The thought of winning a contract to supply a mass retailer is enough to make a sales manager salivate. Toys "R" Us accounted for a fifth of the US toy market in 1996, The Home Depot sold more home improvement products than all hardware stores combined, and a quarter of the underwear purchased by Americans came from Wal-Mart. Exhibit 1, Exhibit 2, and Exhibit 3 give an indication of the strength of mass retailers in the United States, and how they have come to dominate many product categories.

Landing an account with one of these mass retailers can double or even triple a supplier’s annual sales. But rapid revenue growth is not always accompanied by a surge in profits. The strain of coping with high volumes and the service needs of powerful customers can put tremendous pressure on suppliers’ profit margins if they attempt to conduct business as usual. Some manufacturers that supply mass retailers even find that although their sales rise faster than those of other manufacturers, their earnings growth is slower (Exhibit 4). Even giants such as Procter & Gamble, Unilever, and Kraft, which have considerable bargaining clout, have felt the squeeze and are searching for new...