Scan-based trading and oligonomies
The direction of the retail world is evolving rapidly. From being a company that invests in inventory and takes the risk of being able to sell it, the major retail oligonomies are more and more becoming intermediaries that charge dearly for the privilege of displaying wares on their shelves, while meanwhile making suppliers jump through hoops to please them, while the retailers take minimal risk on themselves.
This pattern has long held in the retailing of books, where unsold wares are shipped back to the publisher at the publisher's own expense. The big oligopoly chains take little risk, and they take their time paying their bills. Even the biggest publishers sell their biggest blockbusters "on spec," that is, they take all the risk. And there are fees paid for prominent placing of special displays or other in-store marketing.
A recent New York Times story ("What Wal-Mart Knows About Customers' Behavior", 11/14/2004) shows this trend extending to general merchandise retailing. The article documents the massive amount of data Wal-Mart collects on customers, workers, and suppliers. This allows the company to track item sales across the country on a real-time basis, to perform analyses of data, in-store inventory, and so on. It can measure the effect on sales of minor changes in price and it can see how well a promotional campaign or new product does hour by hour. It gives the company an in-depth understanding of customer shopping patterns. It also uses the data to discipline suppliers whose truck arrive even an hour late to a store or whose sales on specific items does not meet targets.
Pretty impressive and pretty scary, depending on your point of view, and certainly one of the big reasons for Wal-Mart's success. The company is getting more and more detailed profiles of its customers and their behavior. Easily available data means they can match credit card numbers and other information to determine where each customer's lives, the value of their house, their income bracket, the car they drive, their family status, and so on. From your purchases they can know what size pants you wear, what books you read and DVDs you watch, how much junk food you buy, and, if you use their in-store drugstores, what medicines you take. This same intelligence gathering is catching on at other major retailers, from supermarkets like Safeway, to general merchandisers like Target, to electronics retailers like Best Buy, Pretty chilling.
This data-driven approach is now launching Wal-Mart into a radical change in retailing. As the article explains,
Eventually, some experts say, Wal-Mart will use its technology to institute what is called scan-based trading, in which manufacturers own each product until it is sold.
"Wal-Mart will never take those products onto its books," said Bruce Hudson, a retail analyst.…"If you think of the impact of shedding $50 billion of inventory, that is huge."
In other words, Wal-Mart, as with books, will take none of the risk. The supplier does not get paid until the goods have made it past the cash register. If goods have to be discounted to get rid of them, the manufacturer will take on all the lost revenue, or be asked to send a truck to pick the items up. If there is breakage or pilferage or a mistake at the cash register, what suppliers call "shrinkage", the responsibility falls on the supplier. In addition to freeing up capital, Wal-Mart would be almost totally inoculated from any misfortune. It will move into a world of what Hudson calls "a world of supply and command, instead of a world of supply and demand." And it's not just Wal-Mart. Safeway and Target have moved in that direction as well, and other will follow.
One of the companies that Wal-Mart has started converting is American Greeting Company, the #2 greeting card company. According to an article in Baseline, a magazine that covers supply-management issues ("Scan-based Trading Still a Work in Progress", 3/15/2003)
The negative effects of initial scan-based training systems were made painfully evident last year. American Greetings, the nation's second largest card supplier (after Hallmark), reported that the scan-based trading initiative it launched in the November 2002 quarter with Target and Wal-Mart meant it would have to reduce sales by $65.5 million. That was due to the fact it had to take back into its own inventory the value of cards already booked as sold to retailers.
And the suppliers, those who survive, will take it without (open) complaint. Wal-Mart, the most powerful oligonomy of all, has created a situation in which suppliers have little option but to take it. As the Baseline article puts it:
Unfortunately, many suppliers aren't in a position to push back on scan-based trading, as retailers like Wal-Mart use their buying power to set what type of trading system they're going to use with their suppliers.
