investment made by suppliers to switch shoppers once in the aisle to higher margin store brands thus creating a leveraged play on the underlying brand's investment while improving their margin mix.  Sixty percent of purchase decisions are made in the aisle according to MillerZell, [2009].  Recently traditional promotional tactics such as price roll backs, have increased intensively at Walmart which together with recent accounting changes have confounded manufacturers' top-line sales and gross margins.

Now Ad Age's Jack Neff, in an excellent commentary released today, reveals that this symbiosis in no longer good enough.  In a bold move Walmart has signaled manufacturers that it seeks direct investment of their advertising dollars in support the Walmart brand.  Think of it as the Mother-of-All Slotting Fees.  Such a move amounts to a tax on branded manufacturers that supports non-advertised store brands, in-store promotion, and the retailer itself.  In addition, it may raise further confusion on how manufacturers would account for A vs. P dollars in their P&L while exerting downward pressure on brand margins.  Mr. Neff quotes Leon Nichols at Management Ventures (WPP) who attributes this tactical shift to Chief Merchandizing Officer John Fleming's arrival from Target.  Greater than 30% of most major manufacturers' sales are bought by Walmart.

Inherent in this marketing concept is the implied threat that non-investor brands may find themselves on the street.  Destocking candidates, now numbering some 15% of all sku's, might include:  weak turnover and orphan sku's, second and third tier brands, and last year's line extension failures.  Additional pressure will be brought to bear on weak or underfunded line extensions particularly those with no incremental benefit or new technology.  All this seems like an effort to remove shelf clutter, delist sku's, and strong arm manufacturers. 

Since an "ad surcharge" would be proportional to dollar volume high-volume and premium-priced brands would generate fees while store brands may not.  In counterpoint, category captains/leaders may refuse to play and their refusal could cripple the concept or raise questions of "unfair" trade practices.

Donald K. Riker, Ph.D.
Dr. Riker is the President & Founder, On Point Advisors, LLC, a healthcare consultancy, and Editor-in-Chief, OTC Product News dedicated to the over-the-counter healthcare industry. He is the former Vice President R&D & Chief Scientific Officer, Chattem, Inc. and Associate Director & Fellow, Personal Healthcare, Procter & Gamble. Dr. Riker is an elected member of several medical and scientific organizations, The Licensing Executive Society, and the Association of Healthcare Journalists.

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0 # Mid Tier Masher 2009-08-17 12:24

Who cares about the mid-sized companies or the ones that charge more because they still make things in America? If a mid-sized American company has all that extra profit in it's brands and wants to keep its brand "premium", then they deserve to get taxed more. I mean, why not tax the middle cl[censored], it's the American way. The "category captains or leaders" have already made the move to having their products made in Asia or South America or have automated their lines so much that there are few American man hours in thier costs. You know these companies, there the ones that had enough money and insight to source those join ventures overseas when Wal-Mart first said, "hey, I can buy a widget, the same as yours, in Asia for half what you want our customers to pay for your brand". Hat's off to Wal-Mart and it's continued sculpturing of the American dream....You know the one...."Someday I'd like to have my dream job....a Wal-Mart Greeter".

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