From partner to rival

Toy manufacturer Hasbro sees the Internet in much the same way many business-to-consumer catalogers regarded it a decade ago: as a new sales opportunity. The Pawtucket, RI-based company recently broadened its marketing model as more consumers began searching for “Hasbro” online to buy its products, says Edward Kriete, senior vice president of marketing and sales.

Now in addition to selling to retailers, the manufacturer is selling direct to consumers through a Website, HasbroToyshop.com, launched in May 2005, and its first shop-at-home catalog, dropped this March. “It’s part of our long-term effort to communicate with consumers,” Kriete says.

A growing number of other manufacturers are coming to the same conclusion. From brand superpowers such as Levi-Strauss and Nike to dozens of smaller players, all sorts of manufacturers are trying their hand at direct-to-consumer sales, particularly as it has become easier than ever to launch a Website or find experts to manage direct sales and fulfillment.

“From the manufacturer’s perspective, it makes sense to be in as many channels as you can — but without alienating the others” who market your products, says Jim Padgitt, president of Mount Pleasant, SC-based consultancy Direct Marketing Insights.

While the phenomenon may be a win-win for manufacturers and end users, resellers often have a different perspective. The more b-to-c sales the manufacturers nab online, the more they stand to offend their retail partners, who’ve been marketing their products for years.

“Some distributors have this feeling that manufacturers are supposed to be loyal to them,” Padgitt says. “They’re not in favor of anything that has the potential of working to their detriment. It’s this overt fear of competition.”

The notion of manufacturers selling direct isn’t new. The concept, sometimes referred to as disintermediation because it removes intermediaries from the supply chain, was bandied about with gusto during the dot-com boom of the late 1990s. The theory went that cutting out the middleman would allow manufacturers to sell their goods for less, giving them a competitive advantage.

“In the ’90s there was a lot written and said about the prospect of manufacturers doing their own thing online and what impact it would have on retailers,” recalls Tim Lyons, spokesperson for Plano, TX-based general merchant J.C. Penney Corp. “Now we can see that the brick-and-mortar retailers were the ones who were able to build their business and really sustain their franchise online.”

Levi Strauss & Co. was an early case in point. It first tried selling direct to consumers online in fall 1998, only to pull out in early 2000. “It was a lot of effort for not a lot of gain at the time,” says spokesperson Jeff Beckman. For one thing, many consumers still weren’t comfortable buying apparel via the Web at that time. For another, Beckman says, “for a company that was used to shipping truckloads of jeans, selling one and two and three pairs at a time was very different.”

In fact, Padgitt believes that manufacturers that move out of their core competency to market direct to end users aren’t likely to succeed on their own, because of the vast differences in communicating with and fulfilling orders for consumers than resellers. But those that hire marketing expertise “have a pretty good chance of competing with their retailers,” he says.

San Francisco-based Levi Strauss certainly believes that’s the case. When it reentered the e-commerce arena this past fall, it outsourced the consumer Website’s execution and fulfillment to King of Prussia, PA-based e-commerce solution provider GSI Commerce.

Keep ’em happy

If you’re a manufacturer expanding into direct-to-consumer sales, you need to make a concerted effort at keeping your resellers happy. One way to do so is simply to be open and honest about your plans. Being straightforward “can take some of the sting out” of your decision to sell direct to consumers, Padgitt says.

So don’t let your resellers find out about your b-to-c expansion by accident. “If you were to find out through a direct mail flier that your supplier was selling the same product to consumers as you were, that would be an emotional blow,” Padgitt says. “But if you got an e-mail or a letter prior to the company announcing their decision publicly and having them explain to you why they don’t think it will have any effect on you, that would take a lot of potential issues off the table.”

As part of the explanation, make it clear that your b-to-c operations aren’t designed to compete head to head with those of your retail partners. If you’re targeting a somewhat different customer — say, grandparents who buy the toys you produce as gifts for children rather than the children and their parents who frequent toy stores — you can help to ease their mind. “Just because I can be successful selling Hasbro toys off the Website doesn’t mean people won’t continue to go to Toys ‘R’ Us and KB Toys,” Padgitt says.

Another way to set resellers’ minds at ease — and to let them know that your going direct may benefit them — is to include a dealer locater on your consumer Website or a list of resellers in your print catalog. Levi Strauss, for one, doesn’t receive complaints from its resellers about selling its full line of jeans on its own direct-to-consumer Website, Beckman says, because it continues to advertise resellers’ online stores.

What’s more, says Patrice Varni, director of Internet and consumer marketing for GSI Commerce, the Website “engages people in the brand and builds the equity of the brand, which tends to have a halo effect for everyone. It increases sales across the board.”

Hasbro’s Edward Kriete agrees: By building awareness of the company’s products, Hasbro’s e-commerce site should benefit all merchants who carry its merchandise. “Talk to any multichannel merchant and when they drop a catalog, they will see a pick up at retail,” he says. “It’s all about driving our incremental sales overall and not about trading off with our retail partner,” he says.

Mixing it up

You can also use merchandising strategies to show resellers that you are not in direct competition with them. For example, you might want to offer resellers slightly different versions of the items that you plan to sell on your consumer Website. Simply adding accessories or changing the color selection can be enough to differentiate an item “so that the distributor can’t say you’re selling exactly the same thing I am,” Padgitt says.

Sid Kerber, of the Catalog Consultancy in Boca Raton, FL, agrees. If you want to get into direct sales, you need to differentiate your offerings so that you’re not taking away sales from your original constituency. A shoe manufacturer he’d worked with accomplished this by selling only a limited number of its styles and colors direct to consumers. And in its outgoing packages, the company included a brochure listing retailers that carried its products.

“We were helping the retailer by letting the customer know where to go for additional items,” Kerber says.

Conversely, placing the URL of your direct-to-consumer Website on the packaging of products that you ship to resellers isn’t helpful to retailers at all. Steve Spangler, who sells educational toys to consumers via his Steve Spangler Science catalog and Website, says he stopped buying rocket balloons from Cold Spring Direct when he saw that the company had plastered its Web address on the products and their packaging. The problem, from Spangler’s perspective, was that buyers would go directly to the manufacturer’s site for refills or to buy a second device instead of coming back to the merchant. Spangler still carries rocket balloons, but he buys them from D&L Toys for about $3 more than Cold Spring Direct charged.

For his part, Cold Spring Direct president Chris Gackstatter says he wasn’t aware of any merchant who had a problem with his labeling. Besides, he says, his company is the one that revived the popularity the 50-year-old balloon-and-pump product, which is not trademarked, due to a direct-response television campaign that showed it in action.

“We started the Website as a place to order the product from our TV commercials,” Gackstatter says. But since the commercials, in his view, inadvertently helped Gackstatter’s competitors as well, “we really have to spend time trying to protect our quality and our name” — hence the Web address on the packaging.

But to Spangler, that’s trying to take a follow-up opportunity away from the merchant that sold the product in the first place. “I print the catalog, mail the catalog, take the initial order, fulfill the order, then when the customer gets it and they’re out of the balloons, who do they turn to? They look at the outside of the package,” Spangler says. “I can’t survive on a one-time sale. It costs me too much to obtain the customers.”

The issue has made Spangler more careful. His buyers now ask vendors whether they sell direct to end users, what their pricing policy is, and whether their Website is prominently displayed on their packaging. “You have to do a lot more investigating before you write an order,” he says.

Paying the price

If you’re a manufacturer looking for a surefire way to alientate your resellers, just try selling items on your own Website for less than the suggested retail price.

“We have a problem with vendors that actually compete with us,” says Marc Whitehouse, co-owner of Austin, TX-based children’s apparel merchant BestDressedKids.com. While he doesn’t mind manufacturers who use their Websites to liquidate overstocks, Whitehouse won’t do business with those that sell first-run merchandise, especially if it’s priced below the standard markup or comes with a free shipping offer.

“We’ll stop buying from those people,” Whitehouse says. “We’ll support the vendors who don’t do that.”

Whitehouse estimates 5%-10% of the 100-150 vendors he buys from now sell some of their merchandise direct to consumers online, often seconds and overstocks. “They’re trying to cash in on the e-catalog craze,” he says. “They see there’s some success in it, and they’re trying to get into it themselves.” Some do it discreetly, he notes, operating a Website under a different name “so they don’t draw attention” to what they’re doing.

Spangler, who was a manufacturer/wholesaler of educational science kits before launching Steve Spangler Science, understands the conflicts from both sides. When Spangler is marketing a science kit that he sells wholesale for $10, he says, “it’s tempting for us to put it online for less than $19.95 and beat the competition.”

But he resists the temptation. Instead Spangler assures the merchants he supplies that he will price his products on his own Website at the same suggested retail price they’ll likely use — that is, with a 50% margin. If the resellers choose to sell for less, they can. But he won’t undercut that price.

Spangler learned early on from other distributors that merchants don’t like to do business with manufacturers who compete with them. The conflict helped convince him to sell his Be Amazing Toys company in 2004. The manufacturing business, which now operates under the name Be Amazing, still commissions Spangler to create toys, but if he wants to sell the innovations in his Steve Spangler Science catalog and on his e-commerce site, he must buy the items for the same wholesale price as any other merchant, he says.

“Somebody has to address some etiquette in terms of what to do,” Spangler says. E-commerce has attracted so many novices, he says, “It’s like cowboys riding in the wild, wild West. All of a sudden anyone with an Internet connection can have a store — and some don’t have the ethics or experience.”


Wilmette, IL-based freelanc writer Ann Meyer has written for The Chicago Tribune and Small Business Review, among other publications.

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