In its second-largest acquisition, Amazon buys the company for $970 million.
Retailers are forcing prices down and creating their own private labels, so manufacturers are going direct to consumers online
Lexar Media Inc. is a $681 million manufacturer of portable file storage devices including the JumpDrive Sport, a nifty little item that lets consumers store, tote and transfer 1 GB of data in a unit about as big as a thumb. The JumpDrive Sport is sold in stores and on such retail web sites as Sears.com, Walmart.com and BestBuy.com--and on Lexar.com.
Do major retailers who stock the item in their stores and on their sites see the manufacturer`s direct-to-consumer play as competition? Not anymore. Lexar Media knew there were concerns among retailers about Lexar.com having an online store. "Initially, there is always resistance to
anything a manufacturer will do that appears, at least on the surface, to be in conflict with what the retailer`s business is," says vice president of marketing James Gustke, who terms that dynamic "a classic conflict." But the company had done research showing that before consumers made a purchase, they often searched multiple avenues for product information. So providing multiple paths for purchasing didn`t necessarily take away from one channel or another, it just helped shoppers feel more comfortable with the brand, the company decided.
The comfort channel
"We believe people are going to purchase from the brands they trust most--whether it`s an online brand, an offline brand, or a manufacturer," says Gustke. "So offering a consumer multiple options so they can purchase a product from wherever they feel most comfortable is the strategy we have taken with our online store."
Lexar.com drives that point home to its retail partners with a site designed to send visitors from a product page directly to information about where the JumpDrive can be purchased at a local retail store or at an online retailer. Lexar.com keeps that information current with XML feeds on inventory status from the retailers, provided by Channel Intelligence Inc. Buying the product right there in Lexar`s own online store is just another option among several offered.
Up to 25% of visitors to Lexar.com make a click for such purchase information, and that`s traffic the retailers might not have gotten were the e-commerce path on Lexar.com not set up to direct it to them. While he didn`t disclose incremental sales from Lexar Media and other manufacturers that link to BestBuy.com for online or store purchase information, Mark Ebel, director of new business development at Best Buy Co. Inc., sees that it`s producing a lift. In fact, he`d like to grow the number of links to BestBuy.com from about 40 manufacturer sites today into the hundreds. Channel conflict, meet channel cooperation.
It`s not that friction between manufacturers and the retailers they depend on for distribution has evaporated. On some fronts, it`s increased. Retail chains` growing interest in higher-margin private label merchandise and cheaper imported goods has put a squeeze on manufacturers. That`s forcing brands to compete for store shelf space not only with each other but also with retailers themselves while struggling to maintain acceptable margins and grow sales volume.
For their part, retailers that inventory branded merchandise have historically objected to those brands going direct to consumers with the same offer, fearing it will rob them of sales. What`s changed is that with a new understanding of how consumers shop across multiple channels and new software to track that behavior, there`s a greater possibility of resolving sales channel conflict issues between retailer and brand manufacturer in a way that can benefit both.
One of the biggest challenges facing brand manufacturers in today`s retail environment is the rise of private label merchandise. What started years ago as cheap generic filler products to round out store inventory have at some retail chains developed into actively marketed in-store brands. Wal-Mart Stores Inc., for instance, now has two private-label consumer electronics brands; J.C. Penny Co. Inc. and Sears, Roebuck and Co. have the Arizona and Covington private-label apparel brands, respectively.
Private store brands are gaining ground among retailers not only because having something unique brings shoppers into the store, but also because private brands provide a richer margin. That`s because retailers have greater flexibility in how to design, develop, merchandise and price their own private labels so as to ensure the targeted margin is achieved.
"The target is to be somewhere two to five points better in your maintained margin on those products than on a nationally branded product," says David Bassuk, retail analyst with consultants Kurt Salmon Associates. With numbers like that, "Many retailers have stated goals that they are looking to grow private brands to 20% to 25% of their offering," Bassusk adds. "Some, like Penney and Sears, are double that." Imported goods also play a role, effectively driving down prices across the board in some categories, which means brand manufacturers must sell more units to get the same sales volume in dollars.
Given the current pressures in retail, "There is a real interest among manufacturers in developing alternatives for growth," says Dan Stanek, executive vice president at consultants Retail Forward Inc. "There are a number of directions in which manufacturers are going to get new sales, including going direct, and online is one of those direct channels."
When brand manufacturers started to offer direct sales on their web sites about five years ago, retailers` initial reaction was alarm. "We thought initially that the strategy when some manufacturers put up their web sites was that it was an anti-retail play," says Ebel. "We thought they were trying to compete with us. They assumed that the money we were making, they could make."
But as any retailer knows, making money in retail isn`t quite that easy. Unlike a retail store or retail web site, which both pull in regular traffic and sales with a broad assortment of brands and products, a brand-specific site pulls in visitors only when they are in the frame of mind to research or buy a particular product. When that need is satisfied, they may not visit or buy from that site again for some time.