by Beth Stackpole

No More Channel Conflict

Feb 15, 200115 mins
BPM Systems

Reader ROI

* Find out why disintermediation didn’t happen

* Learn how companies have reflowed distribution channels in the wake of e-business

* Understand how new types of online entities compete with dotcoms

When Polaroid first floated the idea of a B2B website for its commercial imaging customers, company execs began talking about how Polaroid could use e-commerce to cut out its dealer channel. Eliminating trading partners, proponents of the B2B site argued, would give Polaroid more control over how its products were sold and, better still, pad profits by absorbing the dealer markup. Yet once Polaroid e-commerce managers started factoring in costs for things like inventory management and logis-tics, the math just didn’t add up. Polaroid was no more equipped to ship, bill and service products than its dealers were to manufacture photographic goods.

“In a matter of weeks, we realized we were not going to do a wholesale channel disintermediation,” says Jim Barron, vice president of Internet development at Cambridge, Mass.-based Polaroid. “The reality of having to bill and ship goods is what we really had to think through. We quickly realized that whatever margin we’d recover from disintermediating the channel would be eaten up quickly” to cover those costs.

Instead of excluding dealers, Polaroid embraced them. Last June, the company launched, a site for commercial customers that delivers information and demonstrations on products such as film, cameras and digital imaging equipment. Customers don’t actually close a transaction over the site. Instead, they use it to comparison shop, and a dealer locator capability provides maps and directions to three local dealers where products can be purchased.

Some business customers do want to buy online, however. For them, Polaroid used the Web to reflow its dealer channel. Polaroid accredited about 20 of its top U.S. dealers to support a “Buy Now” capability?essentially a hot link on the site that takes customers directly to the dealers’ websites for completing the transaction.

Already, the Buy Now function on has translated into about three or four sales a week for Bernie’s Photo Center, a Polaroid distributor in Pittsburgh, according to Bernie’s president, Bruce Klein. Klein says he’s not surprised that Polaroid and other manufacturers like Eastman Kodak and The Global Olympus Group are exploring programs to bring the dealers into the e-commerce loop. “It’s always in their best interest to keep the dealer structure and distribution the way it is,” he explains. “They don’t want the headaches of dealing with individual sales?someone giving a bad credit card or a shipping address going bad. Polaroid is a manufacturing company, not a direct-sales company, and they realized that off the bat.”

Polaroid seems to have hit upon a win-win proposition that is increasingly resonating with Net businesses. Although many early e-commerce initiatives flirted with bypassing long-standing channel relationships, the focus has shifted to finding ways to empower partners and make them an effective piece of a company’s online sales operation. Often this means rethinking the structure of channels and re-creating them to make the best use of the Web. A year or so into the online game, companies are realizing that creating and marketing a Web storefront for B2C or B2B commerce is the easy part of the equation. The other key pieces, customer service and fulfillment, are a whole new ballgame for companies?one most are not fully equipped to handle.

Far from being disintermediated out of existence, distribution channels remain essential, but they need to be updated for the Internet age, says Dan Garretson, a senior analyst with Forrester Research, a market research company in Cambridge, Mass. “Most industries are finding that the [distribution] channel actually serves a valuable role, and the issue is now what changes have to be made and what has to be done to have the channel better support them,” he says. But that’s not to say a vendor can afford to let its upstream manufacturers do all the work. Channel partners that don’t reinvent themselves to become more efficient and add value are always in danger of being cut out. “Refining roles is where the conflict now lies,” Garretson says. “If an activity is not adding value, it will ultimately go away.”

Companies are exploring a number of ways to pump up and realign channels in the wake of e-business. One of the easiest and most prevalent moves is offering dealer locator services online. These give customers the option of getting hands-on support from a local entity, if desired. In some cases, the dealer locator apps award the selected channel partner with a percentage of the transaction even if it didn’t participate in the sale. On the marketing front, companies like and Kawasaki Motors are teaming up with distributors on websites that help drive traffic to local stores and their individual websites. Helping less tech-savvy channel players build websites is another way companies are lending a hand. And some companies, like General Motors, are going so far as collaborating with their channel partners to create new online ventures that can compete with dotcoms.

“It’s next to impossible to find any company jumping off a cliff and saying ’We’re laying our reseller relationships on the altar of e-commerce,’” says Simon Yates, an analyst at Forrester Research. “Manufacturers don’t know how to deal with consumers in a B2C or B2B world. That’s why there’s such a deep relationship with the channel. So disintermediation happens first, and then things get reintermediated again.”

Still In Good Hands

It didn’t take long for Allstate Insurance to understand the value of its 13,000-strong agent channel for online sales. But the Northbrook, Ill., insurance company did give serious consideration to selling directly to customers online in the very early stages of planning its e-business initiative. The Allstate strawman project, code-named, was entertained briefly as a way to use the Web to garner efficiencies in selling insurance products. Allstate got a scare, however, as soon as it started talking to customers, says Steve Groot, president of direct distribution and e-commerce at Allstate Insurance. While customers were bullish on using the Internet to purchase Allstate products, they were adamant about having a real, live person as part of the process to help them with decision making, particularly when it came to life, property and car insurance. In addition, the company would have had to spend millions to create a new online brand, and there were concerns that such a move would harm Allstate’s carefully cultivated brand recognition.

When Groot’s team actually sat down to do the math, disintermediation turned out to not make much business sense, either. “Selling insurance directly over the Internet wasn’t something we could offer at a substantially different price level,” Groot says. “In the cost of personalized insurance products, there’s not a lot of distribution cost relative to the total cost of the product, so there’s not a lot to disintermediate.”

As a result, Allstate settled on an integrated strategy that would let customers shop for insurance the traditional way via local agents or through more modern conveniences like an Internet site and a call center, both of which are available 24 hours a day. “When you say Allstate, people think of agents first. We didn’t want to do anything that would upset what the customer visualized as the value proposition,” says Groot, the executive sponsor of the call center and Internet direct initiatives. “Now we’re presenting to the public both a clicks-and-bricks presence, and agents are an essential part of us moving forward.”

Through, which began rolling out on a state-by-state basis in May 2000, customers can research, get quotes and purchase automobile and property insurance online. Customers are prompted to pick a local agent if they are familiar with one; if not, the system automatically assigns an agent to the sale and allots him a service commission on the transaction?regardless of the agent’s input. In addition to the financial rewards, agents can leverage the online reference for future cross-selling opportunities. Allstate keeps the product selection and price of the online offerings consistent with its brick-and-mortar insurance line to guard against channel resistance from agents.

“There’s been continual communication to our agents on our strategy since November 1999,” Groot says. For the next five years, he notes, the bulk of Allstate’s sales will still come through agents, with as much as 20 percent through direct channels and the majority through call centers. Still, Groot contends that the clicks-and-bricks model holds promise: “Agents see the potential of [the new direct efforts] providing a new flow of customers and pros-pects for them.”

Boosting sales is just one of the carrots Kawasaki holds out to its dealer channel as part of, its B2C site that markets accessories like chrome bolt-ons for motorcycles and leather riding gear. Kaw-asaki opted to sell accessories, not vehicles, on its site partly so that would not compete with its dealers’ businesses and partly because the model could also increase sales at local stores, according to Roger Peterson, vice president of information systems for Kawasaki Motors Corp. USA, based in Irvine, Calif. “By creating a presence on the Net, we’d drive traffic into their stores because a lot of people looking to buy accessories want to see and touch them,” he explains. “Also, we know accessories sell more vehicles and vehicles sell more acces- sories, and we wanted to sell more of both.”

Like, has a dealer locator function, which upon checkout requires the buyer to specify a local dealer before the sale can be completed. Unlike Polaroid, Kawasaki takes care of order fulfillment, shipping and returns?responsibilities it has always retained for accessories, since few dealers carry the full line of accessories. For their part, dealers are urged to provide support, if requested. In return, dealers get a cut amounting to 60 percent of the difference between the manufacturer’s suggested retail price and their cost, Peterson says. “It’s a no-lose proposition,” says Terry Adams, owner of Montgomery, Ala.-based Adams Motorsports Kawasaki, one of the top 35 Kawasaki dealers in the United States.

The deal gets even sweeter with Kawasaki’s B2B website, accessed via a URL similar to (Kawasaki withheld the URL for security reasons). Here, the company provides software tools so that dealers can analyze customer data to custom-tailor future marketing campaigns and refine their product mix. Dealers can also check warranty claims, access all technical service bulletins, get reports on their online rewards and order replacement parts at any time of day instead of being restricted to traditional business hours. Both Kawasaki websites include an electronic parts catalog that dealers and consumers can access. Although consumers can’t actually purchase a replacement part over the Web, they can research their requirements and generate a list of part numbers and descriptions, making it easier for local dealers to process orders. “We wanted to put together a model that would be a positive business move for dealers,” Peterson says.

When Avon Products launched its e-commerce site in 1997, it didn’t initially reach out to its 500,000 U.S. Avon representatives, although that was always the beauty products company’s long-term goal, according to company spokeswoman Laura Castellano. At that time, Avon headquarters in New York City discouraged independent reps from setting up their own websites hawking Avon products because the company wanted to create a consistent look and feel that would promote the brand across all Avon-related sites, she says.

Last September, as part of an effort to bring its distribution channel into e-commerce and turn some sales reps into “e-reps,” Avon rolled out webpage templates that reps can use to offer Avon goods under their own URLs. The templates are visually consistent with the corporate site,, but reps can modify up to 10 percent with photos or special deals, for example. Already, 16,000 Avon reps have signed up for the program.

“We are using the Internet as an enabler for our channel,” says Castellano, adding that reps can also use the corporate website for ordering, tracking inventory and billing. “We are a direct sales company. Ninety-eight percent of sales last year came from our direct sales channel, and we anticipate that 90 percent of sales will still come from that channel five years from now.”

The Wheel Turns

Some companies are using the Web to deploy new channels for their existing dealers. General Motors, for example, is looking to change its business focus by collaborating with its 7,700 dealers on a new online venture that will compete with independent car buying sites like According to Michael Gluk, director of business development at GM, the existing site, which offers buying information, live inventory data and dealer referrals related to GM vehicles, appeals mostly to existing GM owners (40 percent of the new car market). With the new, unnamed site, GM and its dealers will be able to reach the remaining 60 percent of new-car buyers by offering the same type of data on GM and non-GM cars. “We have no intention of going direct [to car buyers],” says Gluk. “Dealers have the relationship with customers; we’re just giving them the tools to strengthen their relationship.”

Although the project is still in the early development stages, Gluk says GM and its dealers have already determined a number of ground rules. Most likely, the site will be part of a separate company, jointly owned and funded by GM and its dealers. (Support from GM’s channel partners is crucial; because people rarely buy cars online, the concept might never get off the ground without dealer cooperation.) The site will most likely provide a no-haggle, “guaranteed e-price” because customers who are serious about buying want to see real prices, Gluk says. And to show consumers the validity of information on the new website, GM and its dealers are hoping to co-brand the site with an objective partner?for example,, which delivers comparative automotive pricing data. If the site flies, it will mark a shift in GM’s approach, from selling only its own products to selling cars regardless of make. Gluk says executives hope to make a decision on the appropriate business model for the site by the end of 2000 and have it operational in the first quarter of 2001.

Clark Security Products, one of the largest U.S. distributors of locks and locksmith supplies, also saw opportunity in creating a new e-commerce venture with its channel. Instead of cutting out its 20,000 dealers, Clark spun off its online enterprise as a separate division (to avoid conflicts between the e-commerce and traditional businesses) and then handpicked 700 independent locksmiths with whom it will collaborate for online sales. The new company,, markets the site and fulfills online orders, but sales transactions are electronically completed through the accounts of a nearby affiliated locksmith. Consumers choose a locksmith from a list generated by a dealer locator function. The selected locksmith also receives a cut of the transaction. leverages the hands-on installation services and support of local locksmiths to grow its Internet business, while the locksmiths get increased sales, a compelling Web presence and the ability to offer a wider array of products via a “virtual” inventory?something most couldn’t accomplish on their own.

“The promise of the Internet is to redefine the channel,” says Glenn Younger, chief operating officer at in San Diego. “We could develop a slick site and sell directly to users or industrial accounts, but we needed someone to help us with that last mile?mainly service and installation.” sets up locksmith shops with a merchant account and transfer-of-funds account. Before credit card information is exchanged, the customer is prompted to select a retail location to complete a transaction. From there, steps in to process the sale and wire money to the specified locksmith’s merchant account. offers a range of additional assistance to locksmiths, from content development to referrals and marketing to website design services. “Our goal is to make them look like a 21st century company,” says Younger.

As a 14-person lock shop catering to the commercial market in greater Los Angeles, 4Point Access Control welcomes the change in its channel relationship with Clark. “We get more credibility to be part of the national SecureRite organization rather than [becoming known as] ’those Van Nuys guys with the cute website,’” says Med Mosher, one of 4Point’s quartet of owners in Van Nuys, Calif. Mosher freely admits that 4Point would never have entered the Internet age so quickly if not for and Clark. “The locksmith mentality tends to not be computer-oriented but more craftsman-oriented,” he says. “We’ve always turned to Clark for our business orientation.” Clark, in turn, solidifies its connection with a key distributor.

The benefits run both ways in this channel relationship; both Clark and its distributors profit from the presence of Their experience highlights a lesson of e-commerce. Rather than disintermediating their channels, companies choosing to take channel partners along are finding the ride through the new economy a lot smoother.