Kellogg School Corner | Retail competition set for new phase

Kellogg School Corner | Retail competition set for new phase

This summer, the US Supreme Court reached a 5-4 decision that returns a measure of control over American retail distribution to branded manufacturers, andushers in a new era of pro-consumer planning and collaboration with channel partners.

The ruling has substantial implications for product manufacturers and investors in India.

US retail competition, which has been commoditizing rapidly for at least 15 years, is now likely to start swinging towards local market distribution services that provide consumers with clearly differentiated, non-price benefits. Such benefits include better education about product differences, more convenient purchases, easier problem resolutions, and more.

The underpinnings of the court’s new reasoning were developed long ago by economists who argued that allowing manufact-urers to stipulate prices on branded products can lead to greater benefits for end consumers, when increased retail margins are used to fund required service levels. For nearly a century before the high court’s ruling on Leegin vs PSKS, Inc. ,“resale price maintenance" (RPM) agreements—contracts that set floors on the prices retailers may charge consumers—were held to be in and of themselves anti-competitive, anti-consumer, and hence illegal. From now on, any given instance of RPM may be within the law—if the manufacturer can show it has not used excessive market power to compel retailer compliance, and if it can show that disciplined pricing at retail stimulates healthy competition and consumer demand. Evidence to support RPM policies may include actual channel costs, activities, and margins, in conjunction with research on consumer experience needs.

By focusing retail channel strategies more squarely on end consumer benefits, the court’s decision is expected to improve conditions in particular for branded manufacturers and retailers in two profound ways.

First, it will reduce free-riding. Free riders include discounters, Internet-based sellers, and other off-price retailers who piggyback on the promotional and sales efforts of their higher-value competitors, while poaching their customers. Over time, less free-riding should lead to a wider variety of retail offerings that more accurately target the service needs of distinct consumer segments.

Second, the Leegin decision will gradually transform the nature of partnership between manufacturer and retailer. Manufacturer-retailer sparring over contracts and access to cost and customer data will recede in favour of constructive executive conversations, coordinated strategies and consumer experience innovations. New market leaders will emerge that are comfortable discussing service demands, market segments, retail innovation, and economic returns—not just with their own people but, collaboratively, with their retail channel counterparts at all levels.

RPM will not be a universal remedy for all players, or all market situations. Low-cost commodity marketers will often choose to ignore it. Price-cutting retailers will fight it, and if they dislike the terms enough, will move their sourcing elsewhere. Even some branded manufacturers will be unwilling to take on the stiff demands (e.g., initial negotiations, monitoring efforts, and legal costs) associated with implementing RPM.

Yet, all in all, energy is building among forward-looking brand manufacturers to co-improve consumer experiences with retail partners.

Some are even exploring ways to co-fund a portion of the activity at retail. We know this from our conversations with executives in more than 20 diverse consumer market sectors (among them kitchen appliances, pharmaceuticals, meat-packing, high-tech electronics, apparel, and pharmaceuticals).

A surprising number of manufacturers have told us they want to redirect their supply and their distribution conversations away from lower prices towards higher benefits. They want to replace consumer apathy with excitement. They would love nothing better than to escape the commodity trap and return to growth built on innovation and differentiation.

Consumers appear to be with them. Evidence is mounting in published satisfaction surveys, and our private consulting work, that buyers sense something has beenlost. People want more obvious choices in how they can shop, own, use and service what they buy.

If consumers cared only about lowest price, resale price maintenance wouldn’t be a big issue. But, they care about much more, and RPM is a big opportunity. By authorizing healthy, one-on-one strategic planning dialogues around consumer service requirements and end-stage retail prices, the Supreme Court is betting that the nature of inter-brand competition will change for the better, because prices on many goods will once again justify companies’ risks and costs to invest for greater safety, choice, experience and overall demand growth.

Retail competition is about to enter a new phase.

(Louis W. Stern is the John D. Gray distinguished professor emeritus of marketing, Kellogg School of Management. Richard E. Wilson is the adjunct professor of marketing at the School.)

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