Retail viewpoint: in fight for margin, retailers can punch above their weight

March 21, 2018

With winter behind us, retail sales are once again showing signs of life. Core retail sales in February showed a 0.3% month-over-month gain, and a 4.3% year-over-year jump, a nice surprise after the January and December slump.1 Apparel sales inched up 0.4% while sales at online retailers grew 1.0%.2 Meanwhile, spending at hobby shops and sporting goods stores jumped 2.2%.

But it's not only the season that is shifting. Conventional wisdom says big brands have more leverage and bargaining power over retailers. But do they really? We don’t think so, and recent trends support our view:

  1. Millennials are less brand loyal than their parents.3 In fact, according to our study of the latest IRI data released in Q3 2017, 75% of Millennials think private-label products are a better value than national brands.
  2. Consumers can easily research products online, eroding the tendency to base purchase decisions solely on a brand’s reputation.
  3. Smaller, niche brands are increasingly popular and taking market share and shelf space from big brands.
  4. Retailers are finally learning to synthesize the point of sale (POS) and customer data they have (and brands don’t) to learn what customers are doing, and then basing their assortment decisions on these insights.

All of this means retailers have significantly more bargaining power and leverage over brands than in the past. As Warren Buffet said recently on CNBC, there is a constant struggle between retailers and brands, but "right now the retailer is doing better in this round of the fight."4

Yet with so much in their corner, why are so many retailers (even the heavyweights) still on the ropes? Many of our retail clients feel they have limited leverage in this fight and that there are no options other than accepting the prices and terms brands offer. If you see yourself on that side of the ring, we say now is your time to come out swinging!

How to train like a champion

To prepare for bouts with brands, retailers first need to study their opponents. We suggest starting by analyzing each category to see how well each brand is doing to drive profitability (accounting for trade funds) and customer engagement (new customers, retention, annual spend) (figure 1). Then, based on the results, devise a plan of attack that incorporates direct strategic negotiations and the introduction of private label brands.

For brands with high profitability and high customer engagement, we suggest calling off the fight and working together. Retailers should do this by offering brands a strategic partnership that provides increased assortment presence, shelf space, and access to customer data in exchange for lower cost of goods sold (COGS) and higher trade funds.

Conversely, retailers should go for the knock-out with brands that have low profitability and low customer engagement. If a brand’s products are not productive to the retailer’s assortment strategy, then the retailer should demand big cost savings from the brand. Otherwise, the retailer should throw in the towel, trim these products from the assortment and find replacements including private label.

The last two quadrants require more fancy footwork by the retailer.

For brands with high profitability but low customer engagement, there is a strong opportunity for retailers to introduce private brands. This would give the retailer the benefit of the high margins coupled with the ability to control customer engagement-building activities. However, this path also requires time and investment. In parallel with planning for a new private brand, retailers should directly negotiate with national brands for higher marketing co-op and trade funds to improve customer engagement in the short term. If the retailer has had past success developing private brands, our experience shows this creates significant leverage for the negotiation.

Lastly, for brands with low profitability but high customer engagement, there is a ripe opportunity to improve category margins through direct negotiations with brands. To prepare for these, retailers should create a suite of analytics that go deep into space, inventory, customer, and margin effectiveness. Then, the retailer should develop plans for each brand based on exactly where the brand is underperforming and what specific potential alternatives the retailer is considering. Our experience suggests that this detailed, fact-based approach creates powerful leverage in discussions with brands. As a bonus, the effort spent by the retailer to prepare for these negotiations provides insights they can continue to use to inform assortment strategies long after negotiations are complete.

Retailers, are you feeling fit and ready? Then let’s get ready to rumble!


For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above, please contact

1Seasonally adjusted February retail sales exclude motor vehicles, gas, food services, and drinking places

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