Will Retail Chains Lose Their Dominance?

In most industrialised nations the the supply chain of goods from source to end user has changed little for many years. Firstly there are the producers. Then the wholesaler, then the retailer and then the customer and consumer.

In the U.S. the supply chain has always been pulled by downstream consumers. Europe had a different history where a mixture of world wars and interventionist governments led to supply chains that were pushed from the upstream end. Certainly, the rationing of the 1940's and beyond led to a culture of consumers who got what they were given and were thankful for small mercies.

As Europe has become more affluent, consumers have flexed their muscles and demanded an ever wider array of goods at a range of prices and standards. It has now joined the U.S. and most other industrialised nations with consumer-led supply chains.

A feature of this has been the trend towards large retail chains. Many of these chains have become so large that they have virtually dispensed with wholesalers, preferring instead to purchase goods directly from producers. They have also established the so called "own brand". This is where they have dictated the product specification to the producer and told them to brand it as their own product. And there is more: some of the largest chains have increasingly got themselves involved with all aspects of the supply chain from raw material sourcing, packaging procurement and design, all aspects of distribution and even their suppliers' recruitment policies.

This has resulted in a shift in the balance of power from upstream to downstream. Now that every aspect of the producer's business, including their all important costs, have been tied down by the ever inquisitive retail chain, has the pendulum swung as far as it could? We all know what happens to pendulums when they have gone as far as they can in one direction. Now, I cannot surely be the only person who has thought about this. I am sure that directors of some of the large producers out there must have thought to themselves "how did we let this happen?". Perhaps some of the smaller producers whose management can't even visit the washroom without permission from the retailer (it seems) are also thinking "enough is enough".

Just think of this: who has put the capital and risk into the very expensive plant that is needed in a production environment? Not the retailers. Who has the skilled staff including engineers and designers? Certainly not the retailers. Who has detailed product knowledge within their own spheres? Retail chains, by their very nature specialise in putting largely unskilled staff in large buildings with rows of shelving and a line of checkouts. They can only ever have a superficial knowledge stretching across the vast product ranges they sell.

I know I have painted a picture of poor downtrodden producers that have been conquered by those nasty retailers. Firstly the retailers are not nasty at all - they are just doing their job - so let's not blame them. And there will be many producers out there who rather like the status quo and don't want to rock the boat. OK, so they don't get the kinds of profit margins they would like, but they do get volume. Though in my opinion, the reason why many producers want to leave things as they are is that they are slaves, even if they don't realise it.

It's a kind of drug dependency, but with the drug being high volume sales and the drug pusher being the retail chain. It's a familiar pattern. The producer is forced to reduce costs by a retailer promising higher volume in return for a greater share of the margin, so the producer invests in larger production facilities, faster machinery and takes on more staff. This is fine until the producer realises that he is now dependent on the retailer. The producer is now in the position where he must be given volume orders in order to ammortise his costs. The retailer says: I can give you volume, but you must give us more margin. For some producers the moment of truth comes when they need to take a leap into a big new production facility in order to keep up with these demands. So, they take on a loan and expand the business. Now they need a constant fix of volume business, not only to keep the factory going, but in order for their business to avoid bankruptcy. Some producers who have converted to this high volume business have gone so far with it, and have partnered so closely with their master retailer that they simply see themselves as an extension to the retailer and will not contemplate change.

Others may feel differently. They may be run by more independently-minded bosses, or may have kept up sales to other outlets in order to keep some trade going that is outside the sphere of the retail chain. I am sure that some producers want to see that pendulum start to make its way back, even if it is just a little way. But what can they do? Well, things are changing out there, so opportunities may arise sooner than expected.

Firstly, there is safety in numbers. Just ask the unions, or a herd of wilderbeest. I can see alliances taking shape over the next few years between non-competing producers who, between them, can offer a full range of products to consumers. Why can't they open their own retail outlets? Remember, the billions made by today's retail chains will no longer need to be serviced, so prices will be very competitive and margin healthy.

Secondly, there is pressure on fuel supply and prices. There has been a recent blip that might fall off again, but most experts agree that the long term trend is that prices will rise. As fuel costs begin to impact margins and even product prices there will be pressure to retail goods as close to their source as possible. It may even make sense to sell goods directly from a producer's own shop. In the UK, local farmer's markets have taken a significant slice of business away from supermarkets. I am suggesting here that this principle could be extended to more local selling opportunities from producers and not just farmers.

Thirdly, there is an increasing trend - mainly driven by legislation - to re-use parts in products that are at the end of their life and to re-use packaging. This reverse distribution will benefit once again from having producers as close to consumers as possible and it may benefit further by cutting out the retailer altogether for the return of goods.

Finally of course, there is the internet - shopping on line. Not a cashier or a shopping trolley in sight. Yes, distribution infrastructure is still required, but remember that many bricks and mortar retailers have still not fully got to grips with the structures that are required to distribute internet sales. The internet gives producers a wonderful opportunity to change the order of things to their advantage and sell directly to end users.

What many large retail chains have done has been breathtaking and can only be admired. They took control of their supply chains and used their new influence and power to their advantage and therefore to the advantage of their shareholders. Just remember though, that retail chains consist of unremarkable buildings, staffed with unskilled labour and with low-tech plant. They do not produce goods (usually) and they do not own any brands apart from their own. Their main asset is customer goodwill with the large throughputs of customers visiting their sites. If this throughput is threatened by high fuel prices or because of alternative attractions, then these large buildings will become white elephants. If this ever happens, the decline could be swift and decisive, for those retailers are just as addicted to their customers as producers are to them.

There is a lot to be said for buying your products as closely as possible to their source. Arkay Hygiene sells fly killers. Yes they are stocked by retailers, but Arkay Hygiene sells most of them directly from their web site at http://www.eeeee.co.uk. Perhaps they are already ahead of the game.

Retail History

It is one of the biggest employers in the world. It eats up a large chunk of our money. It is the retail industry.

Retailing is a massive, passive beast that pervades just about all our lives. Virtually all of us shop, sometimes as a pleasure and sometimes as a burdenous chore.

But when and how did it all begin? The answer is probably to do with surpluses. As we got better at cultivating the land, some people found that even after feeding their families and animals and putting food into storage, there was some left over. Rather than waste this surplus, it was traded for other surpluses or perhaps tools or other objects.

Those that had enough land and were particularly good at producing food from it would have realized that they were on to a good thing by deliberately producing surpluses. Eventually the informal trade in goods would have become more organized, with central markets being formed where these producers could get together on a regular basis in order to exchange goods.

Of course, trading goods for other goods is all very well until you have just about every thing you are likely to ever need, or the product you want has yet to be produced. In order to get around this, people started to owe goods to other people. Early forms of credit may have just been verbal agreements. As time passed, some traders and producers decided to keep a record of what was owed. One way this was done was by the debtor leaving some collateral with the creditor - some object or an animal that was held by the creditor until the debt was paid. This was OK until the debtor needed the tool or animal in order to produce the very goods that were owed. An alternative way of denoting credit was to use a symbolic object, such as small animal. Since small animals are not very portable, it became more normal to use small inanimate objects such as pebbles. Over time these small object became more decorated and valued and eventually metal coins and paper notes became more and more familiar. So early trading gave rise to money.

As time passed, some producers would have found they were better at selling the goods than growing them (or perhaps enjoyed it more!). Others preferred to stick to growing. So there was a gradual separation of the producers and the traders.

And it was not just food that was sold. Tools, trinkets, jewelry, cups, plates and many other objects would have been traded as well.

The informal markets would, over time, become more formal and more permanent. So shops began. Other traders would prefer to travel around selling their goods. These became known as peddlers. Selling from a regular market, from a permanent shop or peddling goods are known collectively as retailing.

Houston Economic Rebound; retail franchise locations

Houston has always been a boom or bust economy. Yet it is America's third largest city with 5.5 million people. The ten-year economic cycles have been caused by oil price fluctuations. But as Houston diversifies its economy and matures it employs larger and larger percentages of folks in retail and service sectors. Let's discuss some other economic issues during the last recession in Houston. Albertson's pulled out of the Houston Market, Wrath left by Enron, Arthur Anderson Collapse, Continental Airline Lay offs, HP-Compaq merger and all the oil mergers just prior. All these large corporations hurt the Houston Economy along with the telecom layoffs too; but that was over four years ago. Today we see a massive rebound and the price of oil has helped tremendous profits from the major oil companies there.

If you drive around Houston and it's inner suburbs, you see entire shopping centers, which are not doing so hot. Last year there was an article in the Houston Business Journal of the anchor store in many shopping centers through out Houston pulling out. Kmart, took out some stores, so did three other big box stores and a few consumer electronics places and larger furniture stores, now Albertson's has left. Who gets hurt? The franchise stores who pay a high price and lease to be in those centers along side a big anchor tenant. Think about it, Albertson's with their large super stores with Banks in side, Starbucks coffee, bakery, mini eating area, film developing and pharmacy.

If you are a franchise store and are in a ten-year lease and your anchor tenant up and moves, you are left holding the bag and with less traffic in the mall, sales will go down until eventually you file bankruptcy, jump out a window or drown (especially on Houston's East Side-Flooding). Many small business people lose fortunes when anchor tenants moves, demographics in the area shift or economies go through cycles. Houston is on the rebound and times are good again, so is growth in all the suburbs, but one does not have to look too far through the recent periods to see the city is changing and the cycles are still remaining. Think about it; location, location, location.

Houston Economic Rebound; retail franchise locations

Houston has always been a boom or bust economy. Yet it is America's third largest city with 5.5 million people. The ten-year economic cycles have been caused by oil price fluctuations. But as Houston diversifies its economy and matures it employs larger and larger percentages of folks in retail and service sectors. Let's discuss some other economic issues during the last recession in Houston. Albertson's pulled out of the Houston Market, Wrath left by Enron, Arthur Anderson Collapse, Continental Airline Lay offs, HP-Compaq merger and all the oil mergers just prior. All these large corporations hurt the Houston Economy along with the telecom layoffs too; but that was over four years ago. Today we see a massive rebound and the price of oil has helped tremendous profits from the major oil companies there.

If you drive around Houston and it's inner suburbs, you see entire shopping centers, which are not doing so hot. Last year there was an article in the Houston Business Journal of the anchor store in many shopping centers through out Houston pulling out. Kmart, took out some stores, so did three other big box stores and a few consumer electronics places and larger furniture stores, now Albertson's has left. Who gets hurt? The franchise stores who pay a high price and lease to be in those centers along side a big anchor tenant. Think about it, Albertson's with their large super stores with Banks in side, Starbucks coffee, bakery, mini eating area, film developing and pharmacy.

If you are a franchise store and are in a ten-year lease and your anchor tenant up and moves, you are left holding the bag and with less traffic in the mall, sales will go down until eventually you file bankruptcy, jump out a window or drown (especially on Houston's East Side-Flooding). Many small business people lose fortunes when anchor tenants moves, demographics in the area shift or economies go through cycles. Houston is on the rebound and times are good again, so is growth in all the suburbs, but one does not have to look too far through the recent periods to see the city is changing and the cycles are still remaining. Think about it; location, location, location.

2005 Retailer Inventory Orders for Christmas Slow

Generally retail purchasing agents and departments are fully ordered by this time every year as they ramp up for Christmas Season. In fact the merchandise is also getting well on its way to the warehouses and by mid October the stores are taking in the inventory and getting everything in place. This year we see some different trends, sure we see the stores loaded up for Halloween, but we see delayed shipments, lack luster purchasing and higher transportation and distribution costs.

Retailers reported a not so hot recent quarter and many are predicting third quarter to not be anything close to spectacular. Costs of transportation of course are up sharply due to fuel supply driving price. Some of this is due to Hurricane disruptions in production and refining, while other issues include a long-term trend in pump prices and oil barrel price.

Many retailers are already planning sharp cuts after Christmas for instance; Federated Department Stores is cutting 6,200 jobs after Christmas in 2006. Other large box store retailers see the writing on the wall and are taking a look and see attitude, but also planning for drastic measures. With credit card debt mounting with consumers, retail has slowed, also consider the increased gasoline pump prices to fill up that new SUV, pick-up or Mini Van taking its toll on America's discretionary and spendable income. The costs in transportation to ship the products to the stores is also up sharply and those costs are passed on to consumers and higher prices mean more reluctant buyers.

Previously home equity growth helped consumers pay off credit card debt freeing up available balances for consumer spending, yet with housing slowing, housing values will not allow a second or third round of such, coupled with the raising of interest rates slowing housing markets. Thus effecting construction, building materials and that means job losses. Couple this with high fuel prices like in 1975 and the fact that the Federal Government will have to stop acting like spend thrifts and we have ourselves a Retail Sector Rotation and a downturn in our business cycle. The writing is on the wall, is anyone looking at anything other than flickering shadows on the cave's interior. Think on this.

Retail History

It is one of the biggest employers in the world. It eats up a large chunk of our money. It is the retail industry.

Retailing is a massive, passive beast that pervades just about all our lives. Virtually all of us shop, sometimes as a pleasure and sometimes as a burdenous chore.

But when and how did it all begin? The answer is probably to do with surpluses. As we got better at cultivating the land, some people found that even after feeding their families and animals and putting food into storage, there was some left over. Rather than waste this surplus, it was traded for other surpluses or perhaps tools or other objects.

Those that had enough land and were particularly good at producing food from it would have realized that they were on to a good thing by deliberately producing surpluses. Eventually the informal trade in goods would have become more organized, with central markets being formed where these producers could get together on a regular basis in order to exchange goods.

Of course, trading goods for other goods is all very well until you have just about every thing you are likely to ever need, or the product you want has yet to be produced. In order to get around this, people started to owe goods to other people. Early forms of credit may have just been verbal agreements. As time passed, some traders and producers decided to keep a record of what was owed. One way this was done was by the debtor leaving some collateral with the creditor - some object or an animal that was held by the creditor until the debt was paid. This was OK until the debtor needed the tool or animal in order to produce the very goods that were owed. An alternative way of denoting credit was to use a symbolic object, such as small animal. Since small animals are not very portable, it became more normal to use small inanimate objects such as pebbles. Over time these small object became more decorated and valued and eventually metal coins and paper notes became more and more familiar. So early trading gave rise to money.

As time passed, some producers would have found they were better at selling the goods than growing them (or perhaps enjoyed it more!). Others preferred to stick to growing. So there was a gradual separation of the producers and the traders.

And it was not just food that was sold. Tools, trinkets, jewelry, cups, plates and many other objects would have been traded as well.

The informal markets would, over time, become more formal and more permanent. So shops began. Other traders would prefer to travel around selling their goods. These became known as peddlers. Selling from a regular market, from a permanent shop or peddling goods are known collectively as retailing.