IT WAS INEVITABLE: EXCLUSIVE BUYING

David Merrefield

Exclusive buying deals aimed at capturing sole use of a brand, or even the entire output of a producer, have happened in trade channels other than food retailing. Why not food retailing?

No reason, apparently. As you'll see on Page 17 of this week's SN, Kroger Co. entered into an arrangement estimated to be worth some $5 million that will hand to Kroger the entire season's production of the well-known Olathe Sweet corn. The news article about this was written by Robert Vosburgh, editor of the Fresh Market section.

This is reminiscent of what other mass-market retailers have been able to do to gain brand dominance or exclusivity for themselves. In so doing, it's sometimes possible to, in effect, gain a better private label by supplanting an existing private brand with a better-known national brand.

To cite what may be the most recent example available from outside the world of food retailing, earlier this year Wal-Mart Stores and Stanley Works entered into a strategic business alliance intended to bring some 112 stockkeeping units of Stanley tools and toolboxes into Wal-Mart's stores.

The deal gives Wal-Mart the chance to become the power retailer of the brand, lessening the need to depend on its own private brand of such product. Indeed, when the distribution of Stanley products into Wal-Mart is accomplished, Wal-Mart is to discontinue its private-label brand of carpenters' and mechanics' hand tools.

In replacing its private brand with a national brand, Wal-Mart is following the type of logic that is at the root of the debate between organic growth vs. growth by acquisition: It's possible for a retailer to grow by opening new stores in a new market, with the hope of capturing share from incumbent retailers. But it's costly and difficult to do so. It's also possible to enter a new market by acquiring a competitor, a plan more likely to succeed and to produce quick returns. Similarly, it's possible for a retailer to increase margins by introducing a private brand and winning share from a similar national brand. But it's costly and difficult. The surer route to success is to acquire or somehow capture much of the production capacity of an established national brand.

Moreover, capturing much or all of a brand limits or denies that brand to competitive retailers. No wonder a private label often looks lame against these advantages.

There are many instances of large-scale discounters and department store retailers capturing much or all of a brand, but it's not so common when it comes to food retailing, simply because until recently food retailing lacked the size needed to pull off such a feat.

But, as the example from Kroger clearly demonstrates, food retailing now has achieved the requisite mass to do such deals. It's easy to see that more deals of this sort could be done by the nation's largest food retailers, and in product categories of more significance than corn.

That's because if other classes of trade have seen an advantage to capturing national brands, food retailers will see that advantage too -- indeed, a greater advantage should flow to food retailers than to others. That's because most of the largest food chains operate stores under several different banners, so capturing the exclusive right to a national brand offers the possibility of replacing a veritable cacophony of private labels with one well-known national power brand by making that brand common to all retail banners.

Numerous vendor-retailer opportunities exist.