Traditional brick-and-mortar Retail: Retailer/Manufacturer rules of engagement…

RetailFirst 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 Manufacturers –they are landlords…).

Second rule: products must sell like hot cakes…

Retailers will always test a new product in two or three stores before committing the whole store-chain: if it doesn’t sell like hot cakes, it will be unceremoniously withdrawn after just a few days.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), that have almost unlimited funding 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”) 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…).

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.

N-th rule: ?

…feel free to suggest some additional rules!

Andy Cavallini –



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s