Harvard Business Review
The Idea in Brief
Many consumer-goods manufacturers believe that big-box retailers are bad for their business and a scourge on their brands. The conventional wisdom goes this way: Retailers like Wal-Mart, Toys R Us, Staples, and Home Depot cut prices relentlessly to squeeze out smaller retailers. In the process, they destroy brands and transform entire product categories into low-margin commodity markets dominated by private labels. Consumers become conditioned to buying on price and exchange loyalty to brands for loyalty to the retailer. Faced with shrinking margins, manufacturers cut back on investments in product innovation and brand building, further stunting their products’ growth.
Like so much conventional wisdom, this scenario overstates the case. Far from suffering a premature death, some manufacturers have turned relationships with the big boxes into a competitive advantage. Their strategies share three core elements.
Tailored Product Mix. A consumer shopping at a big-box retailer often has different needs from someone shopping at a specialty retailer. The same holds true for the retailers themselves; they too require different products and different levels of service. Any manufacturer who deals with big boxes and with smaller stores must understand the differences between them – and how to meet their needs.
Consider how Pella, a window manufacturer, came out ahead of a much larger competitor at Home Depot. In the early 1990s, Andersen Windows, the market leader in the category, decided to offer the same products to Home Depot that it was offering to its wholesalers – in other words, its full and extensive product line. Andersen also required Home Depot to receive shipments from the company’s complex network of wholesalers, even though it would have been more efficient to ship directly to the chain. The result was an unhappy Home Depot that couldn’t get the service it needed, and unhappy distributors that couldn’t compete with a retailing giant offering the same line at lower prices.
Pella took a different approach. It recognized that shoppers at Home Depot tended to be do-it-yourself home owners and small contractors who wanted simple, easy-to-install products. And it knew that Home Depot wanted a product line with few SKUs and that could be rapidly replenished. Pella met the needs of the retailer and the consumer by creating ProLine, a simple, branded, do-it-yourself line priced 12% to 20% lower than its traditional products. The windows are shipped to Home Depot in full truckloads, direct from the factory. Both Home Depot and Pella’s distributors are happy: each sells a distinctive product line to a unique set of customers.
Several years after Andersen’s segmentation mistake, the company is still struggling to reinvigorate sales and profits. Pella, meanwhile, has been growing profitably at three to four times the overall market rate.