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March 2008 - Strategy Magazine
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Straight talk
The rise, fall and rise of the retailer

by John Bradley
page 59

In a business obsessed with looking ahead, sometimes it pays to look back. Way back. In this mini-series, marketing vet John Bradley sheds light on how the industry got to where it is now, and how things are changing in ways you may not yet realize.

You'd think, given the bleating from brand managers in the packaged goods arena, that the rising power of retailers is an assault on the natural order. However, this is just arrogance and ignorance.

After the First World War, manufacturers were in a far worse position. The world's largest retailer at that time, the Great Atlantic and Pacific Tea Company (A&P), was building a retail empire of 16,000 stores without much reliance on manufacturer brands. Each store only stocked around 300 lines, and half of that consisted of private-label products. No manufacturer told A&P what to do.

A&P's power would be undone not by manufacturers, but by a Judas from the retail industry. In 1930, a middle manager in the Kroger retail business, Michael J. Cullen, came up with the idea that would not only crush A&P, but unwittingly lead to the supremacy of manufacturers.

Cullen's idea was to forget about private labels and stock only branded lines, and in a memo to his boss, he sold the idea hard: "Selling 300 (branded) items at cost and another 200 at 5% above cost - nobody ever did this before. Nobody ever flew the Atlantic, either, until Lindbergh did it. People would break down the doors to get in, it would be a riot. I would have to let the public in so many at a time . . ."

His boss was not the Lindbergh type - it seems the missive went straight into the round filing cabinet - so Cullen walked out of Kroger and set up the concept himself. And people did break down his doors.

What made Cullen's idea successful was that his supermarket had nothing but branded products at rock-bottom prices. This could be achieved because King Kullen, as he modestly named his chain, avoided A&P's vast upstream costs. For example, they not only sourced their private-label tinned salmon from their own canneries in Alaska, but had their own fishing fleet roaming the Barents Sea. Another saving was that brands were advertised nationally, doing Cullen's selling for him.

The model was so successful that it was copied by all major grocery retailers, even A&P. But therein lay the problem: once all the retailers had emulated Cullen's format, they were competing only on price. The all-important role of building an emotional bond with the consumer had, by default, been handed over to the manufacturers - their brands were the attraction, not the stores. Consequently, all the power and most of the profits transferred to the brand manufacturers. This effect was multiplied as the new chains engaged in an arms race over ever-bigger store sizes, meaning that the exploding brand portfolios never had to worry about finding space on the shelf.

This is the set-up in which most of today's brand marketers cut their teeth: manufacturers expecting universal listings for anything they launch, thinking they have a right to consumers' affections and keeping most of the profits.

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