Merrifield Consulting Group

August 18, 2017


















GUIDELINES FOR CHANGING CHANNELS OF DISTRIBUTION

 

Many manufacturers, who have been going to market through established channels that date back to the late 60's or earlier, are experiencing, today, growing stress with their channel partners which usually includes reps, distributors and/or dealers. These relationships have been historically cemented together by the memories of the good years together in the 60's and 70's when growing up with America was easier and more profitable. During this period, partners steadily invested resources in supporting one another to reach significant levels today which are difficult to abandon. And, the top managers are often close friends who grew up doing business together.

 

The stress within these relationships has been caused by a number of trends that accelerated in the 80's:

 

1.         World supply of manufacturing capacity aimed at the U.S. market has continued to outpace a domestic demand that has leveled off. The U.S. has created the first post-consumer society in which a majority of people have run out of waking hours to consume. Total consumption of all things is dropping towards the 1% growth rate of the population.

 

Instead of a growing demand pulling products through the channel profitably, many manufacturers are now trying to ram-and-jam too much supply through channels even at losses thinking perhaps that someday they will make it up on volume.

 

2.         Channel power has switched from manufacturers to end-users. Consumers, for example, had to buy white refrigerators and black phones at book prices from authorized sellers until the late 60's. These were symptoms of supply being less than the demand.

 

With today's global-glut supply and saturated demand, end-users express their growing power in many ways. We, as consumers for example, now expect perfect quality goods and service, unconditionally guaranteed forever. We want over choice in product selection, and we want flexibility in the types and quantity of services available. We want convenience, user-friendliness in buying; speed in delivery; and lower prices. We are steadily getting more of these needs met by more suppliers.

 

3.         Manufacturing technology and methods continue to move towards the make-anything, in-any-quantity-now factory. This will please end-users, but it creates the growing problem of how to market micro-segmented products through traditional commodity channels and mass media.

 

4.         New manufacturing suppliers, often foreign, who can't find qualified intermediaries to distribute their products aren't hindered. "Channel blocking" stills keeps U.S. firms out of Japan and other markets. In the U.S. the new entrants might: sell direct; set up their own distribution in the biggest markets; or sell a new breed of intermediary that traditional suppliers are afraid to sell for fear of retaliation from existing partners. The U.S. business infrastructure is so accommodating and Americans are so quick to experiment with new brands and new intermediary suppliers that penetration happens and competition escalates.

 

5.         With too much supply, and not enough demand all players in the channel are experiencing profit erosion, so consolidation of players at each step in the channel continues. Instead of selling through lots of small, independent agents, distributors and retailers that could be controlled, manufacturers are faced with selling big chains or cooperative groups that control market share or shelf space and can push the manufacturers around.

 

6.         Intermediaries used to have to please just the manufacturers and pass the prices, policies and terms on to the end-user. Now the big end-users are dictating terms too; the intermediaries are getting more anxious about who and how to serve.

 

7.         Progressive manufacturers would like to sell their fragmenting line of goods to more and smaller segments of potential customers which their existing intermediaries haven't pursued and may not be geared to serve. The logical solution should be for the manufacturers to sell niche products through alternate channels that some of their intermediaries might create. Many intermediaries, however, don't see the need to change or don't want to change and threaten retaliation if manufacturers should sell alternate channels. Other manufacturers will then, unfortunately, sell their equally excellent products to the alternate channels. Traditional-thinking intermediaries are, in other words, asking progressive suppliers to join them in- putting their heads in the sand, managing the past, and also suffering market share decline.

 

CONCLUSIONS

 

Because of the enormous diversity in both products and the channels through which they are sold, there are only a few specific conclusions that can apply to most stressed channels:

 

1.         Manufacturers and their partners should stop being volume and product-driven and become end-user or customer-needs driven. If partners can more precisely target segments of customers and give them exactly what they want in products and services, then they will be able to penetrate and retain them better and more profitably than the competitors. Volume and market share will then grow as a by-product; partners must make volume the caboose not the engine.

 

2.         All partners must become niche marketers. If manufacturers can successfully micro-segment both end-users and their matching product lines, then they will probably have to use new marketing methods for reaching specialty buyers.

 

3.         Let the end-user be the final arbiter of what and how they want to buy. If intermediaries understand these niche customer needs, then they should be glad to reinvent themselves to be part of the solution or stand aside and let their manufacturing partners sell in alternative ways.

 

4.         If channel partners can stop managing the past and share a common strategic understanding of what it takes to succeed in a global-glut, post-consumer demand economy, then they can work successfully with the trends. If one or more partners are still operating with outdated, unspoken assumptions for how the partners should be going to market, then tough decisions will have to be made. The partners who push on with forward-thinking strategies do not, however, usually suffer much retaliation. The resisters, instead, begrudgingly start to follow along and can eventually become quite enthusiastic about the new order of business.

 

 

Merrifield Consulting Group, Inc., Article 1.4