The traditional role of a manufacturer is to mass-produce products and sell them in bulk to retailers (or distributors) who provide the infrastructure and services to consumers that wish to purchase these products in the retail market. There has traditionally been a sharp distinction between the wholesale market and the retail market. However, the advent of online retailing and drop-shipping has blurred these lines to a point where manufacturers are now active competitors the retail market.
In the past, this was considered a no-no. For a manufacture to sell direct to consumers meant losing their wholesale accounts, as well as tarnishing their reputation as a reputable manufacturer. Over the past few years, many manufacturers have struggled with the notion that they’re doing all the legwork (product development, purchasing, warehousing, shipping, etc.) while drop-ship retailers are reaping all of the benefits oftentimes at a higher margin than the manufacturer themselves make. We’re finding that more and more, manufacturers and distributors are turning to retail eCommerce websites in an effort to expand their customer base and increase sales. And who can blame them?
It’s a scenario that many online retailers are going to face time and time again in the near future (if you haven’t already, consider yourself lucky). How they’re doing it is the interesting part. Most of them will setup separate business entities to run these sites in an attempt to cover up the fact that they are selling directly. So “technically” they aren’t selling direct, but they drop ship for this “other company” that happens to be run by the same management (or even a parent corporation).
So what’s the big deal?
Imagine yourself as an online retailer of the ever-popular example blue widgets. You buy them from Blue Widget Manufacturing, Inc. for $10 a piece. They may be drop-shipped, or you may even inventory them yourself. Factor in your costs, and markup, and maybe you sell that Blue Widget for $20. You’ve sold it successfully for years, and found it to be a very popular product with your customers. All of a sudden you notice a trend that sales for these blue widgets are declining – is the fad over with? Has their popularity diminished? Are you losing sales to a competitor? Only then to find a new website, bluewidgetsdirect.com and are amazed to see that they’re selling the exact same blue widgets for $10 – your cost! You look in comparison shopping sites and see them listed right next to you – at half the price! How many consumers do you feel are going to buy it from you when the next guy has it for half the price? Who are these guys and how are they selling blue widgets so cheap.
When you find your products online selling for your cost or close, the first thing you should investigate whether you’re dealing with a retail website of your supplier. One dead give-away that you may be competing with your manufacturer here is if all of the products on the site is only from the same manufacturer. Most manufacturers want to increase the sales of their products, not a competitor’s, so they may only carry their brand. Aside from that, if the manufacturer has covered their tracks in an attempt to appear un-associated with this retail website, there’s a few things you can check:
- The address: If it’s in the same city, or even close to the manufacturer consider that a sign.
- The phone number: Call it, see who answers. Many times they’ll just setup a toll free number and direct that to their office where the same secretary will answer both lines. Get the name of the person you’re speaking to, then call the manufacturer to see if it’s the same.
- WHOIS: Perform a WHOIS query on the domain, see who has it registered. If they were smart, they would have listed it privately.
- Use a tool such as DomainTools.com to run a search against that domain and compare against the manufacturer’s website. If the IP addresses are close, or if it’s using the same host those can be giveaways as well.
- Read their policies: Many times these sites will use the same return and privacy policies and forget to replace one company name with the other when they perform the ol’ cut and paste job.
- Use Yahoo! Site Explorer to see who links to the website. Chances are, in their SEO linkbuilding efforts of the retail site they created some links on their existing manufacturing website to the new retail site. If that’s the only retailer they link to then that’s a good indicator.
- Use a Corporations Search (like this one in GA) to find more information about the company running the retail website (if you know the company name).
If these tactics lead you nowhere, ask your sales rep at the manufacturer directly. I’ve had people tell me “no it isn’t them”, or that it’s just a customer they drop-ship for, and a number of other fallacies. But after conducting an hour of research I was able to gather enough evidence to prove otherwise.
Not only is the manufacturer violating the inherit trust established in a manufacturer – retailer relationship by competing against their customers, they’re also low-balling the retailer by selling at, below, or even near cost vs. selling at full MSRP. On top of it all, they’re hiding the fact that they’re selling retail because they know it is going to piss off (excuse my french) their retail customers and in many cases lying to the customer in an attempt to cover up these practices.
I can’t think of an online retailer that wouldn’t be disturbed by the fact that their manufacturers were selling direct to consumers at a lower price. You’ll find this practice much more prevalent with manufacturers who do provide drop-shipping services. If they’re setup to handle individual orders then they’re one step closer to selling directly themselves. You’ll find that manufacturers that ship in bulk only avoid single product shipments like the plague. They’re inefficient, costly, and a drain on their resources. For that reason, they’ll be much less likely to sell retail directly.
This situation is likely to cause strain on the retailer – manufacturer relationship. In most cases, if the manufacturer is already selling online, you’re going to have a tough time trying to get them to stop unless you’re one of their top customers and you threaten to stop purchasing from them. I think the goal in this scenario is to try to at least get the manufacturer to level the playing field by selling at full MSRP to give you a price advantage, or, to give you better pricing so you can attempt to compete with their direct retail site pricewise. Either way, the manufacturer’s have a distinct advantage so it will be interesting to see what direction this takes in the next few years.
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I’m struggling with this on the retailer side now. The manufacturer’s primary interest is to scoop up all of the internet business that they can. They undercut MSRP, hide the connection between the wholesale operation and the retail operation (though with hardly a straight face). They offer some products EXCLUSIVE to their retail outlet, i.e., certain colors, sizes, and products are not even made available to their distributors. Or, if so, only at a wholesale cost that makes that item impossible to sell competitively. It is only technically available to distributors.
They scoop up the wholesale business that they can, because that money pays material, packaging, and overhead costs for producing the lines. This, in turn, allows them to cut the throats of their distributors, using these profits directly against them, because of the massive direct to retail profit margin that just kills distributors. This manufacturer controls over 40% of the retail market and it is climbing.
However, this practice also damages the brand and the market by narrowing what is already a specialty niche. A raft of motivated distributors can sell far more product than they ever will develop on their own. Everybody loses in the end. We would very much like to get into these product lines, and see real potential for expansion of the entire market. Their are areas to significantly expand the niche. However, if the manufacturer can kill us on price, and offer exclusive product not even available to us – we just don’t know how to make this deal happen. The ethics of the manufacturer totally violate the idea of win-win. We are their customers, and they are aggressively targeting ours.
Great post!
This is a major problem for my employer. Our manufacturers are not only selling direct, they are also starting to charge exorbitant drop-ship fees. Meanwhile, they also benefit from all the money we spend advertising their brand through pay-per-click ads.
On the other hand, many manufacturers who have not started selling direct online are stuck in the past when it comes to their distribution models. They get hung up on the concept of “territories” and can’t fathom that having an online business means you can sell nationally.
vendors/ mfgs selling direct is akin to your spouse/partner sleeping around. They lie , they hide, they do everything they can to not be upfront. I’ve been a “partner” WITH SOME of my vendors for 30 years and now they are steeling customers and then say “it’s helping your bidness” they all suck big ones. IMHO. I’ll be glad when I’m out of retailing and my customers can just deal with the manufacturers. Like everyone wants. I’ll not have to work another race or deal with any one face to face. Hope it works out manufacturers
I agree with Larry; ethics, morals, and integrity are out the window. Greed rules with manufacturers; they forget quickly who got them where they are. I have helped build a particular business up and decided to only sell that product. Now that I have helped them establish themselves they are calling on my clients with their own salesmen. Business owners listen up; do not get in bed with a manufacturer unless you can have your name on their product. Branding is the ONLY way to protect your interests.
This is a well-written piece and still as relevant as ever. But let’s take it a step further. If we aren’t exceedingly careful in our high-tech shopping and business practices, I foresee a future in which ALL the middle men are cut out — not just traditional Brick & Mortar mall type stores but web businesses, too. In the quest for ultimate efficiency and profitability for the few who are positioned in the right place at the right time, a Build To Order Economy may not be such a stretch of the imagination. People said that Compact Discs would never be broken down into a song-by-song sales format, but Napster did and iTunes later legitimized the practice. Just as music stores are mostly gone, so too will most forms of retail wherein there are large warehouses or retail stores filled with merchandise for which there is no pre-arranged buyer. So in much the same way we have video-on-demand we’ll have Manufacturing-On-Demand. How many people is that going to put out of business? It’s a sobering thought, but my gut says that’s the direction our appetite for this virtual shopping mall will take us in the long run.
Look at how the trend is already shaping up:
1) Higher gas prices. The Los Angeles Times published an article at the beginning of March 2010 about how oil refineries, who were just busting profit records a few years ago, are looking to PERMANENTLY reduce refining capacity to boost profits. Industry experts justify this by saying that the baby boomers are retiring and aren’t using as much gasoline to commute, people are buying fuel efficient vehicles, etc. What the article fails to mention is that fewer people are driving because they are shopping online. So what starts out as less demand, which should make prices diminish, is becoming an excuse to cut off supply so prices will increase. So for now we’re shopping online because we want to, in the future we may shop online because we HAVE TO (and not because there are still better-priced bargains to be found). So after all these years of criticism that we here in the U.S. have too few domestic crude oil refiners, they’re going to give them the axe. That spells higher gasoline costs, and that spells higher SHIPPING COSTS and that spells less advantage to shopping over the Internet. Therefore…
2) As gasoline prices creep up, traditional B&M stores that also have websites will decide NOT to transport so many goods to market because that costs too much money if the consumer demand does not appear to be a sure bet. So guess what? Now they EXPECT more and more of their inventory to appear online so you HAVE to order it there OR drive long distances to their “flagship stores” for an “expanded inventory”. When the dust settles, the “truckers” that will still have jobs will be UPS and FedEx drivers — not the long haul big rig drivers of today.
Example: Just a few years ago in my suburban community, a well-known anchor store in a nearby mall closed for remodeling. When it reopened, it was using just one floor out of the two it originally sold product on for over 30 years. Somebody I know who went shopping there complained that the store no longer even carried women’s slips. The sales associate directed the shopper to go online or to drive to another city in another county to find what they no longer felt justified the square footage it occupied. THIS, folks, is the wave of the future. The problem is, just when most of us become accustomed to buying more and more online the prices of shipping are going to head up, the legislatures are going to start getting everyone who currently doesn’t, such as Amazon, to collect sales tax and this just won’t be that great of a way to shop for the frugally-minded even as the business owners find their Internet storefronts increasingly less profitable. This, in turn, ultimately leads to the temptations for manufacturers to start selling direct to the public! So…
3) By the time the above has transpired there will be more mass layoffs and store closures. Even Big Box retailers will have shuttered a lot of their locations. So here we are with higher gas prices and we have to DRIVE or otherwise pay transportation costs that are increasingly steep. All the while, the online alternatives won’t look quite as rosy as they do today. End result? Massive inflation. Bye-bye bargain hunting!
Conclusion
We can’t do anything about the oil industry but we can skirt around the cascade of unwelcome trends that adversely hit our wallets and small business profit margins by realizing that online retail should be a component of the economy, not a replacement for B&M storefronts. We should strive for methods of commerce that complement each other rather than totally destroy each other. We will be in dire straights if everyone takes these online shopping trends so seriously that even at the traditional retail operations that appear in our cities and towns today are scaled back to point where retail and warehousing jobs begin to go the way of automotive manufacturing jobs in the 1980s/1990s. We can’t afford an economy in which there are increasing rounds of “market concentration” for that level of “efficiency” isn’t opportunity — it’s a noose for the economy and the consumer alike to swing on. Rampant retail market concentration and online consolidation will only mean that the “new” high prices are not only in the B&M stores but online, and the stores that once appeared on every street corner scale back their nationwide coverage to just about nill.
I don’t want to see wholesalers put e-tailers out of business, and I don’t want to see retail stores use online shopping trends as an excuse to make it near impossible to shop locally or to force consumers at a time when gas prices begin to skyrocket to drive long distances just to obtain the basics of day-to-day life. If we have a society that is TOO consolidated in the way it approaches consumption, that can only mean that the jobs will par down too — and we the average Joe and Jane making MORE money, not less, if we want them to spread the wealth around — which is the very prerequisite to making entrepreneurial dreams possible. There’s too much at stake to justify a “Build It To Order” or “Manufacture On Demand” commercial environment, in which the wholesaler, retailer and the web store all fall victim to this contract between the buyer and manufacturer.
I write about this topic in my March 2010 weblog “The Price of Cheap: The Hidden Cost of E-Commerce”. By that title I am not trying to single out e-commerce as a villain, only this idea that if “everybody’s doing it” we can relegate traditional retail to the status of the Drive-In Movie Theater, the Print Newspaper or the Video Rental Store. We cannot and should not create the very economy that ultimately destroys us just by our business and shopping practices! I don’t think most people envisioned the Internet as “evolving” into a jobs killer, but that is, unfortunately, what I foresee of the “Big Picture”. If we don’t want our landscapes to become a monotony of bars, liquor stores, fast food joints and laundry mats — increasingly devoid even of the big players we take for granted today — you can be sure that the little guy doing business online is not far behind. We need economic expansion — not the loss of all that seemed familiar and much of the jobs, both online and off, that went with them.
Great article and love the posts, too!
I am a brick and mortar retailer as well as an e-tailer in the gift industry. Over the past ten years, I’ve seen almost every single one of my manufacturers morph into including direct online retail into their business. I don’t blame them, terms like “greedy” come to mind but aren’t really applicable in our country, they have the right to sell as much stuff and to whomever they can.
Retail is a tough line of work as is…whether paying sky high rents for “location, location, location”, there’s employee costs, internal and external theft, pricing/displaying/cleaning…I can’t even really talk about it all or I start to realize I make about 1.00 an hour for all the work it takes.
My most recent encounter with the “wholesaler becoming your competitor instead of your supplier” is pretty tough. I sell their line on my website, but as do not “brand” their items, merely offer them as part of my mix. Sales are great, they also offer them through their own website, but in my case I don’t think customers are only shopping for their product…they are shopping my entire collection of items (a mash up of incredible hand picked goods from hundreds of vendors) but stumbling upon them and adding to cart.
The real problem started when after 2-3 years of strong sales, they’ve emailed me a “dealer agreement” that now states we all have to say in our descriptions that the product is designed and manufactured by them and we also have to call each of their items by the name given to them in their catalog, not any titles made up by us.
I am pretty revved up about this one.
They don’t seem to understand that part of being a unique retailer in my market is the mix…sources and wholesale information are heavily guarded like Grandma’s fudge recipe. You just don’t put it out there for your competitors to see. I don’t want to put their company name on it.
Secondly, I don’t like their product names. They don’t do them justice and wouldn’t appeal to my customers. Third, and most important, I think their “dealer agreement” is simply a ploy to get more direct traffic to their own retail site. Anyone with an ounce of web seo savvy knows that if we all call things the same names and use the same keywords, they’ll add to their traffic and since they’re the manufacturer, will most likely get top rankings.
It’s complete BS from my position. I don’t understand why they don’t offer any compromise, like we could brand all their items as theirs on our sites, and they in turn could point the retail sales to our sites…the RETAILERS. Duh, seems like everyone would win. I could live with that arrangement. They claim that it’s only to “prove to the customer that it is authentic and made by them”. The funny thing is no one cares who they are! They’re shopping at my site and buy things without knowing anything about what factory it came from.
So I’ve made the difficult decision to discontinue the line.
The beauty of it is that my mix is always changing. If I don’t feel like selling something, I don’t have to sell it! They are the ones that have to keep reinventing their limited product line. Pissing off their wholesale accounts doesn’t seem to be the brightest way to keep their line going.
I fully accept that the retail/wholesale lines are blurry now, especially online. The part I won’t accept is buying product from a company, do free advertising for their retail/competitive website by being forced through new dealers terms. Forget it!
Thanks for reading my post. If any of you have good points to bring up that I haven’t thought of, write back. I’d love to see it with fresh eyes.
Here’s to retail! (image of me, flipping the bird inserted lovingly here)
Before you buy from a manufacturer you should get some type of an agreement that they will not compete against you in the US, I make this very clear with my manufacturers in China although my products are in the US and China so I have some type of protection even if they try to resell anywhere in the world and you should get these types of agreements.
The problem I have is China selling products that will compete with my products on ebay and on internet sites, this means all American retailers and wholesalers will be competing with China for sales.
This is going to destroy the US economy and place millions out of work.
The US government is standing by watching not doing a thing like a bunch of retarded farmers watching the crows eat all the corn on their crops thinking there just using the corn stocks to preen themselves.
A crime is being committed selling direct to the US public from China bypassing distributors or US inventors of those products.
The US consumer is cutting their own throats buying from China direct, One person on here says they should have the right to sell to anyone they want, well all I have to say to you is how would you feel if China set up a service repair company in the US and did the work for 1/2 what you charge, or why not hire a million medical doctors from China for 1/2 price and get rid of the high priced US doctors, and lets have the Chinese take your job!
It should be against the law for US consumers to buy direct from China manufacturers having the products delivered to there door!
China does not realize what is going to happen when there are no more US consumers with money because they have no jobs to buy from anyone!
We have mentally Challenged people running the US government allowing the Chinese to rape the US people and if we do not do something about it WORLD WAR 3 will be here while I am still alive, more than likely it will be Germ Warfare, releasing a horrible virus in China by someone who lost there job at a lab because nobody can afford to pay anyone to work because nobody can afford to buy whatever they are supplying.
The US government must place laws in place now! banning the purchase and transport of products sold over sea’s that are not sold to resellers but sold to consumers who have no resale license and do not pay import taxes like resellers like myself have to pay.
Randy.
Chinese manufacturers and wholesalers are selling directly to the US public over the internet!
This company sent me an email offering goods by bypassing the US retailers and wholesalers: http://www.goodgoodstrade.com/
This will destroy the American retailer and wholesalers, pretty soon all companies will go out of business because they can not compete with the Chinese selling to the US public!
The end is near! soon a virus will be released in China to save the US people, you know something like that is going to happen if not the US will just be filled with a kill to survive public.