Squeeze Play

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.

New understanding

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.

Growth alternatives

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.

The cost of operating the site, however, remains constant. One industry estimate holds that in the consumer electronics space, a site needs to sell in the range of $100 million to $300 million annually to be profitable, given the ongoing overhead requirements of fulfillment, marketing, customer support, and other functions. Pull in less, and such a site will have trouble operating at a profit.

And despite retailers` initial concerns about sales that could be lost to manufacturers` sites, the percentage of a brand`s sales rung up directly on the brand`s own site remains tiny, compared to sales driven through retail stores and retailer web sites. Lexar Media, for instance, estimates that of visitors who come to Lexar.com with the intention to shop, only 1.5% ultimately buy directly from Lexar.com. Luxury brand Waterford Wedgewood USA Inc. pegs direct sales on Waterford.com at perhaps 1.5% of total brand sales.

Sidestepping conflict

"I don`t think that any manufacturers who sell direct to consumers think for a minute that they`re going to take on the role of their major retail partners," says Dan Hess, senior vice president of industry analysis at comScore Networks Inc.

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One way manufacturers are sidestepping channel conflict with retailers when going direct both online and off is to differentiate that offering from what`s available at retail stores and sites, with strategies built around having different merchandise. "You don`t want to communicate that you are competing with your retail customers, so you might offer entirely different merchandise--merchandise that is not current or not first run," Stanek says.

In the brick-and-mortar world, for example, high-end apparel brand manufacturer Tommy Hilfiger sells through department stores but has also become aggressive in going direct to consumers by putting its own stores in malls. Online, Tommy.com distinguishes itself by providing only a limited assortment which doesn`t include apparel--except for custom chinos, available only online.

Pricing is another way retailers are separating their online direct offering from what`s on retailer partners` shelves. Nike, for example, has retailer store and web site distribution as well as direct distribution through its own stores and a collection of sport-specific e-commerce sites it operates. "If you`re buying first-time, new items, I think you will pay more on the Nike sites than you would at virtually all other retailers," Stanek says. "If you are buying closeouts or distressed merchandise, then the web has the opportunity to become virtually an online outlet store."

The notion that a retailer or retailer channel "owns" a customer because the customer has shopped that retailer`s channel frequently in the past is becoming outdated among forward-thinking marketers and the rise of the Internet is at the root of that shift. "Consumers have become expert cross-channel shopping machines," says Hess. "So the ideal scenario, and one in which all parties can win, is one in which the manufacturer gives the consumer the option of being referred to either an online or offline retail partner or of checking out right there on the spot."

Automated referrals

That`s a strategy that would have been difficult to execute online as recently as two years ago. But since than, technology developers such as Channel Intelligence have stepped up with software that automates referrals to offline and online retailers from manufacturer sites, and even provides product inventory status. A product search on the web site of Channel Intelligence customer Lexar Media, for example, brings up a product page that offers shoppers the option of linking to Lexar`s online store, a link to online retailers that stock the product, and a link that provides current store-level inventory on the product at local stores within the ZIP Code designated by the shopper. That strategy and the new technology to support it are an improvement from earlier times in which brand manufacturer sites may have directed shoppers to a retailer`s corporate home page, if they referred visitors anywhere to buy at all.

Software that assigns a portion of direct-to-consumer sales on a manufacturer`s site to the buyer`s local dealer is another example of channel cooperation that aims to replace channel conflict. Snowmobile manufacturer Fast Inc. makes what enthusiasts have dubbed "the Ferrari of snowmobile suspensions," the Fast M-10. The product is available primarily through snowmobile dealers, as well as having some manufacturer-direct sales through mail and phone orders.

This month, Fast will launch direct sales of the M-10 on its web site, Teamfast.com.

Snowmobile dealers might see that as a competitive strike-- except that software on Teamfast.com from technology provider Reshare Corp. will automatically assign revenue equaling dealers` net on each suspension sale on the manufacturer`s site back to a dealer. Buyers on Teamfast.com are asked to fill in the name of a local snowmobile dealer. If it`s not one that carries Fast products, buyers then get a query list that asks them to choose from a set of other dealers--all of which stock Fast products. If no dealer is plugged in, the software will choose one according to ZIP Code and brand.

"The dealer always gets the amount of money they would get had they done the deal themselves," says David Karpik, Fast Inc.`s director of sales. Fast has shared revenue from direct mail order and phone sales with dealers via a cumbersome manual process; this will improve on that system and, Karpik hopes, increase dealers` enthusiasm for promoting Fast`s products over those of competitors. "We want to make it profitable for dealers to handle our products," he says. After an initial limited launch, Karpik expects to spread the Reshare-powered program across more of Fast`s products.

The store locators

When Waterford Wedgewood went direct online, some of its retail partners--typically, small, high-end specialty gift and jewelry stores rather than the large department stores that provide most of the brand`s offline distribution--felt threatened, says Jennifer Korch, director of Internet marketing. "They may think that if their business is not going well, its` because of Waterford.com, but if anything, that`s helping to grow their business," Korch contends. Korch adds the brand seeks to allay retailers` concerns about the brand going direct online with education about what Waterford.com can do for a retailer`s business. "Eight times more people use the store locator feature than buy online, for example," she says. "If they are a small, local retailer who is not doing a lot of marketing or a catalog, then a lot of their referrals come from us."

Waterford.com also is boosting activity that facilitates offline shopping. It will shortly launch an events section that tells site visitors where and when to find brand events in local stores. After gathering more geographic data on customers, Korch hopes to start pushing out information about the local events proactively via e-mail. "We`re trying things like that to show stores that we are supporting our offline business and that we want to be an information source in addition to getting our own online sales," she says.

At the same time, Korch appreciates retailers` desire to retain sales from customers in the store. That`s why retailers will shortly be given a log-on for a dedicated area of Wateford.com that will allow them to conduct activity on the site on behalf of store customers, at the point of purchase. Korch is also careful not to undercut retailers` prices or promotional efforts. "We always sell at full price, and we limit our special offers to free shipping, gift-wrapping and the like," she says.

Korch`s vision for the future is not just more sales on Waterford.com or more sales of the brand at retailers, but both. "Our main focus this year is segmenting the consumer base, understanding who they are and what channels they want to buy in, and then supporting them in that effort with whatever tools they need, whether that`s online or in the stores," she says.

No single answer

Today, manufacturers and retailers are finding that there is not one single answer or strategy that will drive major growth. "I can`t think of a single manufacturer that doesn`t hold its channel partner relationships absolutely sacred," Hess says. "That hasn`t changed. But the amount of power that consumers now have in the current multi-channel climate has changed the rules of the game."

So increasingly, both brand manufacturers and retailers are turning to strategies that segment the marketplace and differentiate marketing and sales tactics in a way that, collectively, will deliver the volume of growth they seek. "The objective for them is to identify the consumers and types of purchases where they can best meet the need," Hess says. "Market channel and consumer segmentation are clearly the order of the day."

mary@verticalwebmedia.com