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Does a duopoly lead to shared services?

I’ve written about shared services before and many are giving them another look.  First let us take a stroll down Economics 101 to discuss why they might now make more sense than in the past.

 

In economics, a market for a good or service is defined by many features and a primary feature is the number of competitors (sometimes thought of as sellers or producers) in that market.  On one end of the continuum is perfect competition… I won’t get into the details but for our thinking just assume a lot of producers, each kind of doing their own thing... so to speak.  At the other end of the continuum is the famous monopoly… only one producer.

 

Beer distributors (and our friendly brewer partners) operate in what is called an oligopoly.  It is a definition of a market’s structure.  In general an oligopoly is a market in which there are only a few producers and each one can influence prices and affect competitors.  That is a key feature of oligopolies… because of their limited number each oligopolist (that’s you!) is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion… or so the lefties and big government types claim ;-) 

 

From my experiences, generally the opposite is true… competition between sellers in an oligopoly is often quite fierce.  Everybody knows what everybody else is doing… and no one is going to let the other guy get the upper hand.  Look at this industry when wholesalers compete on service… I”LL be here two times a week!  Well then I’LL be here three!  Well then I’LL be here 7!  Well I’LL lose more money coming to see you than my competitors will.  No way… I’LL lose even more.  It is difficult to gain any competitive advantage because the other players are generally aware of what you are doing and if financially and operationally possible, they can match you.  You all have lived this in servicing retailers, pricing, weekend pulls, special events… you name it.

 

But in most markets (and at the major supplier level), this oligopoly has changed or is changing to a special type of oligopoly, a duopoly… a duopoly is a market structure where only two producers exist in one market.  And this change is what might make shared services deserve another look.

 

Think about the differences… imagine a market where one dominate player has 50 share (or higher), the next perhaps 30, and the next the remaining 20 share… and even perhaps a fourth small player.  In this type of market structure, although each player might be aware of what the others are doing, the largest player has significant dominance… think average cases per stop which drive significant profit advantages.  Frequency of service to retail, frequency and quality of delivery, frequency and quality of merchandising, quality of workforce, number of feet on the street, special events, level of compensation, benefits, rolling stock, warehousing, technology … all are areas of potential competitive advantage for the larger player.  Why would this market leader be willing to go to shared services?  They have advantages the other two competitors will have a difficult time matching.  In fact if they are wise, they have advantages the other two competitors have no way of matching.  This was the general market structure in the US for the past few decades.  And I think you have to admit, A-B distributors were laughing all the way to the bank.

 

Of course during this time period shared services might make sense for the two (or three) smaller players, but quite often they are too busy fighting over the crumbs to get along.  In addition, each wanted to purchase the other so why would they join hands and help keep the other guy in business?

 

Fast forward to today… and our duopoly.  Now due to consolidation, the market structure is two dominate competitors.  Yeah the A-B guy might have more market share (but often not by that much), but when you think about the gas that runs the machine – gross profit dollars – often the MillerCoors distributor has a bigger chunk of this pool than his A-B competitor.

 

In our new world, basically anything one can do, the other can match.  They might choose not to, but if they want to they can.  This changes the entire competitive dynamic.  In today’s world, most distributors run quality sales, delivery, merchandising, and warehousing operations.  Although everybody feels their team is better than the other guy’s (and sometimes they are actually right!), generally what each takes to retail is not too different from the competition.

 

In this situation, shared services might just make a heck of a lot more sense than it did a few years back.  Chain power isn’t going to go away and you will be merchandising these stores at a high frequency, whether you like it or not.  Why not a shared merchandising force?  The same could be said for delivery and warehousing.  You can still fight like heck on the street in the sales arena but share services where the competitive reality is at a draw… and is likely to remain so for the foreseeable future.  In these situations there is no competitive impact with shared services since there is no competitive advantage either side holds… the competitive impact of sharing is zero but the cost savings can be rather substantial.  Worth a look?

 

We often bring the past with us in our day-to-day thinking.  Don’t let your past 40 years of competing in a certain way determine the correct way to address the future… the market structure has fundamentally changed and this will drive change.  It might not seem like much, but it truly is a profound change.  Shared services aren’t for everyone but for some, they may deserve a second look.

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