E-Commerce Bullies

Dec. 21, 2004
Big retailers whip manufacturers into (off)line.

If there's one thing manufacturers are learning about business on the Internet, it's that the big retailers -- the companies they've always depended on to sell the bulk of their products -- can be e-commerce bullies. From Robert Bosch to Maytag, from Rubbermaid to Stanley Works, most manufacturers have shied away from offering consumer products for purchase online. Instead of using their Web sites to sell so much as a screwdriver, these companies refer potential online buyers to brick-and-mortar retailers, suggesting that they "click here to find a dealer nearest you." Although some call it "channel conflict," for those manufacturers of consumer products that have tried to use the Web as a new way to make a buck, it's more like being pushed around by the big kid on the block. "Obviously, the major retailers are feeling threatened by the Web," says Mike Davis, vice president of marketing at DeVilbiss Air Power Co., a Jackson, Tenn.-based unit of Pentair Inc. "They've been very bold about this, and those manufacturers that have tested them have been punished." Rubbermaid Home Products' experience is a case in point. Up until a year and a half ago, the Wooster, Ohio-based household-goods manufacturer, a division of Newell Rubbermaid Inc., sold a wide array of products online. Today, the company's Web site has been stripped of its e-commerce capability. Now the site offers customers only a "wish list" of products. "You will be taken to our products page and can then select a category and view details of the product," the site suggests. The company hopes the consumer will print out the list to "take to your favorite store." Why did Rubbermaid quit as an e-retailer? "We had been selling online, but then a year and a half ago Home Depot sent a letter to most of its suppliers," explains Robin Roberts, manager of creative services who is in charge of Rubbermaid's Web site. "That's when we decided not to sell online. It jeopardized our relationship with the brick-and-mortars that are our customers." Now when consumers check out www.rubbermaid.com they find the following terse message: "In order to avoid competing with our retailers, it is Rubbermaid's policy not to sell its products online." Roberts, for one, believes most manufacturers don't sell products on their Web sites for the same reason as Rubbermaid. "They probably all have the same thing going on that we do --their customers have told them they can't compete with them by selling online, or they'll pull their products from their stores," he says. "It's that simple. It's purely an economic decision." With markups for distributors and retailers often representing 50% of the cost of some consumer products, it's no wonder the idea of manufacturers bypassing the retail chain frightens a lot of folks -- provoking some to grab their cudgels in defense. DeVilbiss' Davis believes price is the engine driving the conflict. "As attractive as it may be for us to increase our margins by selling direct to consumers -- we'd love to have that extra $70 on a $200 item -- we don't want to risk losing our major retailers," he says. DeVilbiss, which makes power washers, compressors, generators, and pneumatic tools for consumer use, sells through a number of large retailers, including Lowe's Home Improvement Warehouse and Home Depot. For its part, Home Depot takes the view that it is not pushing anyone around. The company says it merely recommends that suppliers to its stores not sell their products to consumers over the Web. "We suggest that they not sell online," says Jerry Shields, Home Depot public relations officer. Another unabashed e-commerce tough guy is Wal-Mart Stores Inc. If your company happens to be one of the thousands that sell through the giant retailer, woe be to you if your firm is caught selling products online directly to consumers. "Once our suppliers sell online, they become our competitors," says Melissa Berryhill, Wal-Mart public relations officer. "And we have to reevaluate their having access to our retail system. But they may or may not be prohibited from selling in our stores. If they are viewed as a competitor, it's going to be decided on a case by case basis. But I don't know of any companies that are selling both ways," in Wal-Mart stores and via the manufacturers' own Web sites, she adds. The giant retail chain does, however, take orders for many of its suppliers' products on its own Web site. The bottom line is, if you want to continue to sell your products in Wal-Mart stores, don't sell them over the Internet. As the Wal-Mart media relations staffer puts it, "We're not telling our suppliers how to run their business, only how we're going to run ours." The situation is not without its own irony for some manufacturers. Suppliers to Home Depot, for instance, are not permitted to sell online without risking having their wares tossed from the giant home-center firm's stores. Yet Home Depot as of August 21 still was not selling online, except in a limited test with selected participants in the Las Vegas area. In other words, for manufacturers that sell exclusively through Home Depot, their products are unavailable online to most consumers. Another manufacturer that tried -- and stopped -- selling over the Web is Levi Strauss & Co. Two years ago the jeans manufacturer began selling on its own Web site. At the same time, retailers that sell its jeans in more than 3,000 stores were proscribed from selling Levi's- and Dockers-brand clothing over their Web sites. Despite doing a brisk business online for about a year, Levi Strauss, which has struggled with declining sales since 1996, stopped selling over the Web last January after getting complaints from the big retailers that sell the bulk of its products in their stores. Today customers still can purchase Levi's jeans online, but not through the Levi Strauss site -- they're available via the cyberturf of retail giants JCPenney and Macy's. One manufacturer willing to rock the distribution boat to get its feet wet in e-commerce is Herman Miller Inc., a maker of office furniture and some home furniture products. "We have to figure out how to work in this new arena or we're going to be left behind, because business is not going to be done the same way it has been in the last generation," says Bruce Buursma, corporate communications director. Headquartered in Zeeland, Mich., Herman Miller has experienced brisk online sales. "Thousands of our Aeron chairs have been shipped one or a few at a time to customers who ordered online," Buursma says. By electing to sell over the Web, Herman Miller incurred the risk of upsetting long-standing relationships with its affiliated dealer network, including 30 non-company-owned retailers. One advantage it had, though, was that there was no nationwide "Furniture Depot" to contend with -- no single retailer that controlled a huge chunk of its sales. The company also sells its products through an additional 200 independent dealers. "Some of our dealers were cynical and suspect early on, but now they get it," Buursma says. "They are pretty smart folks. They realize they are going to have to refine their package so that they are not just a middleman getting a markup, but a provider of true value, including services, expertise, and knowledge." In part to mollify dealers, but also as a practical matter to facilitate the delivery of products to larger customers, Herman Miller hands off most major online purchases of office furniture to the local dealer serving that area. For the smaller "ones-and-twos" orders, the company ships products directly via common carrier, while alerting the local dealer to the sale as a courtesy. Other companies are looking for ways around the giant retailers. While not a traditional manufacturer, Blue Diamond Growers, a bulk almond producer, also packages almonds for resale by the big supermarket chains and other grocery outlets. The agricultural cooperative will begin offering a limited array of about two dozen almond gift packages and other items in September over its Web site. "We have some experience selling with our catalog, and we have been shipping products to consumers from our three grower stores for some time," says Christine McGlasson, director of Blue Diamond's consumer foods division. Even so, the $500 million Sacramento, Calif.-based cooperative has engaged an e-business consultant and a third-party logistics firm to support the effort. "We feel we have to be on the Internet selling goods," McGlasson says. Blue Diamond executives don't expect any heat from the big grocery chains as a result of their e-store. "The retailers we do business with haven't complained about the grower stores we operate, so we see no reason they would complain about the limited product line we'll be offering on the Internet," says Lawrence M. Dicke, vice president of finance and CFO at the co-op, which represents 4,000 California almond growers. Blue Diamond takes the view that price is the key to the conflict and has sought to ensure that any products it sells online will be priced at least 20% higher-including shipping costs-than those found in retail stores and in its own outlets. Says McGlasson, "If we had a pricing issue-if our e-commerce pricing was lower than our lowest-priced retailer-then they would be upset, and they would have a right to be upset." Admittedly, some manufacturers would be out of their element selling online, because they have little, if any, experience with the complex demands of retailing. "Manufacturers are good at building brand relationships with consumers, but they're not so good at building retail relationships with consumers," says Atlee Valentine Pope, president of Blue Canyon Partners Inc. business-strategy consulting firm in Evanston, Ill. Adds her colleague, Blue Canyon CEO and chairman George F. Brown Jr., "Even Coca Cola has a different corporation to handle its distribution." Another issue is whether it's worth it for manufacturers to go to the effort to set up the order-taking, filling, and shipping infrastructure. "It's mainly a competency issue," Brown says. "We are seeing a lot of companies that are very happy to have other intermediaries handle those processes. " Neil Hastie, chief information officer at TruServ Corp., which operates some 7,000 True Value Hardware stores and other retail outlets with $18 billion in retail sales, agrees. "A manufacturer can take a consumer order, but he doesn't know how to deal with handling credit cards and other credit issues," Hastie says. He believes that manufacturers that try to sell direct to consumers "could stub their toes very hard. If they are willing to take the hit in the retail channel to try to sell online, that's one hell of a business gamble." True Value's online sales represent less than 1% of the total. "But if you're not in online sales, you're conspicuously absent," Hastie adds. No one, manufacturer or retailer, can afford to overlook the potential of Web-based sales of consumer products. Toysrus.com last year did $51 million in online sales. Similarly, smaller retailers are find-ing the Web a lucrative channel, too. For instance, at Home Lumber Co. in Whitewater, Wis., a two-store, family-run business offering power tools and other goods for contractors and do-it-yourselfers, online purchases yield 15% of the company's total sales. "We get referrals directly from DeWalt and Makita," says partner Geoffrey Hale. In the computer business, of course, Dell Computer Corp., which had no brick-and-mortar stores or retail network from the get-go, sells vast numbers of personal computers via its Web site. No retailers, no problem selling direct to the customer. Many in manufacturing admit that it's just a matter of time before most consumer products will be available online, shipped directly from their makers. "That may be true down the road, say three or five years from now," concedes Blue Diamond's McGlasson. "But right now in America we have a system that goes through distributors." Some manufacturers aren't waiting for the change to happen-they're leading it. Last year Nike Inc. began taking orders for custom-built, personalized shoes over its Web site, shipping products directly to consumers' homes and bypassing retail shoe outlets. Personalized shoe orders through its Nike iD initiative take two to three weeks for delivery to the consumer, while regular shoes ordered out of inventory through Nike.com are delivered in a few days, shipped from a Nike distribution center. For now, though, most manufacturers would prefer to cross over to the other side of the street rather than challenge retailers for a piece of the e-commerce sidewalk. "Certainly, someday it [will be] a possibility to sell direct to consumers, and the capability is there now," says Art Learmonth, director of manufacturing, engineering, and logistics at Maytag Corp. in Newton, Iowa. "With us, going direct would mean competing with our existing customers, and that's not something we want to do. "

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