August 18, 2017


















Article 7.9

UNDERSTANDING CHANNEL "CHAOS"

These are turbulent, anxious times for many channel intermediaries. Because enough wholesale distribution channels have been consolidating rapidly, NAW/DREF commissioned a study that has just been published. Manufacturers seem to be strong-arming their channel "partners" more frequently. Some recent consumer channel examples come to mind. The big airlines have just decided to cut travel agentsí commissions another 20% on domestic flights. GM is testing a web site that will allow the consumer to configure and bid out the vehicle of their choice, which will accelerate the deconstruction of US car dealerships. And the big PC manufacturers who sell to the two-step, wholesale/dealer channel are all preparing to match Dellís internet ordering, factory direct model while assuring their two-step channel partners that they will still have a role and a mark-up Ė maybe.

In the industrial and hospital supply channels, large end-users have also been strong-arming their wholesale supply "partners" with integrated sole supply initiatives. The customers donít want to have to shop amongst a number of different franchised distributors and then have to pay for the redundant overhead costs that are built in to the prices. They want, instead, a one-stop-shop, low-cost fulfillment channel solution Ė sort of like what consumers got when the big box appliance stores triumphed over the independent dealer networks.

Doesnít it make you wonder why some manufacturers and end-users are being so opportunistic and disloyal? Donít they know that "many" customers like the traditional channel? Where is all of this change leading? Are some channels immune to big change? Is there new, upside opportunity in all of this turbulence or is there just danger?

THE "ATTRACTOR" THAT GUIDES GENERAL MOTORS:

According to "chaos theory", a system in chaos only appears to be in disorder when there is actually a hidden, "strange attractor" that is re-organizing the system. For example, the water from a torrential downpour may seem to be going in all directions, but the hidden organizer is gravity. The attractor for all current channel turbulence is to empower the final customer to let them buy - anywhere, anytime, their way, for less, now and fast. We are currently witnessing the collapse of producer invented, controlled channels and the birth of customer designed channels that will involve reconstituted, different intermediaries. The two key catalysts for this paradigm shift are: 1) super saturated supply of equally excellent commodities meeting a slow, post-consumer society demand; and 2) real-time, total information availability to the end-user via the internet.

Think through the implications of GMís web site plans. By next June, GMís goal is to let any consumer go to their web site and configure the GM car of their dreams. All of the pricing will be at "retail list." Once the vehicle is configured, the customer will then be able to search the GM universe to see if it is in inventory. If so, the customer can then e-mail the dealer for a quote. What if two or more dealers have the car and both get quotes? How much below "list price" do you think the dealers might go? What if the customer then prints out the quote and uses that as a bargaining chip for a similar car from another manufacturer? What discount will be possible if the car is at the factory lot or if the customer will wait until the factory makes the car?

You might be thinking that not all consumers have ready access to the Internet or know how to do e-mail. But, we must not assume todayís conditions will exist 9 months from now; every 50 days is another year in the web world. GM is planning on putting free Internet on-ramp kiosks in malls and at their dealers. Chrysler is already doing this. Cities are now starting to roll out free Internet kiosks for paying traffic tickets, etc. Retailers will start putting Internet kiosks at the back of their stores to generate foot traffic. By June í98 how many more consumers and students will know about e-mail and Internet car deals to tell and show others how it all works? Exponentially more!

So, how do you think that the small dealer who sells a lot of cars off of a bigger dealerís lot will feel about this service? How about the big dealers who attract customers into their big lots with their economies of scale, "big sale" advertising? Wonít all dealers lose chances for trading customers up; chiseling them on trade-ins; and brokering - insurance, financing and extra, unnecessary warranty coverage? If the e-mail quote department starts selling lots of deals and the customers who do come in take only an average of 30 minutes instead of 6 hours because they are pre-educated, what does this mean to the number of sales reps needed and their commission rates?

Why is GM doing this to their partners? The answer is that they have no choice. Internet shopping and quoting sites are already empowering the customerís shopping process at an exponentially growing rate. For the 70+% of Americans who now buy used cars, Republic Industries and Circuit City are rolling out category killer lots with complementary national database, Internet searching services. These third party players are transforming the car channel to give the customer Ė anywhere, anytime, their way, for less, now Ė service. The manufacturers are panicked, and they have all started experiments that might seem confusing to someone who assumed that fixes for the old channel model were underway. Once we understand the inevitability of the hidden organizing principle, we might wonder why all involved parties are being so slow and resistant to change.

We canít specifically forecast what car dealers will be doing in 3 years, but their one-stop source of services will be a downsized and unbundled version of what it has been. The more they resist the change, the less able they will be to see and capture the new value-added opportunities. The consumer will get what they want in spite of the traditional wishes of General Motors and their traditional channel partners.

DONíTS AND DOíS FOR OUR CHANNEL:

  1. Donít think that our specific channel is different than cars. If cars are commodities in the consumerís mind, then so are the top selling, mature products in any distributor business.
  2. (Distributors) donít think that the traditional markup, commission structures and "value-added" activity levels for our channel are preordained to last forever. These practices mask cross-subsidies and support unwanted levels of service that our best customers have been paying for and are beginning to discover. On the other hand, small, abusive, parasitic customers like the present subsidies that they receive and will squeal the loudest about change. In a totally informed and hyper-competitive world, every customer will have to be both profitable to us and happy with the service package that they will be able to co-create.
  3. Donít think that as our traditional channel practices come under stress, we can patch them up through discussions between producers and intermediaries. We can wait for the roof to cave in or we can proactively start designing the future solution with the end-userís help.
  4. Donít think that producers will be able to come up with all new, monolithic channel policies that can be applied to all national markets, all intermediaries and all end-user customers. They could do that after WWII because they were inventing new channels to distribute significantly new products for which demand chronically outstripped supply.

Dos:

  1. (Producers) do have meetings with the biggest, best end-users that might ideally include open-minded, non-threatened intermediaries. In these sessions, flowchart the current channel structure with its current value-added steps with the estimated, unbundled cost for each step. Then, start creating new value-chain scenarios starting with the customer and working backward to the producer. As these scenarios are discussed, we should try to incorporate the promise of a real-time Internet link between the producer and the end-user. There is probably a key role that some traditional intermediaries can play in the creation of this Internet, real-time link for which they might be reclassified as an "info-mediary."
  2. Do remember two key guidelines as scenarios are created: 1) fulfill the conditions of the attractor - anywhere, anytime, their way, for less, now and fast and 2) each step in the new channel must add value for the customer or the producer in excess of itsí cost or it must die.
  3. Do focus on intermediaries finding new needs and filling them for both the producer and the end-user at a cost that is less than what the beneficiary will pay for in fees. Perhaps a lot of our traditional value-added activity will shrink or even disappear along with our top-line and personnel count, but if our new bottom line is the same or more than in the past that is good.
  4. Do test new channel solutions cheaply. When todayís channels were being developed before our collective memories, there were, undoubtedly, many unanticipated problems. Pick one region, a few end-users and one forward-looking, reconstituted intermediary to work with and to pursue realistic, initial expectations.
  5. Do design new solutions to provide as much maximum flexibility as possible that will give as many customers as possible what they individually want. There will be no new, monolithically applied set of channel practices determined by the manufacturer and its consultants. In the age of the internet and real-time feedback loops we canít forecast the future well enough to anticipate all changes in customersí needs and guarantee intermediaries some simple, sure return. We will all live and die on how well we deliver best value to end-users. The best value will be an ever shifting target. The most flexible, self-organizing and re-organizing channel teams will win over the mechanistic and tradition- bound alternatives.

CONCLUSIONS:

As traditional, producer controlled channels collapse, all of the channel players can be part of the new solution or part of the problem. Because we have limited time and resources, we should focus on forward-looking, end-user driven solutions rather than trying to protect traditional channel practices. Because the internet will continue to deliver information, options and buying power to end-users at an exponentially accelerating rate, we will have even less time than most of us think for re-intermediating ourselves into new channel solutions.

When paradigms collapse there is the danger of losing the old economic franchises and the opportunity of seeing, creating and capturing the new ones. Donít fight the "strange attractor" that is re-organizing all channels; go with it. Like gravity it is too big, too strong and too permanent to defeat.

 

Merrifield Consulting Group, Inc. Article 7.9