Manufacturing brands take a direct approach

Manufacturers and retailers have a well-established relationship. Manufacturers make things and retailers sell them. But what happens when a manufacturing brand decides to sell to consumers directly?

One high-profile company to have taken this route recently is GlaxoSmithKline (GSK), manufacturer of numerous healthcare brands including Aquafresh and Beechams, which has followed the US example of Procter & Gamble and launched its own online store. Last month, the GSK Direct website started offering all of the company’s consumer healthcare products for sale in a single online location.

GSK maintains that the strategy is not an attempt to take market share away from retailers. Instead, ecommerce controller Paul Gurnell says GSK wants to gain access to insights on consumers’ buying habits by forming a direct sales relationship with them. 

The healthcare company’s online shop will benefit the established relationships it has with other retailers, he claims: “We do not have a huge amount of knowledge or experience of how our consumers shop online. We are being asked to do more work with people like Ocado and Tesco.com on the best way to sell our products.”

But while sales themselves, either in terms of volume or value, might not be the main measure of success for this venture, gaining reliable customer data will require both a minimum number of transactions and a representative sample of GSK’s usual consumer groups. Gurnell adds that the company hopes to gain “commercial benefit” from the site.

Critics of this venture argue that GSK is going to struggle to make any profit. Tony Stockil, chief executive of retail consultancy Javelin, argues: “There is very little value in this and I think this will fail. To make any kind of profit you need to be thinking of average order values in excess of £30 in most categories.” He believes most FMCG companies would not succeed at direct selling because of the high order value needed.

Gurnell does not give a figure for an average basket value, but says it is probably lower than many supermarkets but higher than expected. Certainly, if an FMCG company intended to gain a foothold in the market, it would have to give its customers a reason to shop direct, rather than at a retailer, where all their needs can be served at once. The most obvious possible reasons are price, convenience or unique products and services.

Gurnell says that GSK has no interest in undercutting other retailers, and accordingly many of the comparable products on its site are more expensive than on supermarket websites.

Jon Tipple, head of planning at agency McCann Erickson London, says brands that want to sell products directly to consumers have to be able to provide real benefits. On the question of convenience, he asks if the likes of GSK can really deliver: “Why do I want two places to go when I can get it all from one? Is the cost saving going to be enough to make it worthwhile? Does it mean I have got to be in for two sets of deliveries?”

While GSK can’t provide positive answers to any of Tipple’s questions, the point of difference the GSK website does have is that it is a registered pharmacy, and lists some product varieties not on sale at other retailers. More significantly, GSK’s Gurnell points out that consumers tend to research certain types of healthcare products before buying. Web searches for brands such as Niquitin nicotine patches and gum drive a high proportion of the site’s traffic, he says.

FMCG brands are quite unlikely to make any impact on the market by selling direct from their own websites

Tony Stockil, Javelin

Few manufacturers have built successful direct selling businesses – beyond a facility for collecting customer data – by making retail a core focus when it had not been previously. Apple is a notable exception, with both high street and online stores through which it sells only its own branded products, under its own banner. The first of these opened in the US in 2001, and in 2004 the first UK store opened on Regent Street in London. There are now 28 Apple Stores across the UK and 310 worldwide.

Another brand to have built an enduring business model in retailing direct to consumers is Disney (see case study, above). Although its products are not competing on convenience or price, Disney Store has a unique proposition that has lasted 20 years.

According to European marketing director Jonathan Storey: “Nine out of ten Disney Store products are exclusive. These products are designed and conceptualised in Europe with a European market in mind.”

Having a strong associated brand in film production clearly helps too, as a Disney Store is likely to be the first destination a consumer thinks of when looking for Disney merchandise. As a result, the business is in the enviable and unusual position of being a brand in control of one of its most important distribution channels.

Nokia, meanwhile, has had a high street presence since 1998, when it opened its first branded store run by Carphone Warehouse. Its outlets have had mixed fortunes since. Flagship units in London, Chicago and New York closed earlier this year, but Nokia still has a retail presence in a number of smaller UK towns and vice-president of retail and consumer marketing Simon Ainslie says the stores form an important part of the brand’s relationship with consumers.

He says: “Retail is the human face of Nokia, where consumers get a feel for the product, form their own opinions and ultimately make a decision to purchase. It is a tangible experience and an extension of the brand, allowing us to communicate our message.”

Ainslie adds that the stores allow Nokia to display and promote its products in the way it chooses, while the brand benefits from a “feedback loop” that helps to shape its approach on the basis of consumers’ attitudes. He also suggests, however, that “an engaging retail experience has less influence on commodity purchases”.

Matt Piner, senior retail analyst at Verdict, the retail-focused arm of research company Datamonitor, says there could be economic reasons for other electronics manufacturers to follow Apple and Nokia into direct selling. He suggests: “Margins are being squeezed at the moment, particularly in electricals, because the weak pound is increasing the cost of making and importing the goods. On the flip side of that, demand is falling. Maybe relationships with retailers are getting a little bit fractious and selling direct is obviously one way to protect margins.”

While this might also be true of relationships between FMCG companies and retailers, electronics brands do have the clear benefit of being part of a high-interest, high-priced product category, where consumers are likely to take more time to make a purchase decision. Getting expert advice from product specialists from a particular brand might be a crucial factor that draws people into single branded stores.

Javelin’s Stockil says: “If it is a standalone destination product, then it can certainly work, which is why Apple obviously has a very viable website and store. If it is typically part of a basket that includes other brands, then it is much harder, which is why the FMCG brands are quite unlikely to make any impact on the market by selling direct from their own websites.”

Unlike Apple and Disney, for a brand to be in control of its most important distribution channel would involve a far greater commitment to retail than many FMCG companies would be willing to make. While many brands are considering direct selling, such as brewer Molson Coors, few are committing to a full-scale strategy like GSK. And many analysts believe that for brands like GSK, it is not a commitment worth making because the risks outweigh the potential benefits.

Any consumer brand that sells direct, either online or on the high street, risks damaging its relationships with retailers. Verdict’s Piner warns: “For the vast majority of brands, retailers are their biggest channel and they cannot afford to alienate them.” Doing so could prompt price wars or the cutting off of distribution, and they are extremes that no brand wants to be faced with.