Piggy in the middle



It has long been one of the great taboos in the OP industry for manufacturers to sell direct, but it is a practice which appears to be happening with increased regularity now.


The attraction for manufacturers is clear. It cuts out the middleman (ie the reseller, thus giving them more profit) and also gives them more control over the product and the opportunity to collect more information and establish closer relationships with their customers. The reseller almost becomes the piggy in the middle.


That is not to say, however, that there are not some very important factors to consider for vendors looking to take this approach. There are some definite channel conflict issues. According to a survey from Forrester Research, in developing online strategies, 66 per cent of manufacturers cite potential conflict issues with their retail partners as their biggest dilemma. But this does not necessarily preclude them from selling online, with nearly all respondents saying that the web was an important channel for them. And of those that already did sell online, 96 per cent say sales either met of beat their expectations.


It is unclear just how widespread a practice manufacturers selling direct from their websites is. For example, Fellowes used to sell its own products online, but it has since performed something of a u-turn, however, and sells no products online, instead directing consumers to resellers’ websites, as many other leading manufacturers do.


However, there are an increasing number of vendors that are adopting this controversial approach. In a Hot Topic two years ago, (see ‘Forbidden Fruit, OPI October 2003, page 44), we reported how Avery Dennison has incurred dealer displeasure at the fact that its website appeared to steer consumers towards the superstores. Now that has moved on to the company selling direct from its website.


It is possible, too, to buy online from a number of other manufacturers including Acco, GBC, Fiskars and Pilot through its partnerships with Suresource, a company which specialises in operating direct-to-consumer business on behalf of national brands.




It was Al Lynden, co-owner of Tacoma, Washington-based dealer Chuckals, who first brought the spectre of permission marketing and manufacturers selling direct to the discussion table some two years ago.


And in the intervening period, while the subject has gradually slipped from the limelight, the problem has not gone away. Lynden remarks: "Although permission marketing seems to be a topic from the past, it is still, in my opinion, a very important issue for our industry today. I am sure that the manufactures are pleased that the issue seems to be dormant, and as it is, many have taken great strides to improve their strategy of selling direct."


While is.group president/CEO Gentile concedes that there are vendors that do sell direct, he says volume-wise it is not significant, and that generally they tend to sell at list price or greater. Even so, there’s no room for complacency and he has this warning for any manufacturer considering a more aggressive push in this direction. "Manufacturers in our industry need not look at short-term revenue initiatives, but continue to look at the long term," he insists.


"There may be times when manufacturers think there’s a short-term benefit in going out and trying to get some direct business, but what they’re doing is detrimentally affecting their real customer which has supported that brand for years – the independent reseller."




Rather than aggressively selling direct to the end-user, Gentile notes that many vendors are rather marketing and advertising to them. A move which he applauds. He comments: "Within the OP industry we have seen some manufacturers take aggressive steps to improve their brand, such as Fellowes, which is doing a lot of print and television advertising.


"I encourage them to continue to build their brand, because for the most part independent dealers focus on brand because we have nothing else. So when a manufacturer advertises brand, that only reinforces the independents’ selling efforts."


By far one of the biggest developments in manufacturers selling direct, however, involves Hewlett-Packard (HP). In announcing in July a dramatic restructuring of its business at a cost of some 14,500 jobs, potentially one of the most significant ramifications for the OP industry and the dealer community in particular was the news that it is to ramp up its direct selling operation, HPShopping.com.


At the same time as announcing its latest initiatives, HP also revealed that it had appointed Randy Mott as EVP/CIO. The pertinent point here is that Mott joins HP from rival Dell, a company which certainly knows how to sell direct!


HP’s SVP of the imaging and printing group Americas, Lee Ray Massey, cut the ribbon at the opening ceremony of the new Boise-based sales centre which, once up to full speed, will employ more than 200 members of staff.


The initial reaction from the dealer community, which has enough challenges on its plate at the moment already, was – understandably – one of concern. And within hours of HP releasing its press release proclaiming the news, the calls were flooding in to is.group’s Gentile.


"It caused significant phone calls into me from dealers saying ‘what’s happening here? Is our HP contract in jeopardy, are they going direct?’", recalls Gentile. "It was typical dealer paranoia, but justified. So many times the dealers build a solid brand for the manufacturer and the manufacturer turns around and sells direct."


Gentile has sympathy for HP’s position, however, and understands the realities and the pressures that it and new CEO Mark Hurd face on Wall Street to compete with Dell.


"In fairness to HP," says Gentile, "it needs to do what it needs to do as a corporation to grow its market share, particularly the enterprise hardware area. It cannot sit back and let Dell continue to grow its market on using a low-cost direct model. And it’s a lot easier to deal with the logistics and fulfilment on enterprise hardware than it is on supplies.


"Will supplies leak through? Certainly, it does now, but as I’ve said to many of our dealers, clearly the independent dealer delivers tremendous value when it services its end user customers.


"And that value has to continue to be paramount, otherwise end users will find other sources for product whether it be direct mail or manufacturers, because those channels don’t add any value. But it clearly doesn’t appear that HP is becoming a huge direct distributor for supplies."




But the fact still remains that it is a model that has worked incredibly well for Dell, so any significant push by HP into direct sales is bound to worry resellers.


For its part, HP has tried to reassure dealer concerns about its intent. Bob Slack, director of partner sales for HP’s US consumer sales division, says: "We are still dedicated to the [independent dealer] channel and this is not a new or different approach that HP is launching."


Slack insists that HP’s business strategy has not changed in any way and that the new site is merely an expansion of its current HPShopping.com sales facility in Cupertino, California, through natural growth. And he adds: "Our channel partners comprise of the vast majority of HP’s supplies business. We certainly value our channel partners and wish to continue to have a beneficial and positive business relationship moving forward."


Lynden is not so convinced, however. "I guess the easiest thing to say is ‘I told you so’, he comments. "A quote from the press release…’HPshopping.com primarily will be filling telesales positions…’. A quote from About HPShopping.com: ‘HPShopping.com offers customers a one-stop shop for HP home and home office products.’."


He continues: "Remember how, when this issue was raised, we were told that the site was really just there to fill a void in customer service, not a threat to the dealer at all?


"Is this called a customer service centre? Are they hiring customer service staff? No, this is a sales centre, hiring telesales people, and what customer lists do we think they might be working-


Lynden is also concerned by the use of terms such as "home office products". He asks: "What exactly are home office products? I don’t know, perhaps I’m being a little paranoid, but it seems that, at every opportunity I have to work with HP on a cross promotion, my customers are only two clicks away from HPshopping.com, and they are constantly enticed by free products to fill in a permission marketing survey!


"How much longer before we see other ‘home office products’ added to the SKUs? Are we going to see HP pens, HP file folders and HP binders? It would be interesting to know what its fulfilment strategy is, as this was another big stumbling block it talked about. I frequently heard, ‘oh Al, you have nothing to worry about’, HP does not have a fulfilment vehicle to address the small average ticket for supplies’. Apparently, now it does. I guess only time will tell."




One large reseller that prefers to remain unnamed on the subject takes a particularly phlegmatic approach to manufacturers selling direct, especially when it comes to HP. He says: "I would be concerned if it were another manufacturer but I am not concerned with HP selling direct. It has had a direct salesforce for a long time, but has failed miserably. The only company that has done well direct is Dell, and that is to the consumer. It is not having such great success at the business level from what I am told."


He claims that buying online directly from the manufacturer would not suit the business community. "Businesses do not have time to wait," he says, "and do not like to ever put themselves in the position to be locked into one vendor as it relates to service."


And he beats on that favourite reseller’s mantra, adding: "We all hate dealing with the cable/energy/phone people from our homes, why would anyone want that same type of service in the office? Service, service, service, that is what business users want. The end user will conceptually think that it is a good idea, but once their contracts are over, they will move away from that type of relationship with the manufacturer."


A point which Gentile echoes. "While selling direct on the web obviously works for some," he says, "my position has always been the same even when I was at Boise. That if your customer feels he can go to a manufacturer’s website and get as good a service as he is getting from us, then I don’t need a salesforce. I’ll sell everything on the web.


"There’s a value that we provide and it is up to us as sales organisations within the dealer community to demonstrate that."


Gentile does admit, however, that he would not be surprised to see HP take up a more visible position in the marketplace regarding a direct-sell model for its hardware. But he suspects that the ultimate losers in this "expansion" will not be the dealer community but the value-added resellers (VARs). He says: "I think the resellers that are most at risk are the VARs. They’re the ones that are selling computer hardware and peripherals to SMEs, and for years those VARs supported very loyally Compaq, as Compaq did not have a direct-sell model.


"Then, when Compaq was acquired by HP they went and supported HP. So if HP takes a more direct approach to that channel, then those VARs will end up finding other products to sell. That’s the challenge and HP has to try and balance it."


Only time will tell as to who the real winners and losers will be, but you can be sure that dealers will be watching HP, and all manufacturers come to that, very closely.