InformationWeek
Defining The Business Value Of Technology
March 27, 2000
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"Our channel has proven its value time and time again," says Richard Steranka, senior director of marketing for small and medium business at Cisco. Cisco sells to such distributors as Ingram Micro and MicroAge through its E-commerce site, Cisco Connection Online. It also operates a Network Product Marketplace for Resellers that lets them verify prices and product information. More than 80% of Cisco's revenue last year was generated through Web sales, but less than 1% of that came from direct-to-consumer sales. "This goes to the root of what we believe the Internet will bring to the economy," Steranka says. "It will facilitate the commerce you're already doing."
Some companies simply prefer to work with channel partners. Whirlpool Corp, a $10.5 billion home-appliance maker, doesn't sell refrigerators or microwave ovens directly to consumers online, nor does it plan to. Retailers provide what Greg Rodgers, national director of the company's E-Whirlpool Web-integration unit, calls "white-glove treatment": home delivery, installation, and sometimes removal of the replaced unit. Whirlpool provides detailed product information and a dealer locator on its Web site for consumers researching a purchase. But it leaves the shopping to established retail partners such as Sears, Roebuck and Co. "People want the showroom experience," Rodgers says.
In some sectors, the Internet has fundamentally changed the role of middlemen, forcing them to prove their value and justify their margins. "Distributors are probably the most threatened player in the sales channel if they don't add any immediate value," says AMR's Parker.
To prove its viability in the new economy, traditional distributor Ingram Micro is redefining itself as an E-commerce services company. Ingram Micro is charging manufacturers a transaction fee rather than taking ownership of inventory and marking it up for sale to retailers. It provides order-management and fulfillment services for some of the biggest consumer-electronics vendors on the Web, such as Dell Computer and Buy.com Inc. It also helps manufacturers sell directly to consumers by providing integration services to tie customers' order-processing systems into Ingram's warehouse-management systems. It also handles tricky online logistics such as returns. The new model better reflects the value Ingram adds--logistics and systems-integration services--making it more valuable to customers. "It's a common misperception that distribution gets disintermediated in E-commerce," says Guy Abramo, Ingram Micro's CIO.
A new breed of Internet distributors whose target market is dot-coms, such as Electron Economy, Escalate, and Fingerhut, are popping up to provide E-commerce services. In a healthy market economy, "the Internet should fundamentally increase transparency of costs, though business partners may band together to mask that," says Julian Chu, a director at Mainspring, an Internet consulting firm.
VF Corp., maker of well-known brands such as Wrangler, Healthtex, and Jantzen Swimwear, is easing into direct selling online. The $5.7 billion apparel maker's E-commerce strategy is backed by a commitment to partner--not compete--with retailers. "We wanted to get our feet wet before the flood tide comes in, since it isn't our normal channel distribution, and selling direct isn't our core competency," says Amy Robinson, E-commerce manager at VF Services Inc., the IT and support group for VF.
So far, Healthtex is the only one among VF's 21 brands sold directly online. Launched in July, Healthtex.com carries the entire children's line of clothing, with 300 to 400 styles represented each season. Because retailers were apprehensive about competition, VF promised that items sold on the site would list for full price and that there would be no promotions or promotional pricing for some time.
VF also pledged to share with its retailers valuable data about customer buying habits. It's what Bob Hoagland, E-commerce manager for VF Playwear, calls a business-to-business-to-consumer strategy. "When we got into this, our goal was to create better brand awareness and learn how to become better manufacturers by learning consumers' needs, desires, and preferences. And we wanted to know how to best partner with retailers," Hoagland says. This channel-friendly, go-slow strategy is getting a good reception from retailers--so far. Armed with online shopping data, for example, retailers may carve out more floor space for certain clothing.
Cathy Hotka, VP of IT at the National Retail Federation trade group in Washington, says retailers are less wary of manufacturers selling direct on the Web than they were 12 to 18 months ago. The retailers understand that online customers don't always jump at the chance to buy directly from the manufacturer. "Retailers' concerns about channel conflict are starting to be quelled," she says. "Although customers like to go to retailers' Web sites, some manufacturers may have underestimated what's involved in selling directly. That's what retailers do, so that's what they're good at."
Retailers can add selection and presentation to the consumer experience, particularly in highly fragmented markets. "Manufacturers aren't very good merchandisers," says analyst Keenan, "so there's always going to be some kind of middleman."
In addition, more retailers are using multichannel strategies--in-store, catalog, and online sales--because they can boost sales. National Retail Foundation members across the board say customers who use multiple channels buy more--in some cases four times as much--as customers who shop only one way, says Hotka. That creates even more opportunities for channel partners. For example, a growing number of in-store, browser-based kiosks offer inventory that's not in the physical store. "Then you have the question of who warehouses it, who ships it, and who handles the customer service," Hotka says. "These things are still being worked out."
As always, the bottom line is pure economics. While an inclusive E-commerce strategy may calm channel anxiety, concessions to intermediaries lower the profitability of the online business. After all, the attraction of selling directly to consumers via the Internet is to reach new markets and to lower costs by eliminating the margins taken by intermediaries. "There's a reshuffling of the value chain, and the line between manufacturer, distributor, and retail are blurring," consultant Chu says. "It's a battle over who's going to own the customer." What isn't clear yet: Is it a skirmish or a fight to the death?
--With additional reporting by Marianne Kolbasuk McGee and Clinton Wilder
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Illustration by Gary Baseman
Photo of Rodgers by David Joel
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