DOES D2C HAVE TO MEAN DISINTERMEDIATION?

By Jess Brunette June 20, 2016 Industry features & issues

More and more suppliers are offering direct to consumer sales. Can this model coexist with their retail partnerships or are we heading toward a showdown? Jess Brunette reports.

To view a PDF of the complete feature as it appeared in Wares magazine, click the download button at the bottom of this page.

The word “disintermediation” is defined thus: “The elimination of intermediaries such as wholesalers or retailers in business transactions between producers and consumers”.

Around the world, many household name suppliers are already selling direct, either online or through their own showrooms – or they’re looking closely at it.

What about New Zealand? Are we looking at disintermediation in whiteware or consumer electronics here?

To find out, in recent weeks I spoke to suppliers, some of whom are currently offering direct to consumer (D2C) options as well as keeping their ranges in-store.

For good measure, I also spoke to suppliers who are sticking with the traditional model, and a range of retailers to complete the loop.

While many were forthcoming about their feelings on D2C, some of the largest players in supply and retail wished to say little or nothing on the subject, on or off the record, which should give some indication of the sensitivity and timeliness of the subject.

Fortunately, albeit off the record, many others were willing to share their feelings on the D2C model and how it could work – or not.

 

D2C – A VIEW FROM THE OUTSIDE

For an outside opinion, from an informed observer, but one with no commercial axe to grind, I turned to Jon Copestake, Lead Analyst, Data & Research, at The Economist Intelligence Unit.

Can direct to consumer sales coexist successfully with sales through retailers, either online or bricks & mortar?

“Direct selling is a much underutilised retail channel, although, with the rapid development of online and mobile commerce as well as the sophistication and penetration of bricks & mortar stores, it is also seen as something of an anachronism,” he says.

“Given that most firms favour a ‘multichannel’ approach to retail channels, there is no reason why direct selling cannot co-exist with other channels.”

Jon Copestake also laid out some of the arguments for and against a D2C model. First the pros:

D2C is “a channel that goes out to the shoppers rather than the other way round. By being proactive in seeking out customers, it also provides an engagement story that raises brand awareness and operates as both a sales and a marketing tool.

“It is also a style of selling that eliminates the competition. Direct selling monopolises the consumer and creates a window of opportunity to leverage access into upsells.”

The cons are also well established:

“Direct selling can be as alienating as it can be encouraging. It is labour-intensive and will rely on payment of commission. It also has a fairly low success rate – consumers go to shops because they want to buy something. Bringing a product to a consumer when they don’t want something is less likely to yield sales.”

 

D2C – SIMPLY A SIGN OF THE TIMES?

For a take that is closer to home, I ask Greg Harford, Retail NZ’s GM Public Affairs, if the association’s members had expressed concern with emerging D2C models.

“In New Zealand we haven’t heard too many concerns about suppliers selling direct to consumers. Retailers compete with each other all over the place, so in that sense suppliers are becoming retailers and it’s just another dimension of the competitive landscape we are in.”

Does Harford buy into the argument that a supplier can operate in D2C and retail without disadvantaging their retail partners?

“A key point is that when a supplier is selling directly to the public they are retailing. So that is good for the retail industry as a whole in that there is more dynamism in the market and more competition. But, obviously, it may not be to the advantage of individual retailers who are facing a new competitor.”

What of the appearance in recent years of previously D2C-only floor care and food prep products on retail shelves? I ask Greg Harford if this has changed the rules.

“Those products are a good example of a product that has reached saturation through one channel to market and is therefore looking to others and going into stores – that’s part of the natural dynamics of any product as the market matures and it becomes more popular.”

 

SUPPLIERS AGAINST D2C – LET’S STICK WITH WHAT WE’RE GOOD AT!

D2C is a highly sensitive subject and one which made many I spoke to uneasy at best when asked their opinion, retailers in particular. But what do the suppliers think? Here are some sound bites:

 

“I’m not keen on D2C. The reality is that consumers, certainly in consumer electronics, want to be able to touch and feel products and experience them and you would struggle to do that yourself unless you have a buttload of money to set up retail stores.

“Selling direct to the consumer means that you have to do distribution yourself, have your own lines of credit and ship stock from A to B and be experts at that.

“Or you can partner with people who are good at that and make sure it’s a win-win and the same goes for your retailers.”

 

“D2C can always be done wrong. If you go too hard, you actually attack the people who are meant to support you. Then you end up being on your own just owning a shop and no one buys your brand.”

 

“At the of the day you are either in the business of dealing with your consumers or your channel partners and I think businesses who think they can do both will probably end up being mistaken.

“So you have to understand what your business model is and work with that. The complexities of dealing with consumers require a completely separate model, with specialists in website sales or retailers who are trained to look after the consumer so you don’t want to get mixed up.

“Currently, our interaction with the consumer is informative – in terms of adding that extra level of service, setup instruction, and warranties – but in terms of adding value at the coalface for our products that tends to happen at the sales floor level.”

 

“We would never sell direct! TV is probably a good medium for driving demand at retail but our strategy is pretty simple and that’s to channel all our business through our retail partners. We don’t want to be seen undermining our retailers so we’re keen to support that.”

 

“We currently sell direct internationally but we don’t have any plans for New Zealand and that, to be honest, really depends on the support and loyalty we receive from our retailers.”

 

“We’re not looking at selling direct on TV or online and certainly not domestically. We enjoy the relationship we have with our retail partners and we have no plans to change that.”

 

SUPPLIERS FOR D2C – NOT JUST COST-BENEFIT ANALYSIS

Not all the suppliers I spoke to were as politically correct about D2C, with rebates and never ending requests for marketing support among the most frequently mentioned reasons for adopting a D2C arrangement.

 

“In order for us to invest the way that we do on TV and build a brand we do have to sell direct to the market first to get better margins for it.

“But what that enables us to do is to spend a lot of money on TV, build the brand equity and then go to store and we’ve been quite transparent about that with the retailers. While it’s a unique model, in my view, the better that we are able to communicate that to the customer the better.

“Direct selling is a sensitive topic out there but I don’t think it needs to be.”

 

“Any brand exposure is good for brands so if a brand is promoting itself, as long as the retailer isn’t disadvantaged and can match price, I don’t see the problem with it.

“But retailers want it all – they want you to supply them and not others and do everything yourself and then they will turn the tap off when it suits them. At the end of the day, they’ve had it their own way for so long and it’s going to start biting them.”

 

“You can only do 60% off on products if you are relying on the rebates behind the scenes – and rebates are the thing that has buggered up this industry!

“The irony is that the retailers are the ones making these changes by selling ‘As Seen on TV’ products. Now they may have got some percentage of that market but it actually drove the whole market backwards and changed the game and the people who were hurt the most were the suppliers who have helped them all these years.

“If your retailers aren’t going to support you, then we are going to have to search out other ways of selling. They think they have the right to choose their own brands but they have to remember that every time they do that it chips away at relationships.”

 

“I think most suppliers would tell you off the record they have a mandate to achieve D2C in some way as much as the retailers have a mandate to develop their own private label products. So there’s an element of risk mitigation and achieving business objectives there on both parties.”

 

“It’s important for us as a brand to have a direct dialogue with the consumer because ultimately they are paying the bills. And sometimes the message we want to communicate isn’t what the retailer wants to communicate so we have decided to take control of that conversation with the consumer.

“My view is that most bricks and mortar retailers do that with their own private label business so this is no different.

“D2C is not about ripping revenue from one place to another – no supplier I know wants to do that. What’s the point?

“Yes, there will be some savings in the supply chain but, ultimately, everybody wants to grow their revenue and, if it’s not to be had in bricks & mortar retail, then where?

“For the future, those who can maintain and even make small gains in bricks & mortar and don’t disrupt that with solid growth in online D2C sales will be the ones that do well.”

 

“We have such a broad range that the retailers only stock 3-4% of our actual product range. So where does the consumer go if they want something a wee bit specialised or unusual? So, rather than sending them offshore, let’s keep the money in the country!”

 

“If we have products that are not available in retail, they need to be accessible somewhere. Maybe they are end-of-line products that we want to clean up and then the rest we leave for retail.

“So we have an online shop but it’s not something we focus on – we don’t advertise and we don’t go direct to customers in terms of attracting people to our website. We just make it available.

“The market has definitely changed. I think most suppliers now have some sort of direct presence and if I said five years ago that was going to happen it wouldn’t be an easy conversation.

“But I think most retailers these days accept they aren’t going to carry full ranges and, as a consequence, import some products themselves and accept the fact that some suppliers are going to have some supply direct to market.”

 

“D2C is a global trend and those who don’t want to shop in bricks and mortar will use TV shopping and online. It’s all about ease of use for the consumer.

“However you need to be a trusted brand with quality products to gain any share unless you are pumping a lot of marketing dollars in. And if you are pumping so much money into marketing, how much does the product really cost and has quality been sacrificed?”

 

“We will be selling direct both online and TV direct – it’s inevitable. However what our retail partners need to understand is our products need to be demonstrated and explained. That’s their home advantage.

“We won’t be discounting or selling below retail. So, when you add P&P, it’s actually more expensive and that also leaves the retailer to secure the sale.

“And there will always be a place for the retailer when it comes to more technical or more expensive products which the consumer needs to touch and feel in person.”

 

 

RETAILERS AGAINST D2C – OVER MY DEAD BODY!

What do the retailers think? The following is the reaction of a range of independents and senior store managers at national chains.

 

“I suppose D2C could coexist with sales on shelves but it’s going to upset a hell of a lot of retailers. Direct selling is just not on. And I don’t agree with it at all!”

 

“The suppliers that don’t have the same level of strength in branding as Apple are where I can see the conflict happening. The retailer can say: ‘If you don’t have a strong brand in the marketplace and you’re selling direct then why should I stock you?’”

 

“We have had some issues in large appliances with these ‘commercial rates’ where builders in town are getting products from our suppliers, often at better prices than we are getting!

“They come here and want us to stock their product but I know damn well they pop down to the local kitchen cabinet maker who doesn’t stock it at all and offers them a cheaper rate!

“Because of that, they have very little presence in our store and never will.”

 

“It’s not all black and white. I think it comes down to a partnership between retailers and manufacturers.

“It’s like a marriage. If they are running off having affairs you are going to get pissed off – unless it’s an open marriage of course!”

“No retailer can benefit from a supplier selling direct and I think it’s absolutely criminal that a supplier would use us as a showroom then supply it directly, more often than not cheaper than they would supply to us. For example I now have a customer that can buy heat pumps $400 cheaper than I can!

“If a supplier is selling directly against me, I would be dropping them. If they want to be online retailers, let them be online retailers and then see who supports them when they have problems. Because they think they can do it themselves, but they can’t.

“They think they’ve got customer service with people sitting on phones but that doesn’t work for a little old lady, especially when that person doesn’t talk the right language. And I’m having a barnstorming time down here – three huge months in a row – good loyal customers just walking through the door because they aren’t getting that anywhere else.”

 

“It’s not all about brand – it’s more about getting the right solution for the customer from end to end and I just don’t feel you can successfully do that with D2C.

“We love Apple but a customer wants someone to teach them about it and set it up for them which we offer. People love iPhones but they may not want a case that costs $150 whereas we have other branded cases and accessories that we can offer.”

 

RETAILERS FOR D2C? – NOT TOTALLY OUT OF THE QUESTION…

As we’re seeing there is no real black and white around this subject, simply shades of grey… What about the retailers who don’t dismiss D2C out of hand?

 

“In principle, I’m not against a supplier selling direct and having a presence in retailers – provided that the arrangement is transparent.

“The retailer would also have to be able to compete price-wise and not be undercut by the supplier, who’s able to charge the consumer less, having taken out the retail margin, rebates and the like.

“However, if a supplier couldn’t furnish any of the above, then that brand would disappear from our stores pretty quick smart.”

 

“D2C could be complementary to retail – in some stores there is only so much you can stock and you can’t be everything to everybody, especially in provincial towns. You have a lot of write-offs because this doesn’t happen and if you try to complete you are going to have a hard job.

“With direct selling, all businesses are going to have to be part of it. We are working on our own site and our guys say to us, get the peripheral stuff there not the expensive stuff. Tell them you’ve got the expensive stuff but let them come in see, feel and touch it and sell the small stuff direct.”

 

“I think a supplier can sell direct and through retail but it depends on how it’s done. It also comes down to the strength of your brand. Apple put you through hoops but it works because it’s an extremely strong brand that I can sell off into other brands.

“Also, they don’t discount, so the price you buy from me where you can come in and touch it and play with it is the same as when you get it direct.

I don’t think it does any damage at all, it actually probably promotes the fact that Apple is up there on a pedestal.”

 

“There are a number of manufacturers and distributors I am aware of today that don’t deal with retail chains because they know they will just get copied.

“So they try to build relationships with independents but the independents can’t deliver the volume they want. So there is an incentive to find other ways of distributing and online D2C does give them that option.”

 

CAN WE MAKE IT WORK?

As you can see above, while some players make absolutely no bones about their opposition to D2C models, most of the people I spoke to for this feature actually felt that it was far from a black and white issue.

Perhaps the most important takeaway from my conversations over the last few weeks is the importance of maintaining fair and honest business relationships between supply and retail partners.

With competition increasing and more suppliers inevitably taking on their own D2C channels, it’s those players that can make both direct and retail to consumer work who probably stand the best chance of surviving.

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