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March 27, 2000

The Big Squeeze
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Ford also faced off with its dealers at the conference. Michael Baker, VP of the Baker Auto Group Inc., which owns seven dealerships in San Diego, says dealers were assured by Ford executives that the automaker wouldn't sell cars online directly to consumers, now or in the future. "The communication lines seem to be open right now and everything seems to be resolved," he says.

But things could change, and dealers want to stay competitive. Two weeks ago, the National Automobile Dealers Association disclosed its intention to create its own online sales portal. NADA plans to launch its car-shopping Web site next month, giving consumers access to new vehicle prices, an online inventory of new and used vehicles, and links to used car trade-in values and dealer Web sites. Eventually, NADA hopes all 19,500 of its dealer-members, or about 90% of the nation's new-vehicle dealers, will be accessible through NADAdealers.com.

Because the site will feature invoice pricing, NADA's move is a major break from the past, when dealers were loath to disclose their costs for cars and trucks to consumers. That decision, as much as the move to create a consumer car-shopping portal, demonstrates the dealer group's recognition that the Internet is now a mainstream tool for auto buyers. And regardless of whether the NADA portal succeeds, it shows manufacturers that more has to be done to ease conflicts. Ford partnered with Trilogy Software Inc. last month to develop and operate Ford.com, an E-commerce platform dealers can use for their own sites. The as-yet-unnamed company will use Trilogy software, including content-management, needs-analysis, and customer-relationship management tools.

Many companies have no choice but to start selling online. Avon Products Inc., the $5.3 billion cosmetics company, has to counter moves by archrival Estee Lauder Inc.--which sells its products directly through Clinique.com and Origins.com--as well as compete with online beauty startups such as Eve.com and Gloss.com. Avon.com is relaunching its 3-year-old Web site in June and expanding offerings from 400 to 7,000 items. Avon.com will offer its customers online consulting, product samples, and delivery through E-representatives by referring them to a rep's home page. Avon says it's committed to giving its 500,000 U.S. sales reps--the legendary "Avon Ladies," most of whom work out of their homes--a role in 95% of its sales, including online sales. Next month, Avon will begin a "conversion process" to move its reps in the United States to the Web.

Len Edwards, president and general manager of Avon.com, insists the representatives are eager for the online opportunity. But many are worried about the effect on their commission checks. The most a rep can make from an online sale is 20%, while in face-to-face sales they can earn as much as 50%. They make nothing if an online customer purchases without the help of an E-rep.

Photo by Michael DiFilippo Mary Stevens, a full-time Avon representative in Burbank, Calif., has sold Avon products for nine years and earns about $75,000 annually. She's concerned that Avon, which is also opening retail stores, is slowly phasing out its one-to-one sales approach--and its reps. If nothing else, Avon's online moves may make it difficult for Stevens to win new business in the future. "If you have your eyes open, you've got to be concerned," Stevens says. "Mary Kay isn't my competition. Avon is."

The Internet is also on the verge of transforming the conservative insurance industry, where nearly 100% of transactions are handled by 1.8 million U.S. insurance agents. According to the Insurance Institute of America, agents take an average of 11% of every deal. To compete with Internet startups such as InsWeb and Quotesmith.com, which aren't bogged down with overhead costs for local offices or agent commissions, Allstate Insurance Co. is ramping up its E-commerce site and will start selling insurance over the Web in May. To fund the project, Allstate has laid off 4,000 employees--about 10% of its workforce.

Though the layoffs were mainly in administration and underwriting, agents remain leery of the online operation. They're also concerned that Allstate pays agents a 2% commission to provide face-to-face service to customers that get quotes over the Web, vs. the customary 10%. "The concern that agents have is slicing the pie into smaller pieces," says one Allstate agent who requested anonymity. "The market is only so big."

State Farm Insurance Co., with $41 billion in revenue, is taking a cautious approach. It's quoting renters' insurance rates on the Web in some states through its site and other sites such as the Microsoft Network's CarPoint and HomePoint, InsWeb, and NetQuote. But to close the deal, customers must contact a State Farm agent. "You need to have the best of both worlds," says Bob Reiner, unit manager of State Farm's enterprise Internet services. "We still think insurance is a complicated product and needs the counsel of an expert."

Channel conflict can make a company rethink its online strategy. Levi Strauss & Co. pulled the plug on its E-commerce site last year mainly because of backlash from retailers. The $5.14 billion company became an E-commerce pioneer in 1998 when it launched Levi.com and offered online consumers custom-made jeans delivered to their doorsteps. Levi Strauss appeared to be ahead of the E-commerce curve when, just a year later, the company ceased selling online and turned all Internet sales opportunities back to retailers with Web stores, such as J.C. Penney and Macy's. While the company insists retailers were supportive of its online operations, better relationships with retailers were the main reason for its change of heart.

Still, despite the potential for friction, most companies are going forward with E-commerce efforts. In a recent survey of 50 consumer-goods manufacturers by Forrester Research, 66% indicated channel conflict was the biggest issue they faced in their online sales strategies. Despite that concern, however, half of those surveyed already sell online-- and two-thirds of those not selling online plan to within three years. "Retailers have gotten over the fact that there will be channel conflict," says Seema Williams, a Forrester analyst. "Now they have to manage it."

To mitigate problems, companies are broaching the subject with channel partners to figure out how to work together and support both online and traditional sales. The 3,650 franchise dealers that sell 90% of the automotive tools and equipment manufactured by Snap-on Inc. are concerned about Snap-on's self-service Web site, which is now used by more than 100 customers. Disintermediation issues are being discussed at meetings of Snap-on's national advisory council, and the 16 council members are sharply divided over Snap-on's Web initiatives, says Ray Moore, director of franchise operations at Snap-on. "Some are very excited and interested in exploring the different opportunities that the Web might present," Moore says. "Others are computer-phobes who are opposed to everything because they don't understand it."

Some industries are locked into working with their channel partners. In the electronics industry, equipment makers have never attempted to address distribution, logistics, sales, and customer service; they've always relied on sophisticated fulfillment channels for that. Electronics retailers are "unlikely to get disintermediated," says AMR Research's Parker. "Manufacturers are looking to strengthen the channel rather than circumvent it."

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