How can distributors adapt and thrive in a new direct-to-consumer world?

These days, distributors and resellers are caught in a bind. Consumer product brands are increasingly migrating to a direct-to-consumer business model. By keeping control of everything from branding to customer service to the production process itself under one roof, they hope to ensure consistent quality, lower transaction costs, and higher profit margins. As this approach becomes commonplace, intermediaries like distributors have to somehow reposition themselves or find a new way to keep up. The question is, what’s the best way for a distributor to do that?

The list of consumer product brands selling directly to customers seems to get longer every day, with Casper, Tuft & Needle, Warby Parker, and Bonobos being a few famous examples. These days, it’s not necessarily a challenge for a brand to create an online-only storefront that sells straight to the customer’s doorstep. With a wide array of tools promising to help, the question for a brand wanting to embrace this model isn’t How do we make it happen? but more simply, What’s the best way?

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Such brands are eager to build relationships of their own with customers now that user-friendly software has made it possible. E-commerce platforms, data analytics tools, and third-party service providers give these brands access to resources they could hardly have imagined a few years ago. Many of the tasks traditionally performed by distributors and resellers—from logistics and transportation of goods to stocking inventory and reselling items publicly—can now be integrated into the brand’s own business model.

Meanwhile, as marketplaces like Amazon become the default place for consumers to shop online, more and more merchants compete for consumers’ attention. Distributors and resellers now essentially compete against each other for the Buy Box on Amazon, for example, and as time goes by, profit margins are increasingly eroded. This is not a viable model; these companies are clearly in need of something new.


What can distributors do?

Distributors and resellers have to adapt, there’s no question about it. What’s more debatable is how they can best leverage their position and resources. There appear to be two distinct options for such companies to consider: branded products and exclusivity.

The first option is to start developing their own brand(s) and adopting the methods of direct-to-consumer companies. This could even entail a complete transition away from acting as a distributor. Distributors who develop their own brands are definitely leveraging their existing knowledge and capacities—knowing how to move and sell product is already a core competency, and it’s actually not one that companies selling straight to customers can often match. This could be a huge advantage for distributors.

Distributors also have something of an advantage when it comes to deciding which products to develop under a brand name. Over the years they’ve probably gathered mountains of data regarding what sells and what doesn’t in specific markets or for specific needs. This data could be quite helpful for a new product launch. Plus, among a company’s employees there’s probably vast amounts of product knowledge just waiting to be used in a new way. This could eliminate much of the trial and error that new companies go through when creating a brand and producing products that people want to buy.

Making products people want to buy is a crucial point. There’s been a wave of “private label” brands launching on Amazon recently, often with more desire for developing quick profit than quality product. Brand logos get pasted all over generic products because these brands don’t have anything to distinguish themselves from their competitors who are selling the exact same thing. They’re competing on prices, rather than on substance. Very little brand equity is created in cases like this. Compared to firms just hoping to get a sale with a rock-bottom price, distributors with lots of data should be able to put together a much more accurate and thorough picture of what customers want and create a quality brand that reflects that demand.

In the case of British luxury activewear brand Active in Style, the company found that operating only as a distributor of name-brand athletic apparel wasn’t going to be enough to sustain profit margins and differentiate itself in the market. Instead the company combined old and new approaches, launching its own brand while continuing to distribute others.

Using its knowledge of what customers were hoping to find allowed Active in Style to develop its own Avenue C brand. The company gained independence and flexibility by going beyond distribution of other brands’ collections, and its customers got unique, high-quality new activewear options beyond the normal range of styles and offerings. Creating its own brand helped Active in Style increase web traffic and boost profit margins for its products across the board.

There’s also the matter of supply chains. Distributors getting into branded goods have to create their own supply chains just as their longtime clients have had to do, and it’s just as crucial that these be managed well. Yet here, too, there is potential for enterprising brands to succeed—having been part of numerous supply chains before, older firms should be able to negotiate the necessary contracts and navigate the complications of moving physical goods around the world better than newer firms that lack this depth of experience.

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Distributors able to utilize their expertise and point it in a new direction are the ones who will succeed, while those unable to change course may not. Alternately, distributors who want to stick to their area of expertise can still remain competitive by really focusing on their strengths, which is where exclusive arrangements factor in.

 

Exclusivity Agreements

This is the second major option distributors and resellers have. Rather than transitioning the business to a new model, this approach means doubling down to be the best intermediary possible. Many brands are willing to negotiate for exclusivity with a distributor they trust because they understand that ever-increasing competition across various sales channels and online marketplaces can hurt them. They know that making a deal with a trusted distributor could actually be a great help. Exclusivity can streamline business operations as well. Having an exclusive agreement with a distributor can simplify logistics and make things like pricing and legal issues more predictable.

Brands know exclusivity can help them. Having lots of other companies selling their products across the internet will cause prices to fall and profit margins to erode, which can lead to seriously decreased brand equity in the long term and lost profits right now. That’s the whole reason they might be willing to negotiate on exclusivity to begin with. But for this to be an option, distributors must be really good at what they do. You’ve got to be skilled enough at distribution that you’re the one (or perhaps one of a select few) they choose to work with. Newer distributor companies may lack the longstanding business relationships and personal trust to make this viable.

Consider again the example of Active in Style. According to digital marketing manager Thomas Gibbons, the British activewear brand has cultivated a loyal customer base over the years, which has enabled it to negotiate from a position of strength with consumer brands whose products it retails. The company also offers extra marketing or creative work for exclusive products. Negotiating from a strong position gives Active in Style a heftier profit margin, which it can then reinvest in its next product innovation. And since the company sells a variety of brands across several different channels, it can see where conflicts between sales channels may occur and use exclusivity agreements to steer clear of them.

Brands don’t want channel conflict between their sales channels (a problem we’ve written about before). For example, selling an item at one price on Amazon that undercuts the agreed-upon price at which a longtime retail partner is selling the same item will lead to unhappy business partners. Existing relationships can be preserved and strengthened when distributors give brands the chance to limit distribution of their products in various ways.

Distributors aiming to focus on exclusive distribution rights should consider which products, industries, and brands have had trouble with channel conflict or lowered profit margins in the past. Insider industry knowledge could be vital in this process. With careful analysis of how exclusivity could benefit all parties involved, distributors might be able to uncover opportunities for brands they’d like to do business with and set up satisfactory long-term contracts that newer firms or outsiders wouldn’t be able to do. Being the sole American distributor for certain types of durable goods like a high-margin, high-value electronics product or kitchen appliance, for example, is a different game than being the only distributor in the western United States for consumer commodities like a certain brand of blue jeans.

Time is of the essence. There will probably be a first-mover advantage to lining up more profitable deals before other distributors wake up to the need for new approaches in the face of direct-to-consumer selling. Those who adapt sooner are likely to do better.

 

A world with fewer distributors

One thing seems certain. As the direct-to-consumer business model grows more common, the number of distributors and resellers will decrease. The new roles available for savvy distributors may not have been their original dream, but they can certainly adapt and stay competitive in the market by considering the two pathways outlined above.

And there is cause for optimism. Distributors have exciting opportunities to pursue. In developing a brand, they can look to the very consumer product brands now selling straight to customers and learn from them. They can use their considerable expertise to avoid the pitfalls younger and more inexperienced companies would make. In pushing for exclusivity agreements, companies can figure out which types of deals would best serve their needs and act on that analysis before others do.

In either case, distributors and resellers typically have a good deal more experience and practical knowledge than the firms trying to supplant them. Success will be a matter of applying this knowledge in a new way.