Nov 7, 2008

Signs of New Distribution Era Emerging

Signs are everywhere that a sea change is occurring in how branded product makers and their channel partners chart growth strategies together. Many will start moving away form old-school adversarial relationships to find new ways to re-focus on providing consumers with the benefits of trusted brands.

For too long, manufacturers and their dominant distribution partners have danced around the trade-offs that price- and cost-only systems create. The trade-offs are especially acute when a marketplace is supplied by long, overseas supply chains where oversight and quality control are more difficult to assure. While long supply chains are an important part of the global economy, they still demand operating oversight which drives up costs and investment. Contract manufacturers (and distribution channels building their own store brands) are finding out there's more to sourcing than "spec and buy".

  • NYT on risks of cost-only sourcing: a sales manager at a company in southern China said leaded paint was about 30 percent cheaper than paint without depends on the client’s requirement, if the prices they offer make it impossible to use lead-free paint, we’ll tell them that we might have to use leaded paint. If they agree, we’ll use leaded paint. It totally depends on what the clients want.”
  • WSJ on toys supply chain: After a summer of toy recalls, toy licensors and trade associations are counting on stepped-up safety pledges to reassure parents before the holiday shopping season...some industry analysts question the effectiveness of tighter safety measures by companies that own brands and images but may have little manufacturing know-how...licensors have less experience... toy manufacturers such as Mattel and Hasbro Inc. are better seasoned at quality control.
  • NYT on government oversight: A working group appointed by President Bush recommended preventing problems by building safety into manufacturing and distribution, intervening when risks were identified and responding quickly after an unsafe product made its way into the country...Representative Rosa DeLauro [said] the plan should detail how bad actors will be held accountable, how strict safety standards will be developed and enforced, and how such a system would be funded
What's important about this development is the impact it has on total system costs and end prices. It turns out that buyers who came back from overseas sourcing trips exclaiming - "it seems too good to be true" - were spot on. It was, and consumers are getting more and more concerned about who to trust.

In a related development, earlier this summer the U.S. Supreme Court seemed to anticipate such developments when they overturned a nearly 100 year old ruling to give manufacturers the right to set minimum resale prices. Why would the court suggest that higher prices are better for consumers?

The underpinnings of the court’s new reasoning were developed long ago by economists at the University of Chicago who argued that allowing manufacturers to stipulate prices on branded products can lead to greater benefits for end consumers when increased retail margins are used to fund required service levels. In reaching its new decision, the 2007 court acknowledged and embraced this view of consumer market dynamics, and concluded that any given instance of resale price maintenance is now within the law – if the manufacturer can show it has not concentrated market power to drive a supplier or retailer cartel, and if it can show that in setting a minimum price at retail, it is promoting consumers’ best interests and driving up overall demand.

Current consumer sentiment seems to be supportive of the Supreme Court's direction. None of this, however, suggests that manufacturers and their resale channel partners have free reign to drive up prices beyond what customers are willing to pay. But watch for new developments. In the new era of distribution, forward-looking manufacturers and their channel partners will once again offer trusted products at price points required to actually deliver on the brands' promises.

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