Direct or indirect?

Direct or indirect?

Selling straight to consumers may sound like an easy win for manufacturers but there are risks.

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Brands have been selling direct to consumers since the 1920s, when Britannica hired 2000 salesman to sell encyclopedias door-to-door across America. Yet almost a century later, as online sales grow faster than in-store purchases, more brands are seizing the opportunity. By cutting out wholesalers and retailers, they believe they can drive up sales, raise brand awareness and increase their margins.

This trend is not confined to one sector. Food giant General Mills expects e-commerce’s share of sales to grow from 1-2% to 5-6% in the next few years. Nike aims to expand online sales from US$1bn in 2015 to US$7bn by 2020, using 3D printing to offer customization and slash delivery times. The likes of Burberry have flourished, supplementing bricks and mortar with strong online sales.

“Technology enables manufacturers to interact directly with the consumer”, says Peter Liddell, Partner in management consulting at KPMG. “It allows them to access a global marketplace and to move beyond their traditional markets and bricks-and-mortar stores.”

The attractions to manufacturers are clear. Selling direct saves money, reduces logistics and lets them retain margins on each sale. They can also be more price competitive and enjoy more control as the fight for shelf space becomes less acute. Direct access to a wealth of customer data can sharpen marketing strategies.

Yet selling direct will not, Liddell says, suit every brand. Many are looking to move beyond bricks and mortar, not replace it. For most, it’s about finding the right mix. “Not every manufacturer is geared up to manage the end-to-end supply chain”, he says. Distributors and wholesalers manage many strategic and business decisions for manufacturers, such as pricing, effective fulfilment and procedures for handling refunds.

“The key questions manufacturers should ask before they sell direct are: how will they price their products now that they’ve cut out the middle man? And how will they ensure integrity and quality of product through the value chain?” says Liddell. “Manufacturers will have to be sure that when the product leaves their depots, it reaches the customer as expected. If service levels dip, there could be a huge impact on brand reputation.”

While selling direct could work well for giants, Liddell says, lesser-known brands “need intermediaries to help heighten awareness of products.” This is especially true for start-ups. Pure play e-tailers such as opticians Warby Parker and footwear company Zappos grew rapidly selling online but Graze, which started out selling online subscription boxes of fruits, nuts and grains in 2008, now sells around 3m snacks through UK supermarkets.

Manufacturers must assess how selling direct will affect existing distribution channels. Some brands have asked stores to help fulfil orders; others report that better brand awareness has stimulated sales in stores. “I expect direct sales to put pressure on indirect”, says Liddell. “As consumers become more confident that they will receive quality items, direct-to- consumer will really take off. In five years’ time, there will be a fundamental change.”

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