How retailers change ordering strategy when a supplier starts its own direct channel

(Press-News.org) Researchers from Erasmus University and KU Leuven published a new Journal of Marketing study that examines how retailers respond when suppliers establish direct channels to reach end-consumers and how suppliers can take steps to avoid a backlash.

The study, forthcoming in the Journal of Marketing, is titled “How Retailers Change Ordering Strategies When Suppliers Go Direct” and is authored by Michiel Van Crombrugge, Els Breugelmans, Femke Gryseels, and Kathleen Cleeren.

Recently, Sony began selling PlayStation products through its PlayStation Direct online store in the UK, which includes many products available at major retail stores such as Currys and Argos. This is an example of encroachment, when suppliers like Sony, Nike, and Lego establish their own direct channels to reach end-consumers. Such direct channels offer suppliers visibility and control over the customer experience, but they potentially come at the cost of upsetting downstream retail partners who may perceive the direct channel as competition.

This raises an important question for suppliers: Will retailers change their ordering strategies at the encroaching supplier, and if so, how?

Should retailers respond adversely and disengage from the retailer-supplier relationship, typically leading to decreased orders and higher wholesale prices (i.e., an exit response)? Or should they respond cooperatively and engage in constructive discussions with the supplier to seek improved terms of trade, typically leading to lower wholesale prices and increased orders (i.e., a voice response)?

This new study analyzes the ordering strategy responses of nearly 2,000 retailers that were confronted with a supplier’s launch of their own webshop in the toy industry. The research team finds that, on average, retailers choose an exit response to a supplier direct channel introduction.

Van Crombrugge states, “our findings show that, on average, retailers disengage from the retailer–supplier relationship. The average retailer decreases the number of distinct SKUs ordered, which is met by the wholesaler increasing prices, possibly reflecting the worsened terms of trade.” Specifically, retailers decrease the number of distinct SKUs ordered by 15 (or 18.75%) in the period after the direct channel entry. Possibly due to these fewer orders, they also pay a higher average wholesale price of €.79 (or 20.84%). The increased wholesale price, however, does not compensate for the loss in quantity ordered. The total order value for the average retailer at the supplier decreases by €399.50 (or 11.69%) in the first six months after the direct channel entry.

The Importance of Retailer Power Such an adverse reaction is troublesome for the encroaching supplier, yet not all retailers respond the same way. “Our studies provide clear evidence that retailer power is a key driver of ordering strategy responses,” Breugelmans says, “such that larger, powerful retailers are much less likely to exit the retailer–supplier relationship than less powerful retailers. In fact, for the largest retailers, we observe no change in order value.”

Gryseels explains that, “one mechanism underlying this finding is confidence from powerful retailers that the supplier will continue to support their retail operations despite the introduction of the direct channel.” Specialist retailers differ from generalist retailers in their ordering response depending on two countervailing forces.

Specialists experience higher switching costs because these specialized, go-to retailers cannot afford to exclude the brands of important suppliers, which makes it harder to disengage from the relationship. On the flip side, specialists perceive more channel conflict than generalists because the direct channel threatens their core business, which can evoke stronger emotional inclinations to disengage. The weights of these two mechanisms determine the specialist retailer’s ultimate decision. Cleeren adds that, “we find the relationship quality between the supplier and retailer to have a substantially lower effect on a retailer’s response than expected. Only when the relationship is particularly strong are we able to find the expected mitigating effect on a retailer’s exit response.”

Lessons for Chief Marketing Officers These findings offer important insights and caveats to suppliers that consider selling directly to end-consumers.

Introducing direct channels may provide suppliers with opportunities to get closer to their end-customers, but the backlash by retailers makes this step risky because retailers may significantly reduce their orders. Smaller retailers with less power are more likely to disengage from the relationship after encroachment, driven mainly by their lack of confidence in the supplier. Suppliers should pay special attention to smaller retailers and design specific incentives and stimuli to increase their confidence and convince them to keep placing orders. This will sacrifice some short-term profits, but it provides retailers with a credible signal that the supplier wants to minimize the potential harm from the direct channel. The supplier might reduce the competition created by the direct channel through differentiation. The extent to which channels compete depends on their similarity, in terms of product, price, and/or service. This means the supplier can clearly differentiate what it offers through retailers versus through its direct channel (e.g., channel-specific exclusives, online-only personalization services) to limit competition.

Full article and author contact information available at: https://doi.org/10.1177/00222429241266576

About the Journal of Marketing 

The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari (Hari) Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor in Chief. https://www.ama.org/jm

About the American Marketing Association (AMA)

As the leading global professional marketing association, the AMA is the essential community for marketers. From students and practitioners to executives and academics, we aim to elevate the profession, deepen knowledge, and make a lasting impact. The AMA is home to five premier scholarly journals including: Journal of Marketing, Journal of Marketing Research, Journal of Public Policy and Marketing, Journal of International Marketing, and Journal of Interactive Marketing. Our industry-leading training events and conferences define future forward practices, while our professional development and PCM® professional certification advance knowledge. With 70 chapters and a presence on 350 college campuses across North America, the AMA fosters a vibrant community of marketers. The association’s philanthropic arm, the AMA’s Foundation, is inspiring a more diverse industry and ensuring marketing research impacts public good. 

AMA views marketing as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. You can learn more about AMA’s learning programs and certifications, conferences and events, and scholarly journals at AMA.org.

END