What to do when your distributor also sells to end consumers & you are a retail store

[boba7523]

Hi guys,

I'm taking marketing course in college right now, and it is pretty interesting. I've just learned about the different distribution channels and such, and I pondered upon a question: what can you do, as a retail store, when your distributor is also selling to end consumers? Here's the story:

Say I have a Prada retail store in the U.S. (sell only Prada products), and I always stock up my inventory from the Prada U.S.distributor. I found out that my U.S. distributor is also trying to make not only my business, but also other end consumers' businesses as well via its own online store (I do not have an online store). Thus, the distributor is reeling in my potential customers by setting lower prices on Prada products than the prices I am charging in my retail store. In this case, what are my options?

I certainly cannot start a price war with my distributor because they will always win... I've been pondering on this question for a while now but can't really figure out how to overcome this. What are your thoughts?

[deepsand]

Absent a contractual agreement that stipulates that you have exclusive territorial rights, and that the distributor will not infringe on such by way of accepting orders from addresses within such territory, your only options are to live with it as best possible or switch brands.

[SteveGerencser]

We go through this all the time when selling real products in real stores.. There really isn't much you can do since they aren't breaking any laws.. Your options are limited to

1. find a new wholesaler
2. find a new product line
3. suck it up and out compete them
4. give up

We select our vendors carefully for this very reason.. Been burned this way before.. One of the largest pc parts wholesalers also sells retail.. And their retail price is usually lower than their wholesale price.. They were the major reason I got out of the hardware business..

[boba7523]

We go through this all the time when selling real products in real stores.. There really isn't much you can do since they aren't breaking any laws.. Your options are limited to

1. find a new wholesaler
2. find a new product line
3. suck it up and out compete them
4. give up

We select our vendors carefully for this very reason.. Been burned this way before.. One of the largest pc parts wholesalers also sells retail.. And their retail price is usually lower than their wholesale price.. They were the major reason I got out of the hardware business..

Oh wow, so this really happens in the real world... But why would the distributor want to do this? They also depend on their retail chain for survival since the distributor only sells online. Sure they aren't getting X% of profits from the retail stores, but retail stores stock up their inventory from this distributor. If anything, shouldn't the distributor try and help drive in more traffic to these retail chains by doing advertising and marketing for them? If more traffic goes to the retail stores, the distributor is also reaping the benefit as well...

Unless the distributor already knows that these retail chains will never be able to drive in as much traffic as they can do selling online...

[SteveGerencser]

Money..

If your cost is $100 and you sell it to me for $150 so I can sell it for $200, wouldn't you like to sell it directly fir $200? Look at all the TV ads the scream factory direct pricing! etc etc. It also tends to only happen with established brands.. We dealt with this with several watch lines.. We bought the watches, did all the advertising, built a market for them, then the manufacturer started selling retail to cut us out of the loop after we created the market for their product..

You argument about inventory stocking doesn't work either.. Most retailers run very limited inventory these days.. We tend to order as needed and keep just enough inventory to stay alive.. Another math example..

I sell 100 of the above listed product every month and the wholesaler makes $5,000 profit.. The wholesaler cuts me out, sells half as many units (50) and still makes $5,000 for half the work.. Or, they sell the same number of units and make $10,000 instead of $5,000.. Like I said, we see this in the jewelry industry all the time.. Jewelers buy a new product line, advertise it, develop a market for it, and then then manufacturer says hey, I could be making more money if I open my own website and sell directly.. And it works.. For a while.. Until the retailers get fed up and stop advertising the product or pushing it in their stores.. And the market dries up and the manufacturer dies a slow death..

[boba7523]

Money..

If your cost is $100 and you sell it to me for $150 so I can sell it for $200, wouldn't you like to sell it directly fir $200? Look at all the TV ads the scream factory direct pricing! etc etc. It also tends to only happen with established brands.. We dealt with this with several watch lines.. We bought the watches, did all the advertising, built a market for them, then the manufacturer started selling retail to cut us out of the loop after we created the market for their product..

You argument about inventory stocking doesn't work either.. Most retailers run very limited inventory these days.. We tend to order as needed and keep just enough inventory to stay alive.. Another math example..

I sell 100 of the above listed product every month and the wholesaler makes $5,000 profit.. The wholesaler cuts me out, sells half as many units (50) and still makes $5,000 for half the work.. Or, they sell the same number of units and make $10,000 instead of $5,000.. Like I said, we see this in the jewelry industry all the time.. Jewelers buy a new product line, advertise it, develop a market for it, and then then manufacturer says hey, I could be making more money if I open my own website and sell directly.. And it works.. For a while.. Until the retailers get fed up and stop advertising the product or pushing it in their stores.. And the market dries up and the manufacturer dies a slow death..

That totally makes sense.

Could another possible option be to negotiate an even lower wholesale price with the distributor? Since the retail stores can't outcompete its distributor in terms of pricing, they can buy the inventory for even lower prices in order to compete with its distributor's pricing.

With e-commerce growing at such a remarkable pace these few years, there really is no need for a brick and mortar business for certain products such as apparels, skin care products, computer parts etc... I don't even think manufacturers need retail stores to help them sell their products if their brand is already very well known...

[SteveGerencser]

That totally makes sense.

Could another possible option be to negotiate an even lower wholesale price with the distributor? Since the retail stores can't outcompete its distributor in terms of pricing, they can buy the inventory for even lower prices in order to compete with its distributor's pricing.

Why would they sell it to you cheaper?? No incentive at all to do that.. What many do though is stick hard to their MSRP.. So you are free to sell it for less than the manufacturer does in an effort to keep your market share

With e-commerce growing at such a remarkable pace these few years, there really is no need for a brick and mortar business for certain products such as apparels, skin care products, computer parts etc... I don't even think manufacturers need retail stores to help them sell their products if their brand is already very well known...

There are still a lot of products that people want to touch, hold and feel before they buy.. And there are a lot of people that still, and always will, refuse to shop online..

[Bliss Ellison]

Say I have a Prada retail store in the U.S. (sell only Prada products), and I always stock up my inventory from the Prada U.S.distributor. I found out that my U.S. distributor is also trying to make not only my business, but also other end consumers' businesses as well via its own online store (I do not have an online store). Thus, the distributor is reeling in my potential customers by setting lower prices on Prada products than the prices I am charging in my retail store. In this case, what are my options?

I certainly cannot start a price war with my distributor because they will always win... I've been pondering on this question for a while now but can't really figure out how to overcome this. What are your thoughts?

Exactly starting a price war is not going to work. Even leaving that distributor wont make any difference, because if you'd leave him, they'd find some other retailer and they are also getting profits from selling retail.
So one option for you is to change the brand manufacturing the same products your selling currently.

Plus, if you go to the option to leave the distributor, do make sure that if he's selling on retail as well. If he's doing dont forget to get signed a legal agreement that guards your exclusive territorial rights as deepsand has said.

[edhan]

This happens all the times in current market situation. I have a few good suppliers that sells higher prices while redirecting them to us resellers for them to make purchases. Of course some other distributors also sell the same price as us which makes it difficult to compete.

It is up to the distributors whether or not they want to protect the resellers. As the market situation is getting bad, the distributors are now doing their own direct sales instead of just depending on resellers.

[Bliss Ellison]

This happens all the times in current market situation. I have a few good suppliers that sells higher prices while redirecting them to us resellers for them to make purchases. Of course some other distributors also sell the same price as us which makes it difficult to compete.

It is up to the distributors whether or not they want to protect the resellers. As the market situation is getting bad, the distributors are now doing their own direct sales instead of just depending on resellers.

Exactly market situation has played a role in creating such situations. As long as the distributors are selling products on retail prices, they dont care if any of the retailer leaves them. So I think to get a legal agreement signed for the exclusive territory rights is a workable solution.