Potential backlash for suppliers selling through direct channels

The study, appearing in the American Marketing Association’s Journal of Marketing, is titled ‘How Retailers Change Ordering Strategies When Suppliers Go Direct’ and is authored by Michiel Van Crombrugge, Els Breugelmans, Femke Gryseels, and Kathleen Cleeren. 

Recently, for example, Sony began selling PlayStation products through its PlayStation Direct online store in the UK, offering many products available at major retail stores. This is an example of encroachment, when suppliers like Sony, Nike and Lego establish their own direct channels to reach end-consumers. 

Such direct channels offer suppliers visibility and control over the customer experience, but they potentially come at the cost of upsetting downstream retail partners, who may perceive the direct channel as competition. 

Should retailers respond adversely and disengage from the retailer-supplier relationship, typically leading to decreased orders and higher wholesale prices? Or should they respond co-operatively and engage in constructive discussions with the supplier to seek improved terms of trade, typically leading to lower wholesale prices and increased orders? 

The research team found that, on average, retailers choose an exit response to a supplier’s direct channel introduction. 

Specifically, retailers decrease the number of distinct SKUs ordered by 18.75% in the period after direct channel entry. Possibly due to these fewer orders, they also pay a higher average wholesale price (up by 20.84%).  

The increased wholesale price, however, does not compensate for the loss in quantity ordered. The total order value for the average retailer at the supplier decreases by 11.69% in the first six months after direct channel entry. 

Such an adverse reaction is troublesome for the encroaching supplier, yet not all retailers respond the same way. 

“Our studies provide clear evidence that retailer power is a key driver of ordering strategy responses,” Breugelmans observes. “Larger, powerful retailers are much less likely to exit the retailer–supplier relationship than less powerful retailers. In fact, for the largest retailers, we observe no change in order value.” 

Lessons for chief marketing officers 

According to the research team, these findings offer important insights and caveats to suppliers that consider selling directly to end-consumers. 

• Introducing direct channels may provide suppliers with opportunities to get closer to their end-customers, but the backlash by retailers makes this step risky because retailers may significantly reduce their orders. 

• Smaller retailers with less power are more likely to disengage from the relationship after encroachment, driven mainly by their lack of confidence in the supplier. 

• Suppliers should pay special attention to smaller retailers and design specific incentives and stimuli to increase their confidence and convince them to keep placing orders. This will sacrifice some short-term profits, but it provides retailers with a credible signal that the supplier wants to minimise the potential harm from the direct channel. 

You can find out more about the study here.