During the 1990s, consumer goods manufacturers had to contend with the growing consolidation of their retail customer base within each national market. As a result, they reorganized their sales forces around major customers rather than geographic regions and began to develop skills in key-account management and trade marketing to supplement their traditional focus on consumer marketing.

But now, at the start of the new millennium, these same manufacturers face a new challenge. Following a wave of cross-border mergers and acquisitions, an increasingly powerful group of international retailers has emerged (Exhibit 1). As opportunities in the domestic markets of retailers diminish and financial markets press retailers to grow, the pace of international consolidation is likely to accelerate.¹

Manufacturers must decide how to respond. Are these international retailers primarily a threat, likely to use their power to extract ever greater concessions from manufacturers? Or do manufacturers capable of working with new-breed retailers have an opportunity to increase global sales? If so, what new skills will manufacturers need to manage these customers successfully?

To explore such issues, McKinsey conducted a survey of 37 leading consumer goods companies and 8 international grocery and do-it-yourself retailers (see sidebar "About the survey."). The survey was conducted largely in Europe, chiefly because it has been the locus of most recent merger and acquisition activity in retail trade. But most of the companies involved are truly global—and all consumer goods manufacturers should heed the survey’s warning that few of them are well prepared for what lies ahead.

Big and bad or big and beautiful?

The results of the survey demonstrate that international retailers are becoming more important to manufacturers. Five years ago, the top five international customers accounted for, on average, 21 percent of the business of the manufacturers in our survey. Today, that figure stands at 32 percent and is expected to grow to 45 percent over the next five years.

Moreover, these retailers are increasingly operating on a more international basis. Although manufacturers say that only one-third of their international customers currently negotiate trade terms centrally or with strong central involvement, headquarters are increasingly making decisions on private labels, overriders,² and category management (Exhibit 2). An effective relationship with these retailers is therefore essential. "If you do not have business with the top five global retailers today, you will not even be in the game in ten years’ time," said one manufacturer.

Clearly, these developments pose threats for manufacturers—in particular, on pricing. Some retailers are already pushing their weight around. "They threaten us with delistings before we’ve even started talking," complained one manufacturer. "They want 1 percent off for nothing in return," said another. Retailers have also used their global presence to extract concessions and have then embittered manufacturers by failing to deliver globally. One retailer, for example, offered a global promotion that was far costlier than a country-by-country promotion would have been—but then failed to execute that promotion effectively in all of its stores around the globe.

Nevertheless, only 35 percent of the manufacturers see the internationalization of retailers primarily as a threat. Another 35 percent believe it to be more of an opportunity, and 30 percent view it as a threat in the short term but as a long-term growth opportunity if handled properly.

The most optimistic assessments of the new environment come from the biggest manufacturers, perhaps because their strong brands and geographic presence strengthen them in negotiations with retailers. These optimists are excited by the growth potential of closer partnerships with international retailers. Indeed, the strongest manufacturers feel that they have an advantage over purely local players given the international retailers’ preference for negotiating multicountry deals.

The manufacturers’ status: Unprepared

No matter how manufacturers view the future, the survey results suggest that few of them are ready to meet the challenges posed by international retailers.

To begin with, manufacturers admit that they are not doing as much as they should to work effectively with retailers. The survey defined a spectrum of five possible responses to internationalization, with varying levels of proactivity. At one extreme, manufacturers could try to work against the trend—for example, by heightening variations in product ranges and trade terms in different countries to discourage cross-border companies. At the other end of the scale, manufacturers could aggressively seek close relationships with key retailers and develop joint international business plans with them.

The survey revealed that 46 percent of the respondents go no further than the third of the five options—adopting a reactive plan. This unassertiveness is often not the result of a clear strategic choice: indeed, almost half of the respondents believe that they are not being as proactive in dealing with international retailers as they should be (Exhibit 3).

Respondents offered a number of explanations for their inertia. Some said that they preferred to sort out internal problems before tackling customer issues, others that their national managers were reluctant to cede power to a central body. Many were unable to get the question onto the agenda of top-ranking executives. "Senior management has, unfortunately, not yet understood why the issue must be a key priority," commented one respondent.

In addition, many manufacturers feel ill equipped to deal effectively with international customers. The survey identified 12 skills or capabilities manufacturers believed were important, but few felt that they performed well in any of these areas. The retailers surveyed were even more damning in their evaluation of the manufacturers’ capabilities (Exhibit 4).

Particular areas of weakness include not knowing the true cost of serving key accounts³ and the lack of a harmonized global trade-terms system enabling the manufacturer to make accurate cross-border comparisons. These weaknesses severely inhibit manufacturers in handling retailers’ attempts to push prices lower. In addition, manufacturers feel they lack an international key-account management structure that mirrors the way retailers increasingly manage their businesses—and hence are not well placed to build successful international relationships.

The way ahead: A new organizational blueprint

Given the lack of readiness of the manufacturers, they need to move urgently to address these organizational weaknesses. Exactly how the manufacturers react should reflect their overall strategic response to the internationalization of retailers—a response that will be driven by their geographic presence and the strength of their brand portfolios, as well as the nature of the categories in which they compete (see sidebar "Dealing with international retailers"). But whatever strategy manufacturers choose, they need to make sure their organizations are equipped to carry it out. This will involve addressing five key areas: structure, trade terms, assets, relationships, and skills.

Structure

Manufacturers will need to structure their international sales organizations to fulfill three roles—but only 38 percent of the survey respondents have all three roles effectively in place today.

1. Common policy making. This entails defining the overall approach to managing international key accounts, designing and coordinating global systems of trade terms, and driving the building of skills and the transfer of best practices. The purpose of this role is to ensure consistency across countries and raise standards everywhere.

2. Global account management. For each international customer, there should be a clear, single interface for global negotiations. The focus of this role is therefore on developing overall account strategies, translating general guidelines into account-specific plans, and coordinating the execution of these plans with local account managers.

Many important negotiations are still conducted at the local level, where global deals become reality

3. Local account management. As long as substantial decision-making power and executive responsibility lie with the respective national arms of international retail organizations, local account management remains critical. It is at this level that many key negotiations are still conducted and global deals become reality.

Exactly how companies choose to organize themselves to perform these roles will vary depending on their overall corporate culture and organizational approach. Some manufacturers may prefer to have a powerful policy-making and account-negotiating body at the head office. Others might want to have a global network of sales directors to set policies, with global account negotiations handled by the sales organization in the country where the retailer is based. Either approach can work if responsibilities are defined clearly enough to avoid duplication and to allow fast and effective decision making. Handing out new titles without clarifying and communicating precise areas of accountability only creates uncertainties that retailers or competitors can exploit.

Trade terms

As a manufacturer prepares to discuss pricing with international retailers, it needs both an accurate understanding of the true costs of serving them and an internal trade-terms system that facilitates cross-border comparisons. But only 24 percent of the respondents said they could measure the true cost of serving individual accounts at the national level, and only 11 percent could do so internationally (Exhibit 5). Moreover, only 25 percent said that their trade-terms systems are well harmonized across key markets. Indeed, one manufacturer commented, "If our customers were to cherry-pick our trade terms across countries, they would probably get our products for free!" While the survey results also suggested that retailers themselves are not yet well prepared to compare prices and terms across countries, manufacturers clearly need to address their own weaknesses before this window of opportunity closes.

Manufacturers also need to align the actual trade terms so that retailers cannot exploit major discrepancies. Today, effective net prices vary from country to country by as much as 25 percent more or less than the average. Most companies are aiming to reduce deviations to no more than plus or minus 5 percent and to ensure that they reflect real cost differences, such as differences in logistics or local production costs. Manufacturers won’t be able to eliminate big price variations overnight, but they should be able to do so within five years. They should start now, beginning with the riskiest products, such as identical stock-keeping units (SKUs), which lend themselves to easy comparisons, or products that retailers might obtain more cheaply from other countries. So far, only one in six respondents said that their companies have well-aligned trade terms in the companies’ key markets.

Assets

To create a powerful and cost-efficient platform for international competition, manufacturers need to rationalize their assets in terms of both their brand portfolios and their supply chains.

Reducing the number of brands by merging weaker into stronger ones can lower supply chain costs, create economies of scale in sales and marketing, and promote market share increases by focusing investment on leading brands. Such brand consolidation is not without risk—for example, space formerly devoted to the weaker brands a manufacturer withdraws may go to competitors’ (or private-label) products—and therefore needs careful management. But these risks have not prevented Unilever, for example, from seeking to prune its 1,600 brands back to 400.⁴

Manufacturers can further reduce the complexity of their operations by eliminating low-performing SKUs. Experience shows that, in many cases, only 20 percent of a manufacturer’s SKUs account for 80 percent of sales and 90 percent of profits. Often, the proliferation of SKUs reflects history more than real consumer demand for so much variety. Seeking to maximize common SKUs between countries and cutting low-volume SKUs can permit companies to reduce costs significantly.

The advent of the single market and the euro means that factories and warehouses no longer have to serve purely national markets

Finally, manufacturers can do much to redesign and rationalize their supply chain networks, especially within Europe. With the advent of the single market and the euro, factories and warehouses no longer have to serve only the national markets of the countries where they are located; indeed, companies adopting a borderless approach require dramatically fewer facilities. Although many manufacturers have been trying for a number of years to create supply chains that transcend borders, 46 percent of our survey respondents still rated the cost-effectiveness of their own supply chains as average or poor.

Relationships

Manufacturers need to consider carefully what sort of relationship they should build with different retailers. They should give priority to those retailers that both are looking for cooperative relationships and can actually deliver deals on an international basis. The survey confirmed that respondents do use such criteria to prioritize their key retailer partners. But manufacturers should also consider which retailers have strategic interests similar to their own.

Manufacturers with strong geographic positions and powerful brands, for example, ought to focus on international retailers looking for category captains and try to cooperate with them on category management projects. Manufacturers with strong brands but weaker geographic coverage need retailers with established positions (or plans to build them) in markets where those manufacturers want to expand and should seek to develop joint product-introduction plans. Manufacturers with weaker brands but a willingness to provide private-label goods should select retailers interested in sourcing products internationally from a few preferred suppliers and seek to codevelop products, to drive joint marketing campaigns, and to identify opportunities to reduce costs along the supply chain.

Skills

It is perhaps no surprise that manufacturers think dealing with international retailers effectively will require the development of corps of managers with international business experience and foreign-language skills. But our survey also shows that manufacturers believe that they need to improve their existing capabilities in key-account management and cross-functional category management even on the national level.

To fill these gaps, some organizations are investing heavily in programs to improve the recruitment, development, and retention of high-quality sales personnel. These programs include efforts to provide for cross-functional or international job moves, to ensure the active mentoring of account managers by senior colleagues, and to create mini-MBA programs for rising managers—both to improve the employees’ skills and to help build useful international networks.

Building a new organizational blueprint is only half the battle that manufacturers face: implementing it effectively is a real challenge given the degree and complexity of the changes that are typically required. While there is no single way of making change happen successfully, experience suggests that any program should follow some key rules of thumb.

Top-level sponsorship is vital to communicating the importance of the issues to the entire company. As one manufacturer attested, "Since we brought the customer relationship into the boardroom, relations with our international customers have changed dramatically for the better." In addition to this high-level sponsorship, both line managers from key countries and managers from corporate headquarters must be involved in the process to ensure that there is a company-wide buy-in and that the solutions identified are compatible with the corporation’s overall goals. It is also critical to address all five key areas outlined above in an integrated way.

Finally, pragmatism is essential: 80 percent-right solutions that can be implemented effectively are preferable to supposedly perfect answers that are too unwieldy to work or take too long to develop.