In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury’s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.

If that reads like something you would find in a celebrity tabloid, you’re probably right. The relationship between brands and large retailers is truly one of the “love-hate” kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo’s FritoLay and GlaxoSmithKline in the past.

I won’t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn’t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.

There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There’s more: special promotions, differential merchandising and delivery needs…the list of demands seems endless.

On the other side, retailers love brands for the footfall they bring. The brand typically creates a “need to buy” on the consumer’s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don’t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product’s price itself is multiples of a generic product’s price.

The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy’s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.

An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer’s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.

For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.

However, economic shocks various times and the rise of low-cost imports raised questions in retailers’ minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.

Enter private label, the “other” in the love-hate triangle.

Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label.  The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.

The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers’ own labels are now serious brands in their own right even though they are restricted to only one retail chain.

The difference between a “label” and a “brand” is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.

However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer.  Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting – in this case, replacement of the brand with an alternative or a retailer’s own label is truly feasible.

The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money.  The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi’s potato chip brand Lays. Retailers such as the Future Group, Shopper’s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer’s shelves are new to the market, and don’t yet have a strong imprint on the consumer’s mind.

However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.

There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won’t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing “key account management” functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.

So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?

As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.

In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.

When we began studying the basic fundamentals of marketing, our professor introduced us to the 4-P framework covering Product, Price, Place and Promotion created by “the Great P” of Marketing, Philip Kotler, whose textbooks are classics among marketing management studies.

In time, others modified it to 5-P, 6-P and 7-P, but the basic framework stands best on the original four legs defined by Kotler.

The principle is that to design an effective marketing strategy you need to:

• clearly define the product or service (covering the core as well as augmented product) to sell to the target customer
• identify the price (point or range)
• define where it will be sold and
• define what will be communicated, and how the product offer will be promoted.

If you are truly disciplined, you may then extend any of these into spider-webs of clearer attribute definition. For instance, when you get involved with defining the product it can start from “breakfast” and then be further defined by attributes such as taste (e.g. sweetened or unsweetened), texture (e.g. crunchy or wet), fullness (e.g. light or filling), and go further into the benefits (e.g. helpful in losing weight, or in gaining body mass) etc.

Given that the basic framework is straight-forward and simple to apply, when we ask the question “what is your marketing strategy”, it is surprising to get the answer: “advertising”. It gets somewhat more distressing when we interrogate further, when we examine what the advertising is focussed on: “cheaper prices than competition”.

Okay, let’s grant a couple of reality checks here. One is that most retailers and consumer goods companies in the current stage of the market’s growth want to grab the maximum possible market share in the minimum possible time. Two, if you want to get the attention of a lot of customers very quickly, shouting out a great price offer is one of the easiest ways to do it.

Which brings us to the basic issue: in the current market scenario, if you are a retailer or if you have a brand that you want to scale up fast, advertising extensively about the “great value” is highly likely to quickly give you the footfall and conversions you need.

But the question is, when does it stop being a good tactic and just becomes lazy marketing? And once it’s in that territory, when does it become dangerously weak even as a sustained tactic?

Imagine a scenario with me: the CEO strides into a marketing strategy meeting and says, “I want you to stop advertising the way you do. In fact, I want you to stop advertising, period. But I don’t want sales to drop and I don’t want our brand image to suffer.”

Shock, horror, dismay at the thought of “where is this company going”? Resignations, even, on the CEO’s table?

But just stay with that thought for a minute, and then look at Kotler’s framework again.

Let’s look at “product” holistically because, in the noise of high-decibel advertising about low prices, typically the definition of the “product” is the first to slip from attention. How the customer relates to the store, what her experience is as she walks through from the entrance to the check-out and beyond is part and parcel of the “product”. What does she think the store is about? Does her perception of the store’s “product” (the entire experience of shopping) match with the retailer’s own perception? Does the retailer even have a clear perception of his product?

Secondly, “place”. Sure, in-store product placement is frequently governed by the marketing function. But how many retailers have marketing involved in selecting the store location? A great store location is the best live, “walk-in advertisement” that a retailer can have. If a fashion brand like Zara can eschew advertising (founder Amancio Ortega has been quoted as saying that “advertising” is a distraction), and instead focus on its stores to create the traffic and the awareness about the brands, surely the store location should receive some attention from the marketing heads of food and grocery companies.

Let’s also reconsider how much connection there is between the marketing strategy and the store layout itself (in many cases it is not enough). Whether the customer likes wide aisles and a “clean” experience or prefers a chaotic environment, the store must make a statement that is in sync with the overall business strategy and the target customer.  Good retailers understand this intuitively, but it is important also to express it overtly within the organisation and get the marketing team involved in the planning and execution. Further, once the customer is actually in the store, clear price ticketing, intuitive adjacencies and clean signage can make a tremendous difference in converting walk-ins to purchases.

Let’s leave price alone for this inquiry because, whether high or low, it gets a lot of attention anyway, and let’s move to promotion.

If we define marketing’s role as getting customers into the store and getting them to buy, then the surely promotion is the driver of the marketing engine. But does promotion necessarily have to mean advertising?

We’ve discussed Zara’s example of using the stores as the medium of promotion. Another thing that works for Zara is word of mouth publicity, as well as the humongous amount of publicity the company gets due to its business model. (Other interesting companies, such as Pantaloon, Reliance, Wal-Mart, The Body Shop etc. also enjoy promotion through publicity.)

Pizza companies use cost-effective menu flyers dropped at the customer’s door and “box toppers” to drive the next purchase (yes, of course, they also advertise hugely, but during their lean years when they have had to reduce advertising, it is the flyers and box-toppers that have kept them going.) Direct selling companies can also offer some learnings about creating and sustaining interest, as do entrepreneurial start-ups. As a matter of fact, think of the last time you saw an advertisement of the most popular “unbranded” take-away in your area. Ever?

It may be time for us to dust off the notes from the Marketing 101 class, and re-examine what we do.

Creating an entrepreneurial ecosystem is absolutely critical to a healthy and vigorous society and economy.

Creating a “democratic” entrepreneurial ecosystem is even more critical to sustaining that health. A democratic entrepreneurial system is like all other democracies – inclusive and widespread – and vital to improving the baseline quality of life.

As we’ve pointed out elsewhere, retailing is not just a fundamentally entrepreneurial business, it also offers up a platform for the birth and growth of other entrepreneurial businesses.

Obviously, big retailers offer a change for companies to scale up faster, once they meet the performance criteria set by the retailers.

The interesting thing is that small retailers offer an even more interesting growth opportunity since, as their own business grows, they grow their supply partners as well.

Countless companies and brands have been launched on the back of the likes of Wal-Mart, Carrefour, Tesco, Marks & Spencer, and in India retailers such as Pantaloon’s and Spencer’s (and even some of the early modern retailers in India that don’t exist anymore).

In view of this, it is wonderful to see 2-9 February 2008 being celebrated as Entrepreneurship Week (on the National Entrepreneurship Network’s website) and also its powerfully worded pledge.