ONE OF THE MOST STRIKING results of the dramatic consolidation in U.S. retailing has been the significant shift in power away from traditionally strong branded consumer products manufacturers. Tensions are rising to unheard of levels in almost all product sectors as manufacturers and large, national, price-obsessed retailers battle fiercely to determine whether retail stores or product brands have the strongest grip on valuable consumer franchises.

Further complicating the manufacturer-retailer relationship is a profound divergence in beliefs about how the marketplace works and where the real basis of power lies. Large, consolidated retailers see their own store-level brand equity as the primary consumer pull lever and increasingly view higher-priced branded products as simply legitimizers of their own private label initiatives. And they worry obsessively about their retail competitors' price points - with often devastating results as branded product profitability to the retailer drops and lower margins lead to a steady erosion in retailer category support.

Many manufacturers believe there is a significant unmet need for incremental investment in new, hands-on, proactive retailing activity.

Retailers, on the other hand, want their vendors to stop pushing for multi-line category expansion and instead to assist them in reaching acceptable GMROI levels. And many home improvement categories present additional complicating characteristics - not only do three or four powerful retailers control a significant share of category volume, but seasonal and year-to-year fluctuations in sales levels makes inventory management difficult and risky, and in-store shelf space requirements expensive.

Of most concern to competing national brands, these large retailers are taking steps to encourage more compliant behavior from important branded product vendors in key categories by offering them more exclusive and consolidated supply alliances - increasingly resulting in one lead national brand coupled with a strong house line. As a result, national brand players are seeing the pace of change increase dramatically as these powerful "big box" retailers pursue new SKU de-listing and line drop initiatives.

In an effort to secure more favorable GMROI results and product line management leverage, many national retailers have been particularly aggressive in integrating backwards into valuable brand ownership territory formerly staked out by manufacturers. In some high-visibility categories, however, their revenue and Gross Margin euphoria has been significantly damped by the alarming realization that mounting supply chain and working capital costs, daunting brand building investments, and intractable customer service challenges are driving a steady deterioration in overall profitability and retailer image.

STRUCTURED CHOICE
Early signals that major retailers may be hesitating in their eagerness for high-cost backward integration moves has created a window of opportunity for product manufacturers to regain lost power. Without the brand equity leverage they once relied on, early winners appear to be those manufacturers making aggressive investments to identify and develop powerful new ways to create tangible value for retailers and achieve sustainable advantage over other supply alternatives.

Successful manufacturers going forward will be those who develop new retail channel strategies to ensure that their companies are in the best position to realize growth objectives in the fast-changing U.S. marketplace.