There’s a war raging in global business markets these days between those that make products and those that distribute them. And the stakes of turning distribution into a zero-sum game are rising fast. At risk is the position, power, profitability – perhaps the very future - of branded product manufacturing.
After years of doubling down on cost, efficiency, sourcing, and operations, alarm bells are going off across the landscape of powerful global product players.
The reason is that more and more consumers and business customers are dissatisfied by rampant commoditization and sameness in their product acquisition and service experiences. These customers are demanding more fulfilling ways to learn about, compare, buy, as well as own, use and maintain new products.
In today’s markets, real differentiation occurs far from plants, warehouses, and advertising meetings. It’s happening in end customer’s total buying and owning experiences, and it’s created downstream - by distribution.
For manufacturers, it is no longer enough simply to supply. Increasingly, they also need to find win-win ways to become involved in the distribution of their products.
One reason is that distribution remains a virtual greenfield of untapped distinctiveness. Another reason is that large distributors have gained sufficient scale to tip the balance of power away from manufacturing. Understanding a product’s end customers better than the distributor that makes the ultimate sale is the best way to rebalance supply chain partnerships. Manufacturers tightly focused on a subset of the product breadth carried by dominant retailers and wholesalers have unique category insights, competencies and resources that can be laser-focused to create improved distribution experiences for end customers. A third, and to our minds predominant, reason is that adopting a genuine distribution mentality implies sharpening the company’s focus externally on end-customers.
Apple Inc. provides a sensational recent example of a manufacturer innovating its distribution. Over several decades, Apple has built an awe-inspiring track record of product innovation. Frustrated that its products weren’t being sold effectively, Apple attacked the problem head on and created a network of best-in-class stores virtually over night. Even though consumer electronics is crowded and mired in price wars, Apple’s retail sales-per-square foot, gross margins and ‘zero to $1 billion in revenue’ speed have set U.S. records for acceleration.
After building a new direct channel from scratch, Apple then proceeded to dominate indirect distribution channels, and in an entirely different product category.
Leveraging fever-pitch interest in its new iPhone, Apple dictated terms to wireless commutations carriers. It told them how to market, where to sell, what to price, and more. The new precedent effectively restructured conventional third-party carrier handset distribution. For any manufacturer, let alone one new to a category, to seize such command of distribution is unheard of. To do so in both direct and indirect channels is as amazing as it should be inspirational to branded manufacturers.
And consider the case of German power tools maker Stihl, which has been running a provocative advertising campaign under the banner: Why is the world’s number one selling brand of chain saws not sold at Lowe’s or The Home Depot? With competitors fleeing small, local channel partners for the promises of obscene volumes from these national Home Center chains, the question posed in Stihl’s ads is more than a rhetorical one. But the company knows that more sustainable market share and profitability growth can occur only if their retail system outperforms on seven specific customer experience needs. These needs, Stihl believes, are best met through independent Dealers. So far, at least, it appears they are right.
While tools competitors are struggling to avoid being elbowed off big box shelves by private labels and imports, Stihl and its dealers are enjoying sales growth well over 10% annually and price premiums the rest of the market envies.
What is the lesson? We believe it is that to be successful, branded manufacturers must absolutely be in distribution. But we’ll all be distributors is a state of mind, not a matter of ‘owning’ every channel. Stihl certainly does not, and even Apple does not go that far with the iPhone. In fact it is usually a mistake for a manufacturer to forward-integrate into distribution (or for that matter, for a distributor to backward-integrate into manufacturing). These two business models call for very different competencies, cultures and investments.
Still, the model for branded manufacturing going forward seems to be that strong, proactive market winners get involved downstream.