What have BSkyB and the Premier League, Thomson Holidays, British Airways, Coca-Cola, Unilever, Volvo, Ford, General Motors and Levi’s all got in common? In the past few months they have all become embroiled in legal or competition authority battles concerning vertical integration and exclusive distribution deals.
The Premier League has humiliated the Office of Fair Trading in its wrangle about collective bargaining for the sale of broadcast rights and its exclusive deal with BSkyB. But the outcome of the other cases looks far less certain.
The Government has expressed its dislike of vertical integration between packaged holiday companies and travel agents by saying that consumers must be told more about the links between the two. British Airways has had its knuckles rapped over its “loyalty scheme” which gives travel agents big incentives to sell BA tickets in favour of its rivals.
Coca-Cola has been raided by the European competition authorities over stocking and price deals with certain European retailers. The UK Competition Commission is threatening to tear apart Unilever’s stranglehold over ice cream distribution. And both the UK and the European competition authorities are putting the car companies’ “block exemption” links with dealers (and their consequent influence over pricing) under the microscope, while Levi’s is battling to maintain its selective distribution strategy to stop retailers such as Tesco selling its jeans at lower prices.
Of course, the details of each case are diverse. There is a vast difference between Unilever, which has built its stranglehold on ice cream distribution through decades of intensive investment, and the car companies, whose control over car distribution has far more to do with effective lobbying than commercial prowess. But either way the political and regulatory pendulum has clearly swung against practices which potentially stifle competition and push up prices.
The authorities may have a point. Coca-Cola has been told to amend its practices before. Volvo was caught in the act of price fixing. But there are now some new ingredients which will not only affect the future of some cosy business relationships and margin-protecting stratagems, but bring sweeping changes to marketing as a whole. Marketing is about to experience a tectonic shift: in most industries the logic of maintaining a division of labour between manufacturer and retailer is breaking down.
There is no law which says these functions must, or should, be represented by different brands or organisations. As management consultants are fond of saying, individual companies don’t compete; complete, integrated supply chains do. It’s no good being an excellent manufacturer if your distribution is terrible, and it’s no good being an excellent retailer if the products you sell are terrible. Therefore, the over-riding marketing and commercial pressure is for both retailers and manufacturers to control the supply chain. Manufacturers do it by extending their ownership or commercial control over retailers. And retailers control manufacturers by moving into own label, for example.
Three important marketing trends are now compounding this pressure. First, marketers are realising that “brand experience” is much bigger than a mere product. One of the reasons why Levi’s and luxury perfume makers are keen to have selective distribution is because they want the retail environment to be part of their overall brand promise. One of the reasons car makers are seeking more control over car dealers is because they want their sales outlets to express their brands’ values.
As one car marketer complained privately recently: “You spend £500m on a concept, and then you let it out of the factory on launch day and put it in the hands of people who have a reputation for being low-skilled, low-tech or no-tech, and with don’t care attitudes. We spend £550m on TV advertising to entice people to a place they would never go. Dealerships are centres of attrition not centres of attraction: great product, great communication and then it hits the point of sale and it all falls apart.” The quest for a better all-round brand experience is just beginning.
The second trend is the rising influence of “point of sale” and the declining power of media advertising. This is not some peculiar circumstance related to retailer power in the UK. It is a symptom of a big shift in what we value: time is now as valuable as money. Coca-Cola recognised it decades ago. A strategy of being “within an arm’s reach of desire” turns a product brand into a service brand.
Now everybody is catching on. If you add value through your product alone, you can never deliver as much value as you can when making the whole process of satisfying the need – including everything it takes to access and buy – a valuable and enjoyable experience. As e-commerce guru Patricia Seybold comments, the secret of success nowadays is to “make it easy for customers to do business with you”.
The third marketing trend revolves around customer “ownership”. You might not be able to “own” your customer, but you can own the transactions information which that customer generates. Access to that information is a strategic imperative for today’s marketers. If you are excluded from the customer information loop, you can’t be close to your customer. And that means you die.
Total brand experience, value for time and customer “ownership” are not going to go away. If marketers can’t tackle them through formal vertical integration, they will seek to do it by proxy, through alliances and partnerships, commercial deals, exclusive contracts and the like. Either way, the inexorable trend is for single organisations or constellations (such as Coca-Cola and its bottlers) – and increasingly, single brands – to represent complete supply chains. The competition authorities won’t be able to stop it.
What they can do, however, is make sure it happens in a way that favours the consumer.