Multiple Channels of Distribution

This may get a bit long, so I apologize in advance, but it’s a complicated issue.

I’ve been following a discussion on another forum on the subject of multiple channels of distribution.  Here’s the gist of the conversation.  A company who manufactures consumer goods in the United States offers two protected lines to independent retailers.  There are restricted dealer territories for each line and Internet advertising is prohibited.  The company does not sell to mass merchants.

However the manufacturer does market its products through other channels which normally don’t interfere with their indy retailers.  Products for these other channels are cosmetically different from the retail product.  Only lower-end items are sold through the other channels, with the more expensive top-of-the-line reserved exclusively for the indy dealers.

The question is, should the manufacturer be selling through these other channels?

Disclaimer:  I used to work for the manufacturer in question, albeit in another division.  I have had this discussion/argument many times, both with dealers and within the company.  Since I no longer work there, I believe I can shed some impartial light on this issue.

hammerYou don’t have to be a rocket scientist to figure out what product I’m talking about, but to keep the blog industry-neutral, we’ll say the product is hammers.  I’ll admit I know very little about hammers except that they’re used to drive nails and that you hold onto the handle and hit the nail with the other end.

First, it’s very difficult to be a supplier exclusively to independent retailers and any manufacturer deserves a lot of credit for trying to do it.  Face it, one order from a big box chain can account for more units than hundreds of indy dealer orders.  Considering the fixed costs of manufacturing, either domestic or off-shore, the chain store numbers are hard to ignore, especially if you want to keep your work force employed and make a decent return on your investment.

On the other hand, it’s very costly to do business with most chains.  The low prices they brag about are usually made possible by their predatory purchasing, payment, and return policies.  If a vendor isn’t careful, he may end up paying dearly for the privelege of having his product stocked on the big boxes’ shelves.  More than one manufacturer has gone broke trying to do business with the big guys.

So, if a company makes the decision to stay out of the chains, how does it generate enough volume to keep the factory running?  One way is through multiple channels of distribution which don’t include the Marts and Depots.

not a hammerLet’s say I’m a manufacturer and I produce a line of hammers that I only sell to independent hardware stores.  I have a full line of these consumer tools including claw hammers, ball peen hammers, and others.  I’ll call this the Alpha Homeowner line.  Within the Alpha line I offer a basic assortment and a deluxe, gold-plated assortment.

To keep production going I also sell a line of professional hammers through industrial supply houses that sell directly to carpenters and other professionals.  I call this the Beta Builder Line.  It has all the same type of hammers, but they’re cosmetically different from the Alpha line.  I don’t offer the gold-plated line-up to this channel.

The problem is that consumers (and builders) are very savvy today.  It’s fairly common knowledge in the tool community that Alpha and Beta are made in the same factory.  It doesn’t happen often, but once in a while, a carpenter will come into one of my retail dealers with questions about  his Alpha hammer.  Some dealers will take it in stride, answer the questions, and maybe sell the customer other merchandise.  Others will be highly offended that they missed a hammer sale, refuse to help the customer, and raise heck with me for selling his “competition.”

The dealer’s suggestion to me is that I stop selling in these other channels.  He argues that with less competition he’ll sell more Alpha hammers, making up for the loss of sales of the Beta line.  But will he?

If I stop selling the supply houses, they’re just going to find another supplier.  Typically, the supply house’s customers don’t shop in hardware stores.  And, consumers usually don’t shop in the supply house either.  So, I lose the business from the secondary channel and gain no sales in my primary channel.

So, putting on my small business hat, should I, an independendent retailer, buy from a manufacturer whose products are available trrough other channels?  I’d say the answer is “yes” with qualifications.  Of course, the big qualification is whether I can make money selling the line.  Or better yet, can I make more money selling that line versus something else?

The Alpha hammer may be available through the supply house, maybe at a local auto parts store, and a few other places.  I may lose an occasional sale.  But, looking at the big picture, is it a profitable line for me, day in and day out?  Is it a quality product?  Do I get support from the manufacturer?  If the answer is yes, then I’d say you’ve got yourself a good line.

Taking off my indy hat and putting my manufacturer hat back on, there’s another 500 pound gorilla in the room that often doesn’t get talked about.  More than three fourths of my retail dealers carry another line of hammers.  They want to offer their customers a choice.  Of course, I have enough hammers in my line between the regular items and the gold-plated series, but the majority of my dealers still devote 1/2 their hammer shelf space to another brand.

All of my competitors do sell the big box stores.  Yet, more than 75% of my customers still sell their lines.  While I give my dealers a protected territory and keep my line 90% competition-free, these dealers still carry other lines.

If my dealers gave me the same protection that I give them, I wouldn’t need the other channels.  Of course, that might mean adding additional models and features, and possibly spending more money on advertising.  It’s really a Catch 22.

In the end, wearing both hats, or no hat at all, I have to say that this whole issue comes down to profitability of the line and to manufacturers and dealers working together.  Both sides have to ask each other (and themselves) how can we reach an agreement that lets both of us make a reasonable profit?  Dealers, do you really need that second line?  Manufacturers, what can you do to make the second line unnecessary?  How can we make this a win/win situation?

In a tough economy, the manufacturer has a responsibility to satisfy all of its stakeholders and keep everyone working.  I say “kudos” to any company who can do that without getting in bed with the big boxes.

Retailers have the same responsibility to themselves and their staff.  Again, I say “kudos” to those of you who can do that and support quality manufacturers who do their best to support you.

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5 Responses

  1. Mike,

    Kudos to YOU for representing both sides of the coin with much forethought included!

    As a Mom and Pop manufacturer of SUN AIRE products here in America, we would ALWAYS prefer Mom and Pop main street indy store fronts selling our products than BBS and/or internet anglers for many reasons.

    Those who are, in our opinion, “still working for a living” by putting their blood, sweat and tears into their home town businesses to make ends meet offering quality products to their valued customers, while supporting the local economy, know what their customers need and most importantly, know the products they sell from back to front and top to bottom.

    They’re not just “dangling the manufacturer’s worm” on the line (internet), hoping for someone to swim by and bite it while never even seeing a worm, buying a worm, or getting a little “dirty” putting the worm on their own hook.

    Our SUN AIRE products lend themselves to “show ‘n tell” just like any quality product. For instance- let’s talk cars again! ; )

    A Cadillac is a car. So is a Yugo. They both will probably get you hopefully from point A to point B….not necessarily in the same way since one will last for years with simple regular maintenance while the other will probably be in the “take it to the metal buyer” catagory before too long. As a car salesman, would you rather sell a Cadillac that makes your customer happy for a lifetime or a Yugo so you have to hide your face when they drive ‘er into the repair shop and are told- SORRY, we can’t fix it! But, you get my point.

    Why build and offer cheaper/inferior products to another “line” of distributors since that’s what got us where we are now- the Made in China lack of quality being distributed in nearly every store front in America today and all of the BBS too… and the mentality that goes with it. Buy it today, throw it away tomorrow. Then, ask themselves what just happened to my hard earned money and my job I used to go to every day? Well DAH!

    If Americans got back to being “Main Street America” again whether you’re a manufacturer or a store front business owner and supported only Made in America products, we wouldn’t have any economic challenges here in this great country we all call home.

    Be the BEST; build the BEST; sell the BEST. That includes American factories building the BEST products they possibly can, creating the BEST jobs where you can support your family and work until you retire, running the BEST store fronts where Mom and Pops can make a living while supporting their local economy….you know….The America Dream!

    Jeannie

  2. Jeannie,

    Thanks for the great response. Like most of the problems in the US today, there are no easy solutions. But manufacturers who truly support independent retailers are the ones I vote for with my dollars.

  3. There is no problem until the manufacturer takes a few of the gold plated Alpha Pieces and puts them with the Beta pieces to sweeten the pot and draw more sales from the Beta distributor. The net effect is it cheapens the Alpha and builds up the Beta. Neither line deserves the change of perception. The Alpha line loses both its Repuation and some of its profit.

    Alpha pieces to Beta dealers are like good street drugs. Its not long befre they need more and are dissatified with beta. Alpha dealers know this. The manufacturer risks losing his Beta dealers if he doesn’t supply them with the right stuff.

  4. Ah, that’s when life really gets complicated, especially if the mfr is at all diversified. Independent reps run into this too. A customer says, “I’m doing $1m in screwdrivers. If you don’t sell me Alpha hammers, you’ll lose my screwdriver business.

    One of my reps once had a customer who was way past due with my company, but the rep wouldn’t help us collect because the customer did big business with one of her other lines. In fact, she wanted us to write off OUR balance so she wouldn’t lose the dealer’s other business. Needless to say, the rep and the customer were soon history.

    Sometimes life just gets way too involved.

  5. […] See original here: Multiple Channels of Distribution « Mining the Store […]

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