Smarter manufacturers do battle with middle-men to win customers

Mar 10, 2011 36 Comments by

It’s no secret that manufacturers need good distribution systems to get their products to customers, but in today’s battles distribution channels run by middle-men are being replaced by smarter distribution systems operated by the manufacturers.

The growth of business online is creating opportunities for many players but also creating huge risks, threats and pain.  Small middle-men operators in distribution channels are already doing it tough  but  social networks such as Facebook are adding to their pain.

Many of these middle-men intermediaries who sit somewhere in the channel between the manufacturer of a product and the end-user or consumer  of the product are threatened by ease with which consumers can connect with manufacturers.  This is not new,  and has been happening online for the past 15 years at least – but it’s getting faster now thanks to Facebook and other networks and middle-men are being cut out of the distribution channel.

Disintermediation

This may look like a scary word and it probably is.  “Disintermediation”  is the removal of the intermediary.

Sometimes this disintermediation is a long slow process involving the continually painful re-definition of the middle-man’s role.  Other times, it happens quickly.

Sadly,  while  middle-men often struggle hard to develop and implement  strategies that re-define and enhance their value in the distribution channel, they often know that while they may win a battle of two, they probably won’t win the long term disintermediation war.

Increasing disintermediation is one of the long term digital age trends and it’s here to stay.  (See  Trend # 12 in the Guide.)

Who Controls The Channel?

There used to be a saying that the person who controls the distribution channel controls the market, and to some extent this continues to be true. These days however the ability for a middleman to control the channel is much harder, especially online.

The reality is more that the person who runs the successful distribution system has increased power  in the  market, and that a middle-man who has no control over the distribution system has very little power at all.

Quality products with premium-end brand names are sought out by consumers across the world.  These consumers are now online savvy.

Online, consumers can easily deal directly with manufacturers – and social networks such as Facebook make it increasingly easy.

After all, why wouldn’t s consumer try to deal direct if they can save money on their purchases,  save time buy buying online and have access to a greater range of products that a local retailer may not stock  anyway?

If a manufacturer sincerely builds a community of users online and makes it worthwhile for users to join,   preference for and even loyalty to the manufacturer can develop very quickly.

As an example, check out the English websites of the  manufacturers of  Scalextric model cars, Hornby trains and Airfix scale model kits.  How would you feel if you had a retail shop selling these products?  Would you be happy for your customers to join the club on the website and buy direct?

And of course, if manufacturers can deal directly with consumers and sell their products at higher margins without the impediments caused by the middle-men (including retailers), then the manufacturer can enjoy a far faster avenue to market and get closer to the customer to get smarter ideas for product improvements as well.

What value does the middle-man offer?

Previously, the middle-man may have been geographically closer to the customers and may have had specialist knowledge in some valuable niche area. Geography is less relevant with global and local shipping, and knowledge is often easily found online.

In the old physical world, the middle-man wholesaler may have added their value by adding economies of scale to the manufacturer’s process by buying high volumes of products from the manufacturer and selling smaller volumes to retailers.

Manufacturers often prefer to ship freight container loads of products rather than individual products to individual consumers. But these days,  this is no longer such a point of value to the manufacturers who can out-source logistics to specialist logistic firms. These firms process orders for manufacturers that come in through the manufacturer’s website.

Logistics firms can warehouse, pack, ship and even assemble products for end-user consumers.  The logistics firm is a new-style of middle-man who adds far more value than the old-style wholesaler with a big warehouse.  This logistic firm is part of the manufacturer’s distribution system, not part of the middle-man’s distribution channel.

No Middle-man is immune or safe

No middle-man is immune and none are safe, no matter how innovative they may be or how safe their position may appear. All middle-men need to continually and quickly adapt. Agility and flexibility are key, especially in the face of digital age evolution.

There is an interesting article here from ITWire, which discusses how the movie and TV production company Warner Brothers in the USA have  announced that it will offer movies for download through its increasingly popular Facebook page.

Today,  Warner Brothers have 248,948 people on Facebook liking their page, and Warners can know exactly who these people are.  Could this useful?   You bet!

In the past, as a movie and TV  manufacturer, Warner Brothers typically would look to distribution channels such as movie theaters, television stations and video sales and rental stores to sell their products.

Video sales and rental stores have been middle-men in pain for sometime now, especially since the arrival of direct mail and online channels such as Netflix in the USA and its copy-cat cousin Quickflix in Australia.  Netflix and Quickflix have worked hard to disintermediate video rental stores, but now the  market positions recently carved out by Netflix and Quickflix are themselves being challenged.

Netflix is currently for USA customers only, so Aussies can use Quickflix…

When Warners made their announcement of providing its product through Facebook, the share price of Netflix  immediately fell.  Warners selling  directly to consumers is dangerous to Netflix, but even more dangerous is the threat that Warners may slow down the release of its products through channels such as Netflix.

When manufacturers build up to the position where they no longer need to  sell through certain channels,  the power balance shifts dramatically – in favor of the manufacturers and the consumers -  and much to the detriment of the previously safely ensconced middle-men.

Smarter Strategies for Manufacturers

But it’s not always easy for manufacturers, especially in highly competitive markets where products are in over-supply,  are more generic or are already commoditized.

Where supply levels of seemingly generic products are high and brands less important, many purchasing decisions are likely to be based on price and availablility.

Where middle-men have been able to establish large scale distribution channels with high barriers to entry, they can have far more power in the relationships between manufacturers and consumers.

The Australian wine industry is becoming an example of a powerful duopoly (largely controlled by  Coles and Woolworths) often to the detriment of small manufacturers who struggle for efficient, effective and profitable channels to market.

Smaller manufacturers need to

  • work on taking back control of their channels by developing their own distribution systems
  • build their own communities with strong and deep relationships with their target consumers;
  • create and effectively manage customer database information;
  • create  compelling and unique value propositions for those customers;
  • create or find cost-effective ways to manage the logistics of distributing smaller sale quantities to higher volumes of customers;  and
  • establish cost-effective systems for providing good pre-sales and post-sales customer support.

There are often opportunities for smart manufacturers  to collaborate with other non-competing manufacturers to enhance products, gain marketing leverage, share their costs  and provide greater value for customers.

Developing the use of social networks may be part of the mix and as Warners have found, the numbers of your fans can add up quickly. You need to also choose wisely from the range of  tools and technologies of  online systems to successfully build your new distribution systems  – which become purchasing systems for your customers to use.

If you plan it well and do it well,  I sincerely believe any manufacturer  can claim or reclaim  your  power by turning the distribution channel you use into the the distribution system you control.

So, what if you’re a middle-man?

  1. Be clever, agile, flexible and incredibly customer focused.
  2. Know your customers and have them know you.
  3. Know the most critical areas of value you add both upstream and downstream. And focus on always adding more of it.
  4. If you can, always own the customer relationships. Your customer database could be your most valuable asset.
  5. Become the most trusted player in your  various customer communities.
  6. Be the person or business that everyone trusts for the best advice, the best products and the best service.
  7. And provide so much added value to your up-stream manufacturers that they don’t want to cut you out or can’t afford to cut you out of the loop.

What do you think?

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  1. Anonymous says:

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  2. Meyer Mussry says:

    That is an interesting point of view, and it certainly highlights how new media can shift power away from those who dominate traditional channels (e.g. Woolworths, Coles & liquor) to new players who are struggling to get shelf space with the majors and if they succeed it is usually after they have been raped.

    This model, however, can’t work in every case. Whenever you are dealing with any technological product that has value, it has the potential for requiring service. In these instances, dealing with an overseas vendor becomes out of the question. You need someone local that you can tie down with a supply contract which includes terms of service. For the average Joe, this contract can simply be laws governing warranty, cooling off periods, etc.

    Other intermediaries can also help sales by making sure a product meets local specifications, and in some cases this can only be done when there is a local resident who signs the paperwork and assumes local responsibility.

    The example of Warner movies works because movies can be downloaded via the internet. A widget will have freight costs and possibly clearance charges applied to it, which could make it much more expensive than something that an intermediary imports in bulk and is able to amortise charges across a much larger population of products.

    A very thought-provoking article nevertheless. If you are an intermediary, you will have to work harder and smarter to justify your place.

    • Richard says:

      Hi Meyer,
      thanks for your thoughts on this. Yes, when retailers become dominant, small manufacturers & suppliers get raped or ignored. Or talked into providing generically packaged products – which may provide some short-term cashflow but long term cannibalism of the supplier’s own brand.

      You refer to technological products which appear to require local vendors – but I would put to you that local service agents are all that is needed – if that. Increasingly, sales are being made online by the manufacturer or by a high-volume low-cost online retailer.

      In this model, the manufacturer provides local support in the case of an “on-site” service model or a national or regional support model in a “return to manufacturer” service model.

      Dell Computers are an example of this. Sell online and thru retail stores – but provide service by local agents – if that is the deal purchased by the customer.

      Local vendors are increasingly only needed if the local customer needs to touch and feel and try the product before ordering it – but even then, many local retailers are hurting when the customer does the touching and feeling and trying on of the product only to then go looking online for the same specific product at cheaper prices.

      And it’s not just technology products – my daughter does that often with clothes from retail shops. Tries on at a local retailer, finds the size and style she wants – and then buys online at a fraction of the price. I didn’t tell her to do this – she and her friends just figured it out. Now they do it all the time – and for serious fashion label clothes and other products too. When local fashion retailers operate at say 300-400% markup and online retailers at say 50% markup (or whatever) then it’s easy to save money.

      You suggest that local intermediaries can help make sure a product meets local specifications and takes local responsibility for paperwork. That may be true – and if it is, then this is one of the points or value the local intermediary adds. Good for them – but they could find it a very transient and easily replaced point of value in a world where the manufacturer and the end-customers increasingly want to deal directly.

      Yes, anything downloadable becomes easy pickings for disintermediation. But so too does anything ‘freightable’. It’s a logistics challenge waiting to be overcome, not an impossibility.

      And yes, gaining economies of pricing by buying in bulk and selling in smaller quantities is one of the traditional value-adds of the middle-man. But they need to have a margin and if you get a sequence of middle-men in the same channel each taking a margin, then the end-price can become over-inflated – compared with the same product being sold directly by the manufacturer to the consumer, even with logistics and freight costs included in the pricing. (By the way, this is “shipping and handling” and online consumers today understand that they need to pay these costs. It’s easy to price these separately and to show the savings from buying direct.)

      You are absolutely right in your final comment . Any and every intermediary will have to work harder and smarter to justify their place in the distribution channel – or the manufacturer’s sales, delivery and support system.

      Control is shifting and it will increasingly hurt small intermediaries and non-dominant retailers.

      That said, it ain’t easy for manufacturers either. Selling direct to consumers deprives them of big chunks of cash flow they get from selling to their channels – unless they have lots of happy customers ready to buy the next product when it is released.

      The importance of the customer database increases dramatically, but more importantly is the relationship that the manufacturer manages to establish with their customers – which goes beyond simply having contact details on the database.

      IMHO, Many manufacturers are not geared up to directly manage customer relationships really well – whereas the middlemen retailers tend to be more customer focused. (but not always.)

      I think that the winners will be whoever does the best job of building customer relationships, building trust and delivering whatever the value criteria are that are critically important to the customer.

      Manufacturers do battle with other manufacturers and with retailers.
      Retailers do battle with other retailers and with manufacturers.

      In my work, I find myself working with manufacturers, middle-men and retailers. They all share the same big picture environment – but the smart strategies, tactics and tools are different for each.

      Thanks again for your comments. I’m glad you found it thought-provoking.

      Cheers
      Richard


      NB These comments were originally made on a LinkedIn group discussion.

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  22. Greg Turner says:

    Very insightful. This is exactly what is happening to the middleman speaking as someone in that position.

    • Richard says:

      Hey Greg,
      thanks – yep, most middlemen are in a tough position, especially if the niche in which they operate is highly competitive with increasingly thin margins.

      Perhaps there is no ‘security’ for most middlemen in the future, but equally there is little security for most manufacturers either.

      Some middlemen (eg in Australia currently Coles & Woolworths) will appear to have the scale of a dominant physical sales network and the ready access to high volume of sales – and they will be able to screw manufacturers for low prices and often generic products. Producing generic products for large chains may provide cashflow and even profit for manufacturers but it does little to build their businesses and only cannibalizes the manufacturers own brands. It often looks like a slow death – and it’s corporate suicide.

      It’s worth stating the obvious and saying that customers generally don’t care who supplies them with a product or service as long as the core needs and wants of the customer are met. Most customers are attracted by acceptable quality for the cheapest price they can get, and most customers have little or no loyalty to individual middlemen or manufacturers. The customer really does not care when a business dies as long as the customers does not lose money in the process. (Of course it’s possible to have loyal customers, but most won’t lose sleep if they know their supplier is in trouble. They will simply go looking for another supplier.)

      So, who loses sleep? I talk with small (and also large) manufacturers who stay awake at night trying to figure out how to secure better relationships with their customers AND with the businesses in their distribution channels. These manufacturers want to be represented by someone who really cares about them – and can sell heaps of their product. They are tossing up whether to encourage direct sales online – they want to do it, but don’t want to be seen to annoy their middlemen. Most are not ready to totally remove their middlemen. Not just yet anyway….

      And I talk with lots of small to mid-size middlemen who are seriously hurting from the stress of customers wanting to go direct to manufacturers – and manufacturers wanting to go direct to customers. Of course, with the web there are very little barriers for this to happen – much to the increasing annoyance of the middlemen.

      Put simply, I think the successful middlemen will be those that
      1. are highly customer focused and provide the love to the customer that the manufacturer can’t or does not want to provide; AND
      2. are able to embed themselves so firmly into the corporate eco-systems of the manufacturers they work with that they become an indispensable part of the manufacturer’s sales and supply systems.

      The challenge for the middlemen then becomes
      1. Creating and cost-effectively providing the love to the customers for those manufacturers who can’t/don’t/won’t give it; and
      2. Doing everything possible to become totally indispensable to the chosen manufacturers in the manufacturers’ various sales systems.

      A. Is this doable? Absolutely.
      B. Is it simple to do? Maybe. Probably not.
      C. Is it worth doing? Hopefully. And if it’s not worth doing, then the writing is on the wall – and it may be time for the middleman to get out of that business.

      Cheers
      Richard

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  27. Robin Powell, New Zealand says:

    Interesting stuff…thanks for the article.

    Large retailers are trying to compete with each other on price and have driven down the quality of manufacturers goods as a result…they tell the manufacturer how much to sell for. Some very well known brands have become polluted by this and can no longer be trusted.

    • Richard says:

      Hi Robin, yes – when brands that have become trusted for their quality start building down to meet price-points, quality often suffers. Savings in production expenses with lower priced inputs and the continual drive for manufacturing efficiencies often come at the expense of quality.

      As we all now know, many manufacturers also shift production facilities to lower cost locations, introducing more potential reasons for product quality to drop. (That said, product quality and value-for-money can often increase with off-shore production – which is why it works so well for so many.)

      However, in the continual drive for products to do more and cost less, something has to give. Planned obsolescence often means that product lifespans become intentionally reduced, especially in our society in which short-life, disposable products are more acceptable to consumers.

      But manufacturers don’t always get the mix of characteristics right, and when they get it wrong, consumer trust gives way to mis-trust – and the brand deteriorates.

      But do the large retailers care? Generally not – especially when at the same time the retailer may be pretending to help the manufacturer by getting the manufacturer to package up generically branded ‘home brands’ which are sold at even lower price points again.

      It’s no wonder in this environment that the manufacturer looks for new and better ways to deal direct with consumers rather than get slowly screwed to death by large retailers.

      It gets even sadder when the large retailers exercise so much market power that they also prevent the manufacturer from selling direct to consumers.

      The prospect of being screwed to death becomes a reality. And it ain’t gentle.

      Fortunately, there are smart strategies manufacturers can use to restore the balance in their relationships with their sales and distribution channels.

      In my view, it starts with the manufacturer taking the decision to develop and control their own sales systems, including all the way to the end consumer. And it can be done.

      (I provide guidance in this valuable area for manufacturers. I also work with middle-men and retailers in different industries, so I get to see and understand the different points of view.)

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