Channel Conflicts

EMarket Holdings LLC, a Stamford, Conn.-based e-commerce consulting firm, was hired last fall to help a multibillion-dollar chemical manufacturer explore opportunities for selling its products directly over the Web. The company's internal e-commerce team had already recommended direct Web sales as a way to better manage its supply chain and interact more directly with customers, says eMarket co-founder Alyse Terhune.

But when the team presented its proposals to the company's CEO, Terhune says his response was terse: "We've done business with our distributors for 30 years, and I certainly don't want to sell around them. I don't even want to discuss it."

In this niche of the chemical industry, five distributors handle most products, so angering even one could threaten a good chunk of eMarket's revenue. "You had a team charged with exploring the Web as a sales channel, when in fact, the guy at the top was not willing to do it," says Terhune.

Snared in the Web

That CEO isn't alone. He was concerned about channel conflict - when a new sales venue threatens to cannibalize an existing one at the same organization. Channel conflicts have existed for years, but the term has gained prominence in the past year or two as the launch of e-commerce operations has raised a new set of concerns for many companies.

For example, about a year ago, General Motors Corp. in Detroit attempted to buy back some car-dealer franchises as a possible step toward selling directly over the Web. Dealers protested so adamantly that both GM and Ford Motor Co. in Dearborn, Mich., spent a lot of time at a recent industry convention reassuring dealers that the automakers wouldn't sell directly to consumers. And in a recent survey by Cambridge, Mass.-based Forrester Research Inc. of 50 consumer-goods manufacturers, 66% cited channel conflict as the No. 1 obstacle to selling online.

Retailers, too, are often daunted by channel conflict. In May 1999, Bob Moog joined Paramus, N.J.-based Toys R Us Inc. as CEO of its e-commerce site, Toysrus.com. He left after just three months over what he terms "philosophical differences" with other members of the senior management team and is now CEO of AreYouGame.com, a San Francisco-based online retailer of puzzles and games.

At Toys R Us, Moog says, conflicts arose over a finite supply of its most popular items. "I wanted every Sega I could get and every Barbie doll I could get. And the corporation's position was that they had an $11 billion [brick-and-mortar] company, and they couldn't sacrifice that for the start-up. There was internal confusion about how to best maximize both opportunities."

In hindsight, says Moog, Toys R Us executives made the right call. "Twelve months ago, it appeared that to have Toysrus.com come out and be a market leader and to do an independent [initial public offering] would be a very valuable thing for the shareholders," he says. "But now, the market isn't valuing online companies the same way it was then. It's much more important for Toys R Us to maintain and improve its core business. So I think the Toys R Us management team looks smart today for those decisions."

Fashion Statement

Levi Strauss & Co. decided to bypass retailers altogether when it started selling its products online in 1998.

"We launched e-commerce sites for Levi.com and Dockers.com," recalls Jeff Beckman, a spokesman for the San Francisco-based company.

"Fashions were changing pretty rapidly in the late 1990s," he explains. "We saw a resurgence of interest in khaki, and younger consumers were looking for more fashion-forward types of denim products. We saw an opportunity to create relationships directly with consumers."

But Levi courted channel conflict by forbidding retailers from selling its products online as well. Late last year, the company pulled the plug on sales at its online sites, which now offer only information. Instead, the Web sites direct customers who want to buy over the Net to online retailers.

On the other hand, channels can complement one another, so that a successful Web site can have a beneficial ripple effect for a company and its partners. For instance, visitors who go to AreYouGame.com can "ask us about a product, and if for some reason we don't have it available, we ask where they live and we send them to a retailer in their area," says Moog.

"What many retailers fail to understand is that manufacturers' catering to consumer needs online pushes the brand and the product and creates a happy consumer, who in turn will continue buying," says Lisa Allen, an analyst at Forrester Research and author of the channel-conflict report. Ultimately, she notes, customers will decide where and how they want to buy products. Manufacturers and retailers should be prepared to sell to them in the venue of the customers' choice or risk losing them to competitors that are.

"The wise approach is to recognize that the goal is to serve the customer and not to preserve artificial turf boundaries," Allen says. "In some instances, channel conflict should crumble."

Zetlin is a freelance writer in Woodstock, N.Y. Contact her at minda@mindazetlin.com.

Copyright © 2000 IDG Communications, Inc.

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