Manufacturers solve their online dilemma

Several selling seasons ago, many retailers viewed the commercial World Wide Web as an opportunity and a threat. The opportunity was to increase sales by selling online. The threat was manufacturers’ ability to increase sales by selling online. “There was a lot of concern about disintermediation, that manufacturers would push retailers out of business,” says Mary Brett Whitfield, senior vice president and director of the retail intelligence program at consultants Retail Forward Inc.

But along with other surprises that came out of the early days of the web, including the failure of over-extended dot-com retailers, the threat of manufacturers selling directly to online consumers turned out to be much less of a threat than expected. Instead, retailers continued on their own decades-old convention of controlling the flow of goods through their stores. “Over the past few decades, power has been concentrated in the hands of retailers, the power to set the merchandising agenda and dictate the terms that manufacturers have to follow to be in retail stores,” Whitfield says.

That means heightened competition for shelf space at a time when many retail segments are consolidating into larger and fewer stores. It also leaves manufacturers relying on retailers to provide consistency in the display and pricing of their products. Those developments mean manufacturers have an added incentive today to make the direct connection with the consumer. “Brands want more control over the way their products are sold, and the prices they’re sold for,” says Neil Stern, principal with retail industry consultants McMillan/Doolittle. “So they’re trying to establish more direct relationships with consumers.”

Seeking more profits

Adding to manufacturers’ renewed desire to sell direct is retailers’ greater profitability, some of which comes from beating down manufacturers’ prices. “Supplier sales growth has trailed retailers’ growth by 4 to 7 percentage points in the last five years,” Kurt Salmon Associates, Atlanta-based retail industry consultants, says in its Financial Performance Report for the general merchandise supply and retail industry released this past summer. It attributes the difference in part to retailers’ greater skill in getting high prices out of consumers compared to manufacturers’ lesser skill in getting high prices out of retailers.

So let’s go to the web to make up the difference, many manufacturers are saying. Indeed, Forrester Research Inc. and others estimate that 70% of consumer purchases are preceded by research conducted on manufacturers’ web sites, giving manufacturers a ready tool for building relationships with consumers.

Manufacturers are tapping into that trend by adopting new web-based marketing and selling strategies. The options include the hard sell through a full-blown e-commerce site, a strategy followed by companies like digital image projector manufacturer InFocus Corp. and watchmaker Fossil Inc.; or the soft sell through an information-focused site to support product research and forward consumers to retail partners, an approach taken by diversified consumer products supplier Newell Rubbermaid Inc. Other options include a hybrid of the latter category with a limited e-commerce section for testing new products.

Regardless of the online approach, the web is helping to level the playing field with retailers by giving suppliers a means of connecting more directly with consumers. “This is shifting some power back to suppliers,” Whitfield says. “It lets them create consumer excitement, and it presents the opportunity for suppliers to get back some of the control over customer relationships.”

And the new realities have forced an accommodation between retailers and manufacturers. “Of course, we would prefer that we were the only sellers of this merchandise, but that is not the reality,” says Kent Anderson, president of Macys.com, the web site for Federated Department Stores Inc.’s Macy’s department store chain. “Retail is a tough business that requires a lot of acumen to succeed. Federated and Macys.com work hard to bring our own expertise to the table, and that’s why vendors continue to do business with us.”

Weighing the risks

The ability to increase revenue and exert control over how consumers shop for its products led InFocus to expand its direct-to-consumer web site two years ago from selling a limited number of lamps and accessories to selling its full line of projectors. Realizing it had little experience in direct-to-consumer sales, apart from a catalog that produced a minor part of its revenue, it hired Greg Mills, an e-commerce consultant to manufacturers and retailers, as manager of Americas e-commerce. The company understood the risks of competing with its retailers, but believed the risks were worth it. “As a manufacturer, a certain amount of channel conflict is unavoidable,” Mills says. “But without it, we’re not pushing the envelope.”

Mills argues that manufacturers can’t just walk away from a group of consumers who prefer to buy direct from manufacturers. Further, InFocus believes those may be new customers and so the web becomes a way to expand its customer base. “There is a class of customers that will naturally gravitate to manufacturers’ web sites and are becoming more comfortable buying online,” Mills says. “We want to capture some of them.”

InFocus is careful to be upfront with channel partners about its direct-to-consumer selling plans and how InFocus and its retail channels can cooperate, Mills says. “We give a clear story of what we’re doing, so everyone understands where we deliver value,” he says. “The fact that we have a direct channel is something we work out with our partners in a way that makes sense for all concerned.”

For instance, InFocus gathers feedback from online shoppers, through customer service communications and e-mailed surveys, as a way to sharpen InFocus’s and retailers’ product offerings. Last year, when it discovered that many customers reported difficulty in figuring out which accessories to purchase for their projectors and where to find them, InFocus worked with its e-commerce platform provider Escalate Inc. to develop an online accessory-finder tool. Online customers enter information on their projector to discover the correct accessories. InFocus views the accessory finder as a tool for customers to learn what they need before they go to a retailer or to buy at InFocus.com. “It’s a web tool that translates into better customer experience in stores as well as on the web,” Mills says.

John Godbout, CEO of The Projector SuperStore, says InFocus has helped by avoiding direct online sales of its premium Proxima projector brand, leaving that to its retailers. "By listing us on their web site, it also gives us a chance to get the service business of their online customers," he says.

Dissipating fear

Such approaches have contributed to allaying retailers’ fears about manufacturers taking over, analysts say. “Retailers and manufacturers are finding the web as another way to collaborate,” Whitfield says. “Concern about manufacturers cutting retailers out of the loop has certainly dissipated.”

While careful to bring its distribution partners into the process, InFocus is clear that it expects to increase revenue and profitability. “We’re looking at the web as a channel for incremental growth,” Mills says. “Our senior executives have high expectations for growth and profitability in the direct-to-consumer initiative.” Although Mills declines to specify the growth of InFocus’s web consumer channel, he notes that it’s been increasing steadily. “We’re pleased at the rate it’s growing,” he says.

When watch and accessories manufacturer Fossil Inc. began selling online to consumers in 1998, it decided from the start to design its web strategy as a complement to the offline as well as online sales through its retail partners, says Matthew Brown, director of e-commerce. “We asked ourselves, how can we supplement store sales with our web site?” he says. “Our retailers made us what we are today, so we wanted to see what online opportunities would benefit both sides of the table.”

Indeed, Fossil initially learned of the consumer demand for a Fossil web site through feedback channeled through retail partners’ stores, where shoppers would ask how they could buy styles not in a retailer’s display case directly from Fossil, Brown says. Fossil’s online sales this year are running 45% over last year, a bit faster than its store sales.

Fossil takes several steps to help its partners’ sales in their stores as well as on their own web sites. In addition to helping shoppers on Fossil.com find retail partners’ locations, Fossil is careful not to offer online discounted prices or other special promotions that would take customers away from retail partners, Brown says. Fossil is also considering helping them build Fossil boutiques on their sites. This helps Fossil control the way its products are displayed by retailers to maintain consistency in its brand. “Anything we can do to help our partners helps us in the long run,” Brown says.

That was then

Ultimately, analysts say, having manufacturers more involved in selling direct to consumers increases sales for both retailers and manufacturers. They point to store examples of Levi Strauss & Co. and Coach Inc. as evidence. Jim Okamura, principal with retail consultants J.C. Williams Group notes that where Levi operates outlet stores, sales of its products at other retailers in the area go up. “The outlet stores are considered brand-builders, providing more reason for consumers to buy the brand regardless of where they buy it,” he says.

Unfortunately for Levi, retailers did not take such a benign outlook when Levi opened Levi.com and Dockers.com in 1999. Levi became the symbol of manufacturers trying to steal retailers’ market by selling direct online. Part of the problem was that Levi dictated that its sites would be the only place consumers could buy Levi products online. But even retailers who weren’t online in 1999 were mad at Levi for daring to sell direct. Some threatened to pull Levi products out of their stores.

Levi now offers its Levi.com as primarily an informational site that lets consumers use a virtual fitting room from My Virtual Model Inc., then forwards them to retail stores. In addition to a nationwide store locator, it features direct links to online and offline retailers, including BabyStyle.com, JCPenney.com, Macys.com, Nordstrom, Kohl’s, Urban Outfitters and Hecht’s.

The Levi case points to the delicate balance that manufacturers must maintain with retailers when selling directly to consumers, experts say. “Manufacturers need to balance their own control over distribution with that of their retailers,” Okamura says.

Leather goods manufacturer and retailer Coach Inc. has struck that balance, says Okamura, whose firm has worked with Coach on maintaining sales in all channels. Coach operates a direct-to-consumer business that includes Coach.com, a catalog, 156 company-owned stores and 76 factory outlets. They account for 59% of its $595.5 million in annual sales. The remainder comes through retailers. And while Coach’s Internet and catalog sales rose 15% in fiscal year 2003 over 2002, Coach sales through department stores kept close pace by rising 11.8%. “It’s maintained a presence in department stores because it’s building its brand more than stealing from retailers,” Okamura says.

In fact, Coach makes that pitch in its annual report. “Coach’s online store, like its catalogs and brochures, provides a showcase environment where consumers can browse through strategic offerings of our styles and colors,” it said in its 2003 financial report. “The growing number of visitors to Coach.com provides an opportunity to increase online and store sales and build brand awareness.”

IRCE 2008 Conference Multi-Media CD-ROM

Product testing venue

While InFocus, Coach and other manufacturers perfect their web-selling strategies, others say the indirect approach of providing online product information but referring online shoppers to retail partners is just as effective in their environments. Newell Rubbermaid has created more than a dozen sites for each of its consumer-oriented divisions. Though intended primarily as informational sites with direct links to retailers, Newell will also use the sites to provide direct sales of replacement parts for products like Graco baby strollers, which are difficult to find in a store.

Ace Hardware Corp., one of the many retailers directly linked from Newell’s Rubbermaid.com, says the manufacturer’s online presence supports a strong multi-channel partnership. “We see the value of customers knowing more about products upfront when they come into our stores after having been on the manufacturer’s site,” a spokeswoman says. “As long as our customers are being helped and know where to find our products, it’s a strong partnership between retailer and manufacturer.” She adds that some Ace stores refer customers to Rubbermaid.com if they don’t carry a particular product or model that the customer wants.

In addition to product education, manufacturers can use their web sites as a low-cost way of testing new products. The testing strategy has been followed with notable success by Procter & Gamble, which has used its PG.com to test-market new products through an online Try and Buy Store, Whitfield of Retail Forward says. For example, it tested Crest Whitestrips, the teeth-whitening product that has since taken off in store sales. The online test and refinement of the product and marketing approach, as well as the ability to use its own in-house medium to market Crest Whitestrips, saved P&G millions in marketing costs, experts say. P&G has also launched HomeMadeSimple.com, where consumers can find extensive information about house-cleaning and other products.

Manufacturers who have navigated the minefield of channel conflict find that another challenge lies ahead: learning how to sell direct. “It’s an evolution, and not one to be moved into lightly as a manufacturer,” Mills says. “We spend a lot of time thinking about how to do it right.”

Escalate hosts InFocus’s e-commerce platform and provides technical consulting services. Those services enable Mills and his team to develop the web site without relying on InFocus’s own IT staff as well as to concentrate on developing the company’s marketing, merchandising and customer service capabilities. “Our in-house IT team can only spend a limited amount of time on e-commerce operations,” he says. “And I need to develop online expertise around marketing and customer service. If we didn’t get outsourced help on the technology side, we’d be distracted from marketing and customer service.”

Mills notes that web success is based on business, not technological, expertise. “Your ability to grow online is all based on the effort you put into marketing and creating a great customer shopping experience,” Mills says. “I have an entire team dedicated toward growing this part of the business.”

While InFocus already possessed limited catalog experience, which prepared it to manage fulfillment of consumer orders of one or two product shipments, it has had to learn how to use the web to lead up to big-ticket purchases. One technique helping to raise online shoppers’ comfort level is a feature designed with Escalate called Find the Right Projector, which recommends a projector after shoppers answer questions about how they intend to use it.

Highlighting the unusual

InFocus also creates online sales, or at least willingness to buy, with a section that displays pictures about how other customers use InFocus products, Mills says. That helps perk up consumer interest by suggesting uncommon ways of using projectors. “For example, some customers have taken their projectors in their backyards to project large images on the side of their house,” Mills says. “The web presents an easy way to share these ideas with a large number of people.”

InFocus also has adopted common online retailing practices such as capturing e-mail addresses from customers and following up with e-mail newsletters. So far, his overall online marketing and merchandising efforts have led to a noticeable increase in the willingness of online shoppers to scale up to higher-priced items, Mills says. He takes as evidence of consumers’ growing comfort with online buying that it is selling its popular X1 projector online for $999. He expects InFocus can now start to move customers above that price point for other products.

Manufacturers who have significant IT staffs with the expertise to run their own web sites can still turn to another kind of outsourcing, that which provides a direct link from manufacturer to retailer then monitors the sales that occur.

About 70 manufacturers, including Xerox Corp., Hewlett-Packard Co., Microsoft Corp., Samsung Electronics Co. and Panasonic, use a technology platform from Channel Intelligence Inc. that enables shoppers on their web sites to view a list of retail partners, including price and real-time availability of a product. In two clicks, a consumer can travel from a manufacturer’s site to the buy page of a retailer’s site. “Manufacturers wanting to avoid channel conflict are one of the primary drivers of our service,” says Channel Intelligence president Alan Fulmer.

“This has helped drive leads to our channel partners and turn casual site browsers into purchasers of our products,” says Joanne Chan, retail marketing manager for SanDisk Corp., a Channel Intelligence client and provider of computer memory cards and related products. “This enhances the usability of our web site and the shopping experience for the end-user.” (See box, p. 24).

Whatever approach a manufacturer takes, the pressure for manufacturers to connect with consumers is only going to increase, experts predict. “When the total retail bucket was growing 6% to 8% a year, that made room for a lot of manufacturers to expand sales and not have to worry too much about the competition,” says Jim Brownell, COO of Escalate. “But today manufacturers are under pressure to increase sales like the rest of us, so they’re forced to expand their channels of distribution.”

paul@verticalwebmedia.com

Directing traffic to keep customers from getting away

Joanne Chan, marketing manager for SanDisk Corp., maker of computer memory cards and other peripherals, figures that forwarding consumers from her company’s web site to a retailer’s is a good way to influence the buying process. “Users generally come to a manufacturer’s site for information, then go somewhere else to make a purchase,” she says. “So why not help them do both online?”

SanDisk refers site visitors to 15 of its best retail partners through a networking platform provided by Channel Intelligence Inc. Although it doesn’t realize any direct sales, SanDisk figures it’s providing a valuable service to customers while helping to assure that visits on its informational site result in sales. “We didn’t go online to see a direct uptick in sales,” she says. “We did it to lead consumers to places where they might not have gone otherwise.”

A direct benefit for SanDisk is its ability to refer customers to its chosen group of top retailers that SanDisk can rely on to provide quality service and consistency in product presentation. “We choose retailers based on their reputation with us, the ones with the best customer service and best sales records,” Chan says.

She adds that SanDisk has been pleased with the rate of sales conversions realized by its retail partners. “When they click from our site to a retailer, they often end up buying,” she says.

Channel Intelligence provides a service to 70 manufacturers that links their web sites directly to the e-commerce sites of retailers. About 180 retailers participate.

While the typical sales conversion rate for retail web sites is about 2%, Challenge Intelligence reports that shoppers who link to retailers from manufacturers’ web sites via the Channel Intelligence system convert at rates of 8% to 20%. Within a week, 34% of visitors to Channel Intelligence client sites make a purchase, either online or offline, the company says.

Channel Intelligence charges between $1,000 and $25,000 a month for its service, depending on a manufacturer’s number of SKUs and the average purchase price of each SKU. For that it provides network connections between a manufacturer’s site and the sites of up to 15 preferred retail partners. Using web services technology designed to easily integrate different computer systems, the network connections can be completed in a day, says president Alan Fulmer. Other than a JavaScript connection it builds into the manufacturers’ web sites, Channel Intelligence clients are not required to build anything onto their own infrastructure, Fulmer says.

Channel Intelligence, which introduced its service a year ago, says most of its client manufacturers had previously forwarded online consumers to the web sites of large retailers known to carry their products. “But shoppers then had to find the product they wanted, then see if it was in stock,” Fulmer says.

Under the Channel Intelligence system, shoppers click on a manufacturer’s product link to call up a list of retailers showing each merchant’s retail price and inventory status. They then can click on one of these retailers to go right to the buy page for the product.

Chan notes that one of the main advantages of the Channel Intelligence system is that it can save shoppers time in making decisions, which can make them more likely to buy before leaving for another source. “We realize they can always go somewhere else,” she says.