JD.com and Alibaba create indexes to identify Chinese shoppers’ spending trends, which help retailers gain insight.
Retailers once feared manufacturers’ online initiatives. But CPG companies have refined their approach to the web and retailers are no longer resisting.
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.