Have You Fallen into the Customer Trap?

Have You Fallen into the Customer Trap?

Huge retailers offer manufacturers the promise of rapid sales growth, but a new book argues the pitfalls can be just as dramatic.

In 1936, due to a Federal Trade Commission order, Goodyear Tire and Rubber Co. stopped selling its tires through Sears and began a decades-long strategy of selling through a vast network of company stores, franchise dealers and independent dealers. In 1989, 70% of those dealers sold only the iconic Goodyear brand of tires.

But unfortunately, the story doesn't end there. Goodyear fought off a takeover bid by Sir James Goldsmith in 1986 and subsequently decided to strike up a new sales arrangement with Sears. In short order, Goodyear also was selling its tires through Walmart and Montgomery Ward.            

The decision to sell its tires through mass retailers had two important consequences. First, Goodyear's premium brand was eroded as its tires were sold, for less, alongside discount and private label brands. Second, Goodyear's dealer network felt betrayed and began to carry other tire brands. By 2001, Goodyear was operating in the red and the company endured a decade of poor performance by its stock.

Goodyear's story is just one example cited in The Customer Trap: How to Avoid the Biggest Mistake in Business (Apress, 2015), the thought-provoking new book by IW contributing editor Andrew R. Thomas and Timothy J. Wilkinson. The authors argue that there has been a huge power shift from manufacturers to 'Mega-Customers,' large retail chains such as Walmart, Target and Costco. When companies begin selling 10% or more of their output to these retailers, Thomas and Wilkinson warn, they fall into the 'Customer Trap,' where this large and powerful customer begins to call the shots in the relationship.

"In reality, a Mega-Customer, simply because of its size relative to the supplier, will logically use its leverage to demand price cuts and other concessions. Companies end up with thin or nonexistent profit margins, and their innovative products and services are often treated as little more than commodities. They may be 'doing a lot of business,' but real, tangible earnings are increasingly hard to come by. The outcome is profitless prosperity...." they observe.

Of course, no manufacturer has ever been forced to sell to a Mega-Customer. They do it, Thomas and Wilkinson note, because of "the promise of incredible wealth" that comes with selling through thousands of outlets around the country or even the world. Decisions by executives to deed over their sales and distribution to Mega-Customers has plenty of support from business gurus, the authors note. These experts argued that manufacturers should focus on their core competencies and shed other responsibilities. In fact, when manufacturers begin selling to huge customers, they often end up with little choice in the matter.

The ramifications of this shift are pervasive, Thomas and Wilkinson write. Manufacturers soon lose control over their brand, that invaluable and irreplaceable set of perceptions about a company and its products. The Customer Trap cites the example of Oreck Vacuums, a premium product made in the United States for 40 years. The company had models costing as much as $1,000 and carrying a 25-year warranty.

In 2003, founder David Oreck sold the company to a private equity firm, which soon decided to sell the vacuums at Target.

"The solid customer relationships Mr. Oreck had built over decades were immediately cannibalized. No one would pay $1,000 anymore for a vacuum cleaner that was now sold like a bag of bricks or any other commodity at a big box retailer. The brand was ruined," the authors write. Oreck sought bankruptcy protection in May 2013.

Mega-Customers' focus on cost has also had a pernicious effect on quality. Fred Whyte, president of Stihl Inc., discussed what happens when a manufacturer is told by a Mega-Customer to reduce its costs or risk losing their business.

"[He] looks at his chain saw and says, well, you know, we don't have to put chrome on that chain, we don't have to put ball bearings in the engines, we could put in bushings, instead. We don't need a gear-driven automatic oiler; we can put in one that takes a little pressure off the crank case that's manual. And those antivibration mounts, well, we can just put a bushing in there too."

The Customer Trap outlines not just how unwary manufacturers have fallen prey to large retailers but offers strategies that companies can follow to maintain control over their sales and distribution. For manufacturers who yearn for the growth that major retailers promise, The Customer Trap offers an important cautionary tale.

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