Bypassing the Middleman

And there’s little retailers can do about it. Levi may depend on a vast network of bricks-and-mortar merchants to sell its apparel around the world. But on the Internet the only place shoppers can buy Levi jeans and Docker khakis is at the Levi Web site.

“I don’t think their policy is very fair, and I’m not pleased with being bypassed,” says Rob Schlein, owner of Dan’s Big & Tall, a small chain of Dallas clothing stores. “If I sell Levis in my regular stores, I should be able to sell them on my Web site.”

Retailers naturally don’t like it when any big manufacturer, such as Levi, cuts out the middleman and starts selling direct to the public over the Internet. But now that consumers are buying everything from clothes to furniture on the Web, it’s inevitable that more manufacturers are going to sell online and compete head-to-head with retailers for shoppers. And retailers better get used to it. Appliance manufacturer Whirlpool Corp. is making Internet retailing a big part of its future plans. And the ranks of manufacturers already selling on the Web include such household brand names as Estee Lauder, L’eggs and Timex.

The battle lines are drawn

In conventional retailing, it can take manufacturers years to build up a national distribution system of merchants. But the Internet offers manufacturers speed and the chance to reach consumers quickly. Levi took just 18 months to develop and launch its electronic commerce initiative. And that quickness to market impresses analysts. In fact, now that one of the world’s biggest clothing makers has made a successful transition to Internet retailing, analysts aren’t just talking about a slow stream of manufacturers coming online; they’re predicting a stampede.

“There’s a huge battle brewing up between retailers and manufacturers about selling direct to the public over the Internet, and it’s going to explode on the industry very soon,” says George H. Whalin, president, Retail Management Consultants, San Marcos, Calif. “Manufacturers see this as a great way to sell product and build up their brands, so they’re just salivating to get on the Web.”

Better get used to it

Most retailers hold out some hope that manufacturers will include them in their electronic commerce plans. But if manufacturers choose otherwise, there’s little merchants can do about it. “This is an emotional issue with retailers,” says Maxwell H. Sroge, chief executive officer, Maxwell H. Sroge Co., a Chicago retail and direct marketing consulting firm. “They don’t like being alienated, yet manufacturers are adopting a retailing mentality about the Internet and that trend will only accelerate.”

Merchandising used to be retailers’ exclusive domain. When the only place to buy consumer goods was in stores, retailers told manufacturers which of their brands they would sell and how much. Today about 85% of all consumer products are still sold through stores.

But over time as national chains have consolidated and retailers have cut back on their numbers of sales associates and buyers, they’ve shifted more of the merchandising role to manufacturers. Today retailers aren’t looking to manufacturers to just supply them inventory. In many cases, they’re dependent upon the manufacturers to train sales associates and even supply the shelves merchants need to stock the goods in their stores.

“Traditional retailers created a dinosaur industry when they began to rely on financials to drive their business and asked big wholesalers and manufacturers to pick up the merchandising slack,” says Kenneth Seiff, chief executive officer, Bluefly.com, New York, a virtual clothing store. “The balance of power is shifting and that’s why retailers can’t challenge those big-name manufacturers who want to sell on the Internet.”

Some manufacturers are taking limited steps to placate merchants and avoid direct conflicts. Levi and Timex Group Ltd. feature store locator buttons on their Web sites. And L’eggs Products, a division of Sarah Lee Corp., plans to feature coupons consumers can print out and redeem at stores around the country.

But those are only token efforts and don’t alter the fact that manufacturers are going to compete directly against their retailers for Internet business. “Retailers are being very aggressive on the Internet and we are going to sell online too,” says John F. Andrews, assistant marketing manager, L’eggs Products, Winston-Salem, N.C. “The Internet is the competitive place to be right now.”

In fact, rather than being low key about their Web selling efforts, most manufacturers are pulling out all the stops and building fully stocked, state-of-the art Internet stores. Mattel turned its Internet site into a hot selling Web store when it introduced an interactive feature that allows shoppers to build their own Barbie doll from a base of 15,000 separate clothing, hair and eye color choices.

And when Timex opened its Web store in May 1997, the watchmaker could have been conservative and offered only a few of its brands. But Timex didn’t think a limited selection would draw consumers, so today Timex offers almost 300 different styles of watches and clocks—its complete inventory and more choices than consumers will find in conventional jewelry or department stores.

“Electronic commerce is coming on and we wanted to be ahead of the market,” says Sally Jagello, Internet manager, Timex, Middlebury, Conn. “Putting the complete inventory online sets us apart.”

Most manufacturers cite customer requests for online shopping and a chance to better promote their brands as the generic reasons they’re opening Web stores. But they’re also looking for ways to increase profits and move more product. Analysts predict Web shopping will soon be at least a $13 billion business and manufacturers are not willing to just hand the market over to retailers. “These are profit-driven companies and they see the Internet as the biggest merchandising opportunity to come their way in a long time,” Whalin says. “It’s just too important a sales outlet for them to ignore.”

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Brand name manufacturers are drawing up elaborate plans to expand their inventories and merchandising efforts, as they sell online to the public. L’eggs, for instance, is building a separate distribution system complete with its own warehouse to fill individual Web orders. And Estee Lauder and Avon are enhancing their Internet stores with interactive applications that help shoppers pinpoint the fragrance or skin care product they’re looking for by asking them for more personal details such as their hair and eye colors.

Reaching out to customers

But selling online isn’t limited to big manufacturers. Even small companies are willing to bypass their retailers in the race to get on the Internet. A.I. Root Co., a small Medina, Ohio, candle manufacturer recently opened a Web store to sell holiday and church candles over the Internet. The company’s products are carried in just under 9,000 stores nationwide, but A.I. Root, which has been in business since 1869, is willing to risk alienating its retailers because it sees the Internet as the only cost-effective way to reach the newest market it is after: younger buyers. “We know our retailers aren’t going to like this and we’re worried about what their response might be,” says Brad Root, A.I. Root vice president. “But we’ve looked at electronic commerce pretty hard and that’s the only way we can reach out to the younger customers we haven’t had before.”

Attracting younger customers is the prime reason Levi is selling directly on the Web. Tired of losing market share to designer jeans makers and impressed with the success Internet retailers such as The Gap Inc. are having with their Web stores, Levi decided it had to have more online than just an information-only site. Today on the Levi site, shoppers can click, select and buy more than 100 different styles of pants, ranging from traditional jeans to khakis. The Web stores feature stylish graphics and various interactive features.

For instance, shoppers can click on a size calculator and receive instant recommendations on the best size of Dockers tops and bottoms for them. And another function—Style Finder—uses personalization software applications to ask shoppers a series of lifestyle questions, which in turn helps them narrow down their clothing selections. Levi wants to use electronic commerce and the Internet to draw in its best customers. But its policy of bypassing other Web merchants and limiting the merchandising of its clothing to its own Internet stores isn’t winning the jeans maker new friends among retailers.

When Levi’s Web stores went live, macys.com, the electronic commerce arm of Federated Department Stores Inc., and JC Penney Co. were among the online merchants that had to put aside their plans for selling Levi jeans and khakis online. Levi insists that its Web selling policy isn’t trying to take business away from retailers. “The Internet is so new a medium that we think that we know best how to build the brand up,” says Jay A. Thomas, director, digital marketing, Levi’s brand, San Francisco. “This is a huge opportunity to stay customer focused and build sales volume for everyone, including bricks-and-mortar stores.”

Publicly, Penney and other national merchants are playing down Levi’s exclusive merchandising rules and use words such as “disappointed” to describe their reactions. But there’s tension in the industry over big manufacturers bypassing retailers on the Internet. And many believe the issue will soon become a full-fledged controversy.

“There’s a lot that’s not being said, but that doesn’t mean retailers all across the board aren’t mad about this whole bypassing issue,” Whalin says. But no matter their level of ire, many retailers believe there’s not much they can do to fight back against the very companies that supply their lifeblood—the products they sell. “The big retailers aren’t going to confront their manufacturers anytime soon,” he says. “They’re too dependent upon them for business. It’s a delicate balance.”

Seiff believes manufacturers may have already won the Internet retailing battle because they’re willing to take risks where traditional retailers aren’t. For instance, Timex and Levi put their entire product inventories on the Internet and enhanced their stores with sophisticated graphics and interactive shopping functions to get customers to buy. In contrast, many big national chains still have no immediate plans to sell online or are limiting their Internet sites to selling only a few select items.

“The Internet is rewriting the rules of merchandising and conventional thinking and I don’t think department stores understand the business model yet,” Seiff says. “On the Web, I think wholesalers and manufacturers are going to be better retailers than department stores.”

Fighting back

But not all retailers agree with that assessment, especially merchants that see electronic commerce as an integral part of their sales and distribution channel.

Unlike manufacturers, retailers also aren’t limited to selling just one line of merchandise. Wal-Mart, for instance, carries nearly 250,000 different products on its Web site. And even if it’s restricted from selling Levis online, macys.com does stock Calvin Klein jeans and dozens of other designer clothing categories. Thus, even if more manufacturers are looking to bypass merchants on the Internet, retailers can still compete based on their product diversity and expertise in selling to the public.

A good example is customer service. Most retailers already know that they are going to lose customers if they don’t have return policies that allow shoppers to conveniently return merchandise. Macy’s, for instance, lets customers who buy items at macys.com return them to any of the chain’s stores if they aren’t happy with the purchase. In contrast, Levi’s online store policy requires shoppers to return merchandise to the manufacturer and limits exchanges at its more than 1,000 bricks-and-mortar locations.

For instance, Web shoppers can exchange a particular pair of jeans for a better size, but they can’t return one style and then select another.

“We can give our customers one-stop shopping on the Internet, and the bricks-and-mortar stores are a tremendous asset in making customers feel comfortable if they want to return something,” says Kimberly A. Miller, vice president, Internet strategies, macys.com, San Francisco. “Retailers also have established order fulfillment systems and a variety of products to offer Web shoppers. Those are assets a lot of manufacturers still don’t have.”

Luring customers in with just the right sales price is another tactic retailers can use to compete against manufacturers. Retailers are experts at pricing merchandise to sell and using sales to make shoppers spend more even when they feel tapped out. For instance, retailers invented the white sale to drum up business in winter, one of their slowest times. And even though consumers took to the Web in record numbers in November and December and shattered analysts’ projections for online holiday sales, that didn’t stop Internet merchants from offering deep discounts on their merchandise beginning the day after Christmas.