Retailers as Gatekeepers

Winning the regulatory battle, losing the war

Gatekeeper theory in issues management: retailers and brand owners.

Retailers as gatekeepers

When a particular product or business practice comes under question, the most obvious part of the threat is that the product or practice will be banned by legislators or regulators. Many companies understand this part of the threat better, because there is a process in place, it is clear who the decision-makers are, and as a result company resources are committed to “lobbying”.

However, in recent years there have been many instances of companies being able to win the regulatory or legislative battle, yet just as they are winning, a number of their key customers announce to them that they are ‘deselecting’ the product in question. We look at the often neglected role of the supply chain ‘gatekeeper’.

Those who campaign for change some time ago realized that just putting pressure on politicians was not sufficient. The regulatory or legislative process is sufficiently complicated and time-consuming that it eats up resources, and such resources are usually more readily available to those defending the status quo than those advocating change. Secondly, it is difficult to attack the political ‘system’ because such systems are set up in such a way as to deflect blame from the individuals involved. Additionally, governments get blamed every day for all sorts of things, so have become relatively thick-skinned on any one issue.

So those campaigning for change – for example, a media outlet or a pressure group – will focus on where criticism can make a difference – companies with consumer brands.

In most supply chains, the companies with brands are at or near the bottom of the supply chain – retailers, consumer product manufacturers, or both. While some issues face these companies directly, many other issues are of greater commercial importance to companies higher up the supply chain. It is these latter issues where the issue of the ‘gatekeeper’ hits.

Some upstream companies focus on the regulatory or legislative outcome, and do not consider the role of their customers (and in many cases, their customers’ customers). In other cases, the upstream company will be alert to the importance of the downstream supply chain, and will organize for small teams to go to present the issue to these customers, showing why the company’s position is correct.

Yet in many cases, not soon afterwards the downstream customers will deselect the product in question. The downstream company will have seen negative media coverage, or will have been paid a visit by a pressure group. All of the good work to ensure a secure future for the product in the legal framework may be redundant. Why does this happen?

Why does the downstream supply chain ‘capitulate’? Why don’t they follow sound science? The following diagrams show why.

Figure 1 shows four theoretical companies: (1) a raw material producer, (2) its customer a ‘converter’, (3) the converter’s customer, the producer of the final consumer product, and (4) the retailer.

At stake in this scenario is a theoretical raw material, challenged because of a health or environmental allegation.

The horizontal axis shows the importance of the raw material to each of the four companies. For the raw material producer, it is obviously critical. For the converter, it is very important – an alternative might be possible but it is not tested / more expensive / less functional. For the consumer product manufacturer, the raw material is currently important, but replacing it would cause less commercial damage than to the two companies above it in the supply chain. For the retailer, what is in the product as a minor ingredient is of minor long-term commercial importance.

The vertical axis shows the value to each company of its relationship with consumers, its consumer brand. The two upstream companies have little or no brand recognition with the consumer; the consumer product manufacturer and the retailer have significant brands to protect.

Sophisticated pressure groups understand all of this. If they are seeking a ban of the raw material in question, in addition to media and political campaigning, they will carefully examine the supply chain. Within that supply chain, they will find the companies whose commercial attachment to the product in question is least, and whose consumer brand is most valuable to them (Figure 2). They will approach these companies, and slowly apply more and more pressure, until the signal is sent up the supply chain that the material is deselected.

The brandowner will often co-operate, because the issue at stake is usually a market entry requirement – safety, health etc. The brand holder may defend the science or the principle for a while, but in the end, the upstream product is not particularly important to the company commercially. Its brand is.

Hence the ‘gatekeeper’, the actor who takes the final decision whether a precut should be on the market or not, is sometimes not the regulator but the supply chain brand holder.

Brand managers and others reading this may think of similar examples which were annoying. Some reading this from upstream companies may know examples which have been disastrous.

We help companies work through issues such as these to protect their commercial interests. But often the first required step is a change of mindset. In addition to saying, “We are right on the science” and “We briefed our customers, and they seemed comfortable”, ask yourself “What will my customer’s customer do? If I had a consumer brand to protect on this issue, what business decision would I take?” That is the starting point for a strategy.

June 2009