The channel/web conundrum... Another interesting article in today's WSJ. Both Compaq and Dell are mentioned...
John
November 4, 1998
Big Companies Fear Online Sales
May Alienate Marketing Staff
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
The Internet commerce boom is posing a tormenting challenge for many of
America's biggest companies. They are tempted to move a lot of business
online -- but they worry that this new way of selling will betray the
salespeople and distributors who have long kept the cash registers ringing.
At the medical-products unit of Hewlett-Packard Co., an army of 500
sales representatives and dozens of distributors account for sales of more
than $1 billion a year world-wide. For years, this has been a
people-centered business, in which face-to-face meetings, handshakes and
product demonstrations have built customer relationships that translated
into big money.
Now, some leading hospital chains want one-stop shopping on the
Internet, says James Cyrier, H-P's head of medical sales and marketing.
With a few mouse clicks, these customers could buy everything from
ultrasound machines to electrodes without ever seeing a salesman. Mr.
Cyrier is intrigued, but if he moves too fast, he risks a mutiny from his
traditional sales force and distributors, who don't want to surrender their
commissions.
Ticklish Business
Across the U.S., hundreds of manufacturers face the same dilemma. The
Internet could prove to be the most effective sales tool since the telephone,
letting companies reach millions of potential customers quickly and
cheaply. Online commerce is an outright menace, however, to the men and
women who do in-person selling or distribution, and who still control 90%
or more of most companies' order flow. As a result, jittery corporate
strategists are trying to capitalize on the Internet's potential without
sabotaging traditional sales channels.
Typically, it is large corporations in highly
competitive industries that feel most boxed in,
says Vish Krishnan, an assistant professor at
the University of Texas business school in
Austin, who specializes in Internet
applications. Such companies have the most
to lose, he says, because they have spent
fortunes mastering traditional sales methods.
Anything different is a threat to their corporate
culture -- and next quarter's earnings.
Ignoring the Internet isn't much of an alternative, though. Selling online can
slash costs as much as 15% by getting rid of paperwork and sales
commissions. Those potential efficiencies are attracting swarms of online
entrepreneurs. So if established manufacturers don't sell their cars,
catheters or chinos over the Internet, odds are that some upstart will.
Those who hesitate risk being "amazoned," forfeiting business to an
Internet newcomer, in the way that bookstore chains have lost ground to
Amazon.com Inc., the online bookseller.
A Sugar Coating
As a result, producers are engaged in awkward dances with distributors,
trying to develop Internet sales channels that won't rock the boat. In some
cases, that means launching Web commerce sites with no publicity or
limited merchandise offerings. In other cases, it means keeping online
prices high, so traditional vendors can lead the way in offering discounts.
Some manufacturers are even trying to placate dealers and salespeople
with a cut of each Internet sale, regardless of whether they played a role in
generating it.
In essence, companies are sugar-coating what may be the most disruptive
sales transformation in a generation. Corporate executives insist that online
commerce is merely another way to serve the consumer. But sales
representatives and dealers privately question whether they will be cast
aside someday as relics of a bygone era.
At Hewlett-Packard's medical unit, managers have decided that Internet
commerce can't be ignored. In the next few months, they will roll out a
Web site that will let major buyers such as Columbia/HCA Healthcare
Corp. and the Premier hospital-purchasing alliance place orders over the
Internet. At the outset, says H-P's Mr. Cyrier, online prices will be
carefully aligned with those available in other sales channels. Online orders
may still generate commissions for the sales representatives who usually
handle those accounts.
Learning From Experience
"We'll learn as we go," Mr. Cyrier says. "We have a big direct-sales force
calling on hospitals, and it would be very demotivational for them if
customers placed an order through this new e-channel, and they didn't get
paid. At the same time, selling online could be more cost-effective. So
maybe we will end up passing the savings on to the consumer."
In the car industry, Internet-assisted commerce is starting to shake up the
ties between the Big Three manufacturers and their independent dealers.
Traditionally, dealers have enjoyed free rein to boost car prices above
cost, generally collecting 3% to 15% of the eventual sales price for
themselves. So far, auto makers and Internet car-buying services are
merely collecting leads online and sending potential buyers to dealerships.
But some industry observers think bigger changes lie ahead.
In Seattle, car dealer Ron Clauden is keeping a close eye on General
Motors Corp. So far, Mr. Clauden has been a willing partner in GM's
Internet initiatives. He has gained 10 sales in the past year from the Detroit
car maker's Web sites, and GM officials say that cooperative approach is
all they want from online commerce for now. But Mr. Clauden thinks GM
someday might consider taking orders directly and getting rid of
middlemen such as himself.
"I would be disappointed if GM didn't think about that eventually," Mr.
Clauden says. "They've always got to look for better ways to sell cars."
The struggle between old and new sales methods is most intense in the
computer industry and related high-technology fields. There, online
commerce already is a multibillion-dollar alternative to traditional selling. In
Round Rock, Texas, Dell Computer Corp. collects $2.2 billion a year, or
14% of its personal-computer sales, from customer orders placed directly
over the Internet. That helps Dell hold down inventories and costs, giving it
an edge over rival makers of PCs such as Compaq Computer Corp.
"We can't afford to lose business to anyone," says Enrico Pesatori,
Compaq's senior vice president for corporate marketing. In the past few
months, Compaq, which is based in Houston, has rolled out its own Web
commerce site, selling computers at rock-bottom prices directly to
small-business customers and individuals.
A Chunk out of Sales
PC dealers are seriously unhappy about the switch. "It's taking a chunk out
of our business," says Richard Wong, head of Sefco Computers Inc.,
South San Francisco, Calif. His company sells about $8 million a year of
computers, and Compaq used to be a major part of his business. "We still
have people ask us for bids on small-business installations, but we don't
win the orders anymore," Mr. Wong says. Compaq's Internet site typically
underprices him by about $50 a machine, he explains.
Some other PC makers, such as International Business Machines Corp.,
have tried a gentler approach, using their Internet sites mainly to steer
customers to online ordering sites run by long-established dealers. But that
approach doesn't take full advantage of the Internet's ability to wring costs
out of the distribution system. For its part, Compaq makes no apologies
for its more aggressive approach; Mr. Pesatori says distributors should
recognize that all-out use of the Internet is essential if Compaq is going to
stay competitive.
Even technology companies approaching the Internet more gingerly are
amazed at how rapidly sales can take off. In May, Radius Inc. began
online sales of its software for handling digital photos. The Mountain View,
Calif., company did almost nothing to promote its Web site, says Mark
Housley, chairman and chief executive officer, because it didn't want to
alienate its traditional distributors. Nonetheless, within three months, nearly
10% of its sales were coming from the Internet. "The Web lets us try new
promotions quickly, at almost no cost," Mr. Housley adds.
Yet the executive shudders at the notion of trying to turn his Web site into
a heavily promoted discount marketplace for Radius software. Distributors
still provide more than 90% of his sales, he says, and he doesn't want to
risk anything that might hurt their profit -- and perhaps lead them to stop
stocking Radius products.
Software maker Intuit Inc. shares this aversion to online discounting. "We
could decide to market aggressively on the Web," says William Harris, the
Mountain View company's CEO, "but we don't do that, in deference to
our third-party resellers." Intuit for more than a year has offered
best-selling programs such as Quicken and TurboTax on its Web site, but
only at list price. Discounting is left to the bricks-and-mortar retailers who
deliver the bulk of its sales.
Reluctant Converts
Outside the high-tech sector, manufacturers aren't feeling as much
immediate pressure to decide their online commerce strategy -- but the
same tensions loom. "None of them really want to start selling on the Web,
but all of them feel compelled to do so," says Trevor Traina, president of
CompareNet Inc., a San Francisco provider of online shopping
information.
A year ago, he says, most manufacturers viewed the Internet as a way to
disseminate product brochures. Now, they increasingly are devising ways
for customers to place online orders, rather than lose that business to an
online rival.
In the airline industry, AMR Corp.'s American Airlines unit has signed up
1.6 million people who get regular e-mail about cut-rate fares available
that weekend. John Samuel, American's head of Internet commerce, calls
the program "a clear home run." It gives American a quick, cheap way to
communicate directly with fliers and generally lets the carrier avoid the
usual overhead of about $20 a ticket associated with staffing a toll-free
phone bank, as well as travel agents' commissions that run as high as 8%.
As the airline moves into electronic commerce, it must tread carefully to
avoid alienating travel agents or hampering its ability to sell seats at much
higher prices. "We don't want our site to become a haven for cheap seats,"
Mr. Samuel says. "But we will use it to manage inventory." In particular, he
says, the Internet is a great way to sell "distressed inventory" -- the
long-haul Saturday afternoon flights unpopular with both business and
vacation travelers.
Structural Concerns
To some companies, even such limited use of Internet commerce is
unsettling. Minnesota Mining & Manufacturing Co., St. Paul, Minn., lists
hundreds of its products on its Web site, but generally doesn't provide any
way to order them directly from the company. That is deliberate, says
Peter Jacobs, an Internet strategist for 3M.
"We are very concerned about our distribution-channel structure," Mr.
Jacobs says. "We take care not to damage those relationships." Besides,
he says, many customer-generated orders would be too tiny to be
profitable. A single consumer might want two dozen floppy disks, for
example, he says. His company would much rather fill two loading-dock
pallets with computer disks and ship them off to a distributor.
One of the starkest contrasts in online strategy is playing out in the
home-mortgage market. Many big lenders, such as Chase Manhattan
Corp., PNC Bank Corp. and Countrywide Credit Industries Inc., have
begun offering consumers ways to execute most of a mortgage application
online. Doing so is faster and cheaper than the traditional approach of
having a loan officer collect all the paperwork, says Cameron King, head
of Countrywide's Internet efforts. Online transactions now account for 1%
of Countrywide's loan volume, he says, and could grow rapidly.
But the nation's biggest mortgage lender, the Norwest Mortgage unit of
Wells Fargo Co., is fighting the trend. It has built a 4,000-person sales
force, with more branch offices than any of its rivals. Face-to-face contact
is crucial in Norwest's business model; even on its Web site, Norwest
repeatedly tells mortgage seekers to call a toll-free number and talk to a
loan officer.
Not a 'Threat'
For now, Norwest's approach is keeping its powerful sales force happy.
"When we first started hearing about mortgages on the Internet, a lot of
sales people panicked," says Scharol Battaglia, manager of Norwest's
Saratoga, Calif., office. "They thought they'd be replaced. But when you
take care of customers the way we do, the Internet isn't really a threat."
Online competitors say that's exactly what they want to hear. Seth
Werner, chief executive officer of First Mortgage Network Inc.,
Plantation, Fla., calculates that he can originate mortgages online at a cost
of about 0.6% of the loan amount -- about half of what traditional lenders
spend. The biggest savings, he says, come from eliminating costly sales
forces packed with loan officers earning $150,000 a year or more.
If some of the mortgage industry's giants don't want to change their
business models, Mr. Werner says, that gives him plenty of room to
undercut their rates by a fraction of a percentage point, and still do
business more profitably. In the hotly competitive mortgage market, he
says, "the Internet is clearly the future."
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