Andreas Bauer: "In the foreseeable future, distributing your own products directly online will become the standard and crucial for manufacturers."
Online retail not only offers sales potential for retailers but also for manufacturers. How can retailers and producers subsequently avoid getting into an uncomfortable competitive situation online? Andreas Bauer, CPO of 004 GmbH, argues in favor of a joint online and offline strategy of producers and retail from which ultimately both benefit.
Mr. Bauer at 004 has recently researched the online potential for manufacturers in different industry sectors in a collaborative study with the ECC Köln. In your opinion, what are the main challenges for retailers and manufacturers when they enter into the world of eCommerce?
The most important difference here is clearly the channel conflict that in most cases is more pronounced with manufacturers than retail businesses. Manufacturers often primarily distribute their products via wholesale trade. When manufacturers subsequently plan on entering the world of eCommerce themselves, it translates into a loss of sales for the wholesalers of course. If he or she then removes the manufacturer’s products from his portfolio, it can result in a loss of sales of up to 30 percent, depending on the percentage the wholesaler holds in the respective industry sector – and this can quickly threaten a manufacturer’s existence.
That’s why manufacturers should focus on lean solutions with reduced consumption of resources when it comes to investing in eCommerce to minimize business risk in case of negative sales trends. A retailer naturally doesn’t experience this kind of problem in the same way since he sells directly to the end customer and does not depend on ”intermediate steps“ to generate sales.
What’s more, this is often about very fundamental problems. The manufacturer needs to first get a feel for the wants of the end customers since he was after all primarily focused on wholesale demand until now. The internal processes and structures at many manufacturers – such as marketing for example – are not designed to reach the consumer directly. This requires a certain level of flexibility on the part of the manufacturer, of course. Without the willingness to meet these challenges, however, he won’t be successful in online direct distribution.
What concrete advantages does a manufacturer’s own online direct distribution offer? After all, selling through retailers works pretty well…
The benefit of direct distribution is quite simply the increased profit margin. By avoiding intermediate steps like wholesale trade, I can increase my own profit as a manufacturer. However, you should not forget about the risk a manufacturer takes by investing in his own online distribution channel. This also varies depending on the industry. A fashion manufacturer is able to sell his products directly far easier than a company in the construction industry, for example.
Maturity level of manufacturers in eCommerce broken down to product fields.
Do customers actually want to buy directly from the manufacturer?
At this point, there is a multitude of studies that address this subject. The assumption is that between one and three percent of customers would very much like to buy directly from the manufacturer – trending upwards. These customers primarily hope for better personal service and are generally also willing to spend significantly more money with each purchase.
There are really more emotional reasons as to why customers would like to purchase directly from the manufacturer. That’s why it is important for manufacturers to meet the needs of this customer group, of course. And you have to clearly state that those manufacturers that respond first and focus on this kind of distribution model, gain a major competitive advantage within their industry sector.
The current trend clearly shows that in the foreseeable future, distributing your own products directly online will become the standard and crucial for manufacturers. The time has already come for some industry sectors – today, no fashion manufacturer can afford to not sell his products directly online.
How can manufacturers take advantage of online distribution potential without getting into uncomfortable competitive situations with their retail partners?
The key to success lies in collaboration. The results of our study also show the importance of an integrated online and offline strategy that manufacturers should pursue together with their business partners. A manufacturer’s own online store does not only result in higher sales but also contributes to branding from which retailers also benefit in turn.
The manufacturer needs to be able to also meet customer needs in his own online shop since there is demand for this in this area. However, to avoid cannibalization, the involved parties should focus on cooperation models. That means, they need to develop a joint strategy and both should agree on which product should be sold at what time, where and to whom since this makes it possible to achieve the best possible brand positioning on the market. Simply put, they need to achieve a maximum level of customer focus without any of the respective partners suffering large losses in sales. Of course, this type of balance is difficult to achieve but there is no way around it in the long run.
What industry sectors are already well positioned in this area?
By nature, the development is most advanced in those industry sectors that have always had the strongest end customer focus. Aside from the fashion sector, the areas of consumer electronics, office supplies as well as toys should be mentioned here. Yet there is definitely also demand in the construction industry – many developers simply no longer rely on wholesale prices but also want to purchase their materials directly from the manufacturer.
This actually applies to all of the surveyed industry sectors. This is why it is no longer a question today of whether it is beneficial for manufacturers to set up a direct distribution channel. Rather the question is when the various industry sectors will discover this business model for themselves. Both sides, retail and manufacturer, need to work together – only then can they tap into the market’s full potential.