Manufacturers Beset by E-Commerce ‘Channel Conflict’

In the midst of the rapid growth of e-commerce and the stampede of new computer users coming online, one sector of the business-to-consumer community is not thriving.

Manufacturers are finding e-commerce to be an uphill battle at best. Many who sell directly to consumers online are finding resistance and resentment from the distribution channels that allowed them to thrive in the pre-Internet world.

One of the great questions of e-commerce is whether manufacturers can use the Internet to bypass their traditional distribution channels. If they can, it raises the specter of no longer needing their distributors.

The very thought, of course, brings angst to those distributors and has given rise to a new buzzword in the industry: channel conflict.

This channel conflict is causing numerous repercussions as manufacturers, wholesalers, distributors, resellers, retailers and e-tailers all engage in an elaborate game of chess to come up with the best strategies to participate in the new world of e-commerce without alienating their brick-and-mortar sales partners.

Even The E-tail World Is Getting Involved

Channel conflict does not just extend to the brick-and-mortar world. Some e-tailers, for example, are directly stating to manufacturers that they may choose other vendors to deal with if the manufacturers continue to sell directly to consumers online.

Unlikely Competitors

Not atypical is Home Depot’s proactive step to stop manufacturers from selling their goods online. Home Depot plans to unveil its own mega-site sometime this year.

As far back as last summer, the hardware company sent letters to its vendors that said, in part, “We too have the right to be selective in regard to vendors we select and trust you can understand that a company may be hesitant to do business with its competitors.”

It was a subtle, yet effective, message to any vendor that valued its relationship with Home Depot that the company would not tolerate its own suppliers functioning as direct competition online. Some industry observers speculate that a similar struggle may have led to the rapid demise of Levis.com.

After a respectable effort to do business online, Levi’s bowed out last year, ceasing direct online sales to customers. At that time, the company took the position that the high cost of running a first rate e-commerce operation was not manageable for them.

Still, it is possible that Levi’s was encountering some negative feedback from retailers that carried their brand and resented the new competition. And it is also likely that the transition from making huge warehouse deliveries to making deliveries to individual customers was complex.

Manufacturer Success Stories

Although increasing numbers of manufacturers are finding online sales challenging, some are doing fine. Dell Computer Corporation is thriving, but it has always sold directly to customers. The Web was a natural extension of its mail order business.

Dell’s major competitor, Compaq, is another story altogether. Compaq succeeded by selling through distribution channels and has encountered substantial conflict with its distributors about online sales. Nevertheless, Compaq has taken the online plunge as one of many different distribution channels.

The big question is how manufacturers can somehow strike the appropriate balance between direct online sales and traditional distribution, particularly since the prospect of online sales at the manufacturer’s suggested retail price, or even close, represents a windfall profit for companies who now sell at wholesale.

This dynamic especially applies to the numerous manufacturing companies with a two-tier distribution model in which the manufacturer sells to a major distributor like Ingram Micro or Merisel, which handles the next level of distribution to retailers, e-tailers and other resellers.

These manufacturers sell at a wholesale price that is marked up for sale to a retailer, who further marks up the product for sale to consumers.

The Best of Both Worlds

Regardless of how difficult it has been for some manufacturers to sell online, there may be ways to sell directly to customers without offending suppliers in the distribution channel.

Some manufacturers, like Black and Decker, are considering selling a product line that is only sold on the Internet. That way, retailers like Home Depot would not find them in direct competition.

Others with well-known brand names may take advantage of the power of online sales by selling products under a different brand name. Still, manufacturers are likely to tread cautiously in moving their operations online.

Without appropriate infrastructure and know-how to sell online, and without retailers to sell their products online or in traditional stores, some manufacturers may end up counting themselves among the early victims of e-commerce.

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