Distribution Killed the E-Commerce Star

In the last few months, we at Intergroup Partners have been working on innovation in virtual distribution; here is the distillation of the theory that we are putting into practice. Have a read, I'm proud of it! 

For a consumer-facing organisation, the truth is stark. Be successful online, or die.

This truth has been driven by a shift in consumer habits; convenience driven by universal logins, 1-click purchases, online commerce engines, appropriate infrastructure geared up to facilitate faster/mobile browsing and deliveries, growing familiarity. These are many of the drivers, to date.

What does an organisation need to do? What are the drivers of online sales? What are the critical success factors beyond price? How can an organisation learn? How does it succeed?

The traditionally vaunted saviour of online sales is Price. Online emphasis reduces costs, right? So, it must follow that a switch to online will reduce the price to the consumer. It used to. But the cost/price pressure on manufacturers has never been higher. Online competition for traditional retail has also resulted in retail margins that have never been lower. The elasticity allowed by a move to online is finite – and increasingly so.

Where savings are available, manufacturers have an issue around alienating traditional volume channels, a conundrum that has resulted in Omni-channel solutions emerging as a must-have capability.

To look further at where competitive models lie (rather than penury) the online retail pioneer Amazon bears closer inspection. It was known initially for price; at least that was the populist assumption – but there is much more to success than price. In many of the more mature markets, value has already been released from the supply chain, margins are tight and retail is suffering: online and off.

Amazon’s value proposition is so much more than price and could be summed up, in it’s simplest form, as a positive cycle; growth is driven by four different, co-dependent factors. Number of sellers, subsequent selection, consumer experience and volume. Price becomes a function of volume-driven competitive behaviour.

When buying online, the experience is the key. Price becomes a function of competition. Many of us have chosen to shop for a requirement online at Amazon, knowing full well that we could probably find cheaper elsewhere online, if we tried. The choice, ease and quality of the experience all contribute greatly.

Online ‘department stores’ are booming. Why? Consumer experience is at the heart of it. The best offer products and services from different brands, market segments, both volume and niche offerings, accompanying services and in short – a browsing experience that is as satisfying as it is agnostic. These environments apply a competitive context to any sellers products, allowing a relatively even playing field and more importantly, choice. As we have seen, more choice brings more higher traffic, higher traffic drives volume and the promise of volume drives competitive behaviour and innovation – and so on. Online and Department Store online shopping demonstrably offer more consumer engagement, clearly visible in the shares results of both.

Kickstarting the positive cycle will prove critical for online retailers. It is the virtual distribution network which will ultimately provide.

The acquisition of brands to sell is the simplest way. However, this flies in the face of accepted principles of streamlining a supply chain. Acquisition adds the cost of multiple extra SKUs, the resource costs required to manage them and risk – volume uncertainty and the spectre of write-downs at end-of-life. When hunting for success, especially in established channels, conventional wisdom suggests that concentrating on the most popular products only and reducing operational costs allows for the retention of margin and/or reduction in price for maximum perceived benefit.

This is especially true of B2B distribution, upon whom large parts of all markets are reliant, whatever the marketplace. B2B distribution is increasingly risk adverse as margins decline in mature/volume markets and yet, it is a vital channel for manufacturers and retailers alike. If diversity is not available here, it will not be available to consumers.

Virtual distribution has been in existence, as a very different, limited idea, since the late c.20. It’s worth searching for the ‘RubberEyes’ advertisement by AT&T to encapsulate it – essentially Virtual distribution was considered online selling, in essence.

Nor is it the more modern idea of Virtual Warehousing or Just in Time delivery, both of which address flexible warehousing solutions and delivery to retailers as product is needed. These are useful tools for cutting the cost of a traditional supply chain, but they are the natural products of the search for efficiency inside an established framework.

Virtual Distribution (with a capital D) is a theory that allows for range extension and the beginning of a positive cycle. I should point out that the term ‘virtual distribution’ means different things to different organisations. In it’s purest form, it allows retailers to range and sell almost any product without ever carrying a stock risk; products are bought/sold in the usual way but fulfilled directly, from manufacturer to consumer.

Virtual Distribution is the disposal of that traditional framework whilst retaining the relationship management skillset. It brings footfall, sales volume, more sellers, a better selection – feeding the consumer experience.

The trick is in managing everything in-between the brand and the consumer – listing tools, real time stock availability, image management and data, information flow, invoice handling, credit risk and returns – and even the websites themselves – to name a few.

There is an emerging role for forward thinking distributors here. By having this expertise available as a ‘product’, distribution can allow outlets to range extend with impunity, crossing into associated market verticals and geographies at the same time as offering brands a vastly increased footprint in the retail environment. It is, in essence, the supply of incremental brands, product lines and revenue to any online organisation, without the associated costs.

The management of this process is a thing of value, in itself, and can take a solid proportion of the financial incentive released by the supply chain. Current distribution is best placed to innovate and supply this expertise, allowing manufacturers that do not want to fulfill orders that expertise and scale where conditions are appropriate.

Amazon’s Marketplace is arguably the ultimate expression of Virtual Distribution to date – Amazon taking the role of online retailer, supplying the billing engine but leaving sellers to manage listings, images, availability etc. Amazon knows that Amazon Prime itself does not go far enough.

Amazon knows that even it’s mighty supply-chain efficiency is still just a refinement of the old-guard thinking. Seller-fulfilled prime allows Amazon to manage the Prime listing space, availability and order/information processing. The seller however, delivers direct to the consumer.

By taking a more comprehensive role – for which they are ideally placed – distribution can enable online retailers to create a department store mentality, curating according to desired audience, with minimal restrictions on category or convention. Brands in turn can apply marketing and promotional activity curated specifically for unique aggregated consumer buying groups across channels and marketplaces.

This ability to react quickly, to run promotional activities instantly, without fear of current stock liabilities, pricing or availability issues adds value throughout the chain and will fundamentally alter the retail landscape. Online retailers will gain the ability to act as wholesalers while remaining conventional retailers to individuals.

Kantar suggests that a feature of retailing in a post-modern marketplace (such as the UK, Germany and the USA) is an alternative to the superstore retail economy, with specialist outlets becoming a part of a more fragmented approach that appeals directly to these emerging buying groups. Existing brands and retailers can both create/access these new marketplaces via virtual distribution and address these consumer groups rather than traditional marketplaces, using the power and availability of data to identify and address.

The packaging of Virtual Distribution software as a service will inevitably emerge – the speed of adoption limited initially I suspect by the trials of integration at a brand level (rather than retail). It seems likely to reach the market as an extension of warehouse management software, but any latency will open the door to more entrepreneurial set.

However it emerges, it will become a reality sooner rather than later. In the very near future, for a retailer, the ability to offer any relevant brand a place, selling and marketing to it’s identified consumer groups, will not only be valuable – but essential.