Retailer vs. Manufacturer: (four) rules of engagement

…it’s better to know the rules in advance, isn’t it?

First rule

Shelf space is priceless

Retail shelf space is a scarce resource and as such, it’s absolutely invaluable; unlike in the virtual world of online retail, space is VERY limited in brick and mortar stores, and each square foot is expected to make a certain profit (I’ll tell you a secret: Retailers don’t make money selling products to consumers, they make money selling “space” to ManufacturersRetailers are LANDLORDS).

Second rule

Products must sell like hot cakes (…no sales? no shelves!)

Retailers will always test a new product in two/three stores before committing the whole store-chain: if it doesn’t sell like hot cakes, it will be unceremoniously withdrawn after just a few days.

Actually, what does “selling like hot cakes” mean?

Retailers require a certain (high) margin and a certain (high) product turn-over. Basically, margin is the difference between Selling price and Purchase price; Retailers do their best to increase the Selling price (usually until product turn-over is negatively impacted, and twenty additional conditions are met…) and to decrease Purchase price (until Manufacturers almost go out of business…). As a matter of fact, it’s easier and far less risky for Retailers to strongly push for a low (…very low…) Purchase price (reminder: they have a lot of leverage…).

Third rule

Trustworthy (…trustworthy!!) Manufacturers

Retailers buy from Manufacturers that have been on the market for decades, that offer a lot of SKUs (they’ve a broad product-range) and that have an efficient supply chain; by the way, a very strong Product-QA (Quality Assurance) is mandatory too.

Often, when a Retailer really wants a specific product from a small (and therefore “NOT-trustworthy” by definition) Manufacturer, it will “suggest” the Manufacturer to sell through a specific distributor; in this way, the Retailer outsources all the risks related to working with small Manufacturers and avoids the management of numerous, sporadic and small-quantity orders.

…it also introduces an intermediary in the value-chain (…that takes a cut on the deal).

Fourth rule

Payment-terms (…payment?)

Speaking of payment terms, Retailers pay net/120 or even consignment; this means that they get paid by Consumers long before they pay Manufacturers – Retailers are cash-flow positive (…they don’t need banks, they ARE banks…).

If Manufacturers are very big companies, “lending” money to Retailers is business-as-usual; if they are SMEs (Small Medium Enterprises), this can be a very critical issue.

Andy Cavallini  –


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