P&G selling direct over the web – is this ecommerce 2.0?

By May 20, 2010Uncategorized

My dad used to work for Unilever and I remember him telling me how they used to have their own brand supermarkets but were forced to close them by Sainsbury and Tesco who didn’t want competition from their suppliers. Back then all the power lay with the retailer because they owned the consumer relationship. That situation hasn’t changed much in the last 30 years. For sure the players have changed, and some new web based companies have emerged of which Amazon is of course the most notable, but the structure of the value chain and balance of power between manufacturer and retailer hasn’t shifted.

As you might have seen, P&G have been making noises about going direct to consumers over the web for a while, and now they have announced they will be selling in the US via their own ‘eStore’. If you read the news reports you can see they are still nervous about upsetting their retail partners, but this move tells us they think they can use the web to radically reshape their industry, presumably with the aim of taking the retailers’ margin for themselves.

This raises the question of how much value multi-brand retailers add and whether they might be disintermediated. It seems to me that from a consumer point of view retailers have brought two things to the table – validation and aggregation. I know that in a single trip to Waitrose I can get all my household shopping done, and that if an item is on sale there it is probably good quality.

From a manufacturer point of view retailers are a cost effective outsourced sales function. For all but the largest suppliers it is too expensive to establish a physical retail infrastructure with sufficient scale to reach a large number of customers.

The web radically changes the first and third of these value add points. Consumers can quickly research products themselves now and don’t need retailers to validate for them, and as we all know it is not expensive for manufacturers to set up a website that can reach pretty much everyone who might want to buy from them.

The third piece – aggregation – is a little more difficult. Without innovation in logistics and delivery to aggregate purchases from multiple brands delivery costs will make it prohibitively expensive to make small purchases direct from manufacturers.

The ratio of shipping costs to purchase price will make it easier or more difficult for different manufacturers to sell direct over the web and hence the ability of retailers to protect their position. Tesco’s position is pretty strong because their customers can spread their £5 delivery charge over a large number of purchases in a £100-200 shop.

So what does all this mean?

Firstly, we can expect to see more manufacturers going direct via the web, particularly those that sell higher value items. Etailers who sell only third party brands might find their positions challenged.

Secondly – there will be more innovation in delivery and logistics. This isn’t an area that has seen a lot of venture activity so far, but the need for innovation could become pressing.

Finally – I expect to see a rise in manufacturing startups adopting a 100% direct to consumer model. The margin and information benefits that come with controlling the value chain end to end are enabling innovative new business and product models.

– Posted using BlogPress from my iPhone