Retail Consolidation Is Killing Traditional Consumer Brands
The rise of a few gigantic retailers with incredible amounts of leverage threatens the traditional consumer-branding model that has existed for well over a century. These retailers may now have enough leverage to kill traditional consumer brands and some of the companies that own them.
The model was to create brands that would be directly marketed to customers. A classic example of this is Proctor & Gamble's (NYSE: PG) Tide. P&G created the product, marketed it through advertising and made its money off the brand's reputation.
P&G's success was based upon brands that were so popular retailers had to carry them, if they wanted to make money. Grocers like Safeway (NYSE:SWY) had no choice but to carry Tide, if they wanted customers to shop there. That allowed P&G to sell Tide at a premium and make a lot of money.
The problem with that business model is that there are now a few giant retailers with enough market share and leverage to make that business model unworkable. This makes it difficult for companies like P&G andColgate-Palmolive (NYSE: CL) to charge the prices they need to maintain their revenues.
Data Shows Traditional Brands are Doomed
The amount of leverage these mega-retailers have is incredible. There are now four publicly-traded US general retailers with revenues in excess of $100 billion. These four companies now have $825.95 billion in combined revenues.
The Big Four or the Kings of Leverage are:
- Wal-Mart Stores Inc. (NYSE: WMT) - which reported total revenues of $483.21 billion on April 30, 2016. Wal-Mart now controls 24.5% of retail food sales in the United States, according to Statista.
- Costco Wholesale (NASDAQ: COST) - which reported TTM revenues of $117.94 billion on May 31, 2016. Costco is the nation's third largest food retailer with 7.6% of American grocery sales.
- Amazon (NASDAQ: AMZN) - which reported revenues of $113.42 billion on March 31, 2016.
- Kroger (NYSE: KR) - which reported revenues of $111.38 billion on April 30, 2016. Kroger is America's second largest grocer with 12.9% of the retail food market.
For a consumer products brand to succeed in the United States, it must play ball with at least three of these four retailers. That goes doubly so for food brands, which are essentially at the mercy of Kroger and Wal-Mart.
Retail Consolidation is Killing Traditional Consumer Brands
The situation is made worse by the speed at which these retailers are consolidating the retail sector. During the last quarter, Kroger added $1.55 billion in revenue, Wal-Mart tacked on $1.08 billion, Costco's revenues grew by $130 million, and Amazon gained an extraordinary $6.41 billion in revenue. Four companies added $9.17 billion in revenue over the course of a few months.
These numbers raise some intriguing questions, including the prospect that the big retailers are taking more and more of the retail profits and income. During the quarter that ended on March 31, Colgate-Palmolive lost $300 million in revenue, and P&G lost $1.117 billion. Kellogg (NYSE:K) lost $170 million in revenue at the same time.
If you look at the charts of traditional consumer brand companies likeGeneral Mills (NYSE: GIS), and Campbell Soup (NYSE: CPB), you will see the same dismal picture of falling revenues at a time of economic growth.
The conclusion we can make here is inescapable, the profits in retail are flowing somewhere else to the retailers. The massive size of companies like Kroger and Wal-Mart, enables them to syphon off most of the industry's profits. The trend is accelerating because of changing consumer behavior.
Changing Consumer Behavior Is Dooming Traditional Brands
Dramatic changes in consumer behavior, some of them driven by the rise of the kings of leverage, are fueling a paradigm shift in retail. The shift is away from recognizable brands propelled by national mass-marketing campaigns to private-able products.
Several trends are converging to drive the switch to private label brands. These trends include:
- Many retailers including, Kroger and Amazon, are pushing private label brands because it gives them more control over the price. This makes it easier to engage in deep discounting, which drives sales, use products as specials and to offer loss leaders. Another advantage is that retailers keep more of the profit, which is vital in an age of lower profit margins.
- The growing quality of private label brands. Historically, much of the appeal of name brands was based on a reputation for higher quality. In recent years, high-quality private-label brands, especially those marketed by stores like Costco and Trader Joe's, have changed the popular attitude towards these products.
- Decline of traditional media. Traditional consumer brands achieved a high profile through large amounts of advertising on mass mediums like television that are now in decline. Traditional TV viewing by persons between 18 and 24 fell by 34% between 2011 and 2015, Nielson reported. Fewer and fewer people are seeing the ads for products like Tide, which means a growing segment of the population is unfamiliar with them.
- Changing demographics. America's largest generation is the millennials, persons between 18 and 34 in 2015, according to the US Census Bureau. That's bad news for companies like P&G because Millennials are the group least likely to watch traditional media and see its advertising. There are 75.4 million millennials and 74.9 million Baby Boomers (persons aged 51 to 69) in America. Marketing is going to get a lot tougher for traditional retail brands as those Boomers start dying off. The median age of viewers of America's popular TV network CBS is 59 years of age, Media Post reported. That indicates a large percentage of Americans are not seeing the marketing channels companies like Kellogg have relied upon for generations.
- Retail consolidation. Big retailers are now in a position to push their private-label brands and deemphasize outside products. This can be done in many ways through product positioning, specials, discounts, and creative use of floor or shelf space. If there are fewer retailers in the market, the big boys are under little or no pressure to prominently display outside brands.
- Decline of traditional shopping. More and more Americans are doing a large percentage of their shopping from the phone or computer. This puts more emphasis on price and less on brand, as Amazon has demonstrated. Amazon's aggressive moves into consumer goods and private label brands may be a game changer here.
- Increasing ease and variety of online shopping. An example of this is the growth of same-day delivery services which give consumers an excuse not to go to stores and see the brands on the shelves. Another is subscription shipping solutions such as Amazon Prime and Wal-Mart's Shipping Pass, which can make buying online cheaper than going to the store.
The future for traditional consumer brands looks pretty dismal. Expect to see major consolidation in the consumer products industry in the near future, as companies like Kellogg have a difficult time maintaining market share.
Also expect to see at least some major consumer brands, perhaps Kellogg, acquired by big retailers. That would be the next logical step in retail consolidation. Being the exclusive retailer of a product like Frosted Flakes would give a retailer like Kroger an edge on the competition and keep that popular brand off of Amazon.
The future looks pretty bleak for traditional consumer brands. Investors looking for widows and orphans stocks had better stay away from them. The Kings of Leverage now control the market and they are slowly squeezing out the traditional consumer brands.
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