Increasing Profits via Dumping Retailers

Increasing Profits via Dumping Retailers

April 8th, 2011 // 3:56 pm @

Online Retaill

The traditional business model for manufacturers was to make things, advertise them to the public and then sell them to retailers who dealt with the logistics and retailing of these products.

Since the end of WW2 we have seem the growth in massive powerful retailing groups. The biggest company on earth, is not a technology giant, an oil company, it is WalMart, a full 25% bigger than Exxon Mobil.

The power of such retailers is staggering, if you are a major manufacturer and WalMart choose not to stock your latest creation, the chances are it will fail. Without their distribution advertising becomes uneconomic and the whole basic economics for your product becomes difficult.

Therefore manufacturers give the WalMart’s of the world whatever they ask for, in margins, in advertising support, or any other type of financial support. The basis for retailer success is being so big manufacturers need to supply them, and in using that power to drive fiscal margins.

Then came the Internet, and a whole new group of retailers, which quickly consolidated into a few major players, such as Amazon with the same strength in negotiations with manufacturers.

However manufacturers have generally been slow to recognize a more fundamental shift in the economics of retailing. They are used to having some form of retailer between them and the consumer and paying huge margins for that privilege. But what does Amazon or WalMart really do for major manufacturers now to justify their margin – I would suggest very little.

Manufacturers have always done communicating to customers the benefits of their product well via advertising, retailers will ask for and get contributions to their advertising, but that is just a way to raise margins, not to really market manufacturers products.

Selling yourself as a manufacturer over the Internet is now relatively simple now, and very profitable. If you are a TV manufacturer, a TV retailing at $1,000, probably entails you paying over $400 in margin to a retailer. If you sell it direct you keep that margin, effectively doubling your profit on that product.

Secondly the way consumers make decisions is changing, we do not go to retailers to compare products, we go online, where a quick look at independent reviews and consumer feedback, can quickly tell you what is the right product for you. Then to stay online and pick the best way to buy it is simple, even the time delay for delivery is now short.

These new way of buying is not limited to high-end electronics. I needed printer cartridges for my printer this week. My local retailer wanted $175 each, a quick search on line, and I was offered the same branded product for half that, and non-branded equivalent for $25. From clicking yes to delivery was less than 48 hours.

It is interesting that many manufacturers have been slow to embrace this new opportunity? As so often the exception is Apple, who sells 30% plus of their product direct to the consumer, and with their great products, this gives them huge negotiation power when they do use retailers. Put simply Apple does not need any one retailer to succeed, and they know it.

So why are other manufacturers slow to move in this direction, it is a mix of fear and inertia.

Manufacturers are afraid of major retailers and with historical good reason, and retailers who aggressively attempt to sell their products direct to consumers will get a rough ride from major retailers.

As to inertia, we all get use to a way of doing business and we naturally resist change, because doing so feels safe. It is of course the opposite, it is the companies who fail to change that wither and die.

Manufacturers need to overcome their inertia and fear and embrace a few new realities:

  • When consumer reviews circumvent the world in seconds, having truly the best product is a critical advantage.
  • Embrace online review and consumer feedback.
  • Build a web and logistic infrastructure.
  • Make sure delivery is quick and free.
  • Be ready for some tough conversations with existing retailers.

The world of retailing is changing, with or without manufacturers, the clever ones will get on board, the more intransigent ones will suffer.





Category : Blog &The Future

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