Disintermediation
by A. Michael Baker - Printed in Specialty Automotive Magazine
It's a three dollar word made up some Cheetos munching internet guru and picked up by all the so-called "evangelists" telling you and I what a great future we'll have if only we invest in their schemes for a brave new world. All they mean is cutting out the middleman. That's it. Disintermediation...cutting out the middleman. Simple. But it is extraordinarily important for you and your future.
Will people sell parts on the internet? Of course they do now and will continue to do so. From one person in a bedroom to megabuck startups like carparts.com there are thousands of web sites offering automotive products for sale online. Our discussion here is whether manufacturers will sell direct on the internet because this is the danger of disintermediation. You are the middleman they are cutting out. The manufacturers won't need you anymore; they'll be selling the consumer direct. That's disintermediation.
Unfortunately, disintermediation has already begun. Some manufacturers, like Crane Cams, already have consumer e-commerce sites and are selling direct. Other manufacturers are a little more sneaky. They pay to put their products on sites like RaceSearch or McMullen/Argus' gr8ride.com, let site operators take the orders for a nominal commission, and ship the product direct. Either way, those manufacturers are competing with you for your customers. It wasn't enough that certain mail order retailers were destroying the marketplace by selling to consumers at WD price levels. Now you have to worry about the very manufacturers you buy from.
Lots of manufacturers (maybe even most of them) are looking hard at moving away from the traditional performance distribution chain. Their reasoning is simple and aimed at maximizing profit. First, they look at the difference between the price they sell to the WDs at and what the consumers are paying. All that extra profit looks mighty tempting. Then they here the siren song of the internet. "Hmm, I can throw up a web site, let the web site take and process the orders, and then I ship the product out. I can have all the money instead of sharing it with those greedy WDs and Jobbers."
In Crane Cams' annual Letter to Shareholders they write, "We expect that as certain of our distributorships grow in size and our Internet website begins servicing most of our customers, Crane's smallest distributorships will start to phase out unless these distributors begin selling directly to the end customer or, alternatively, become 'fulfillment houses' for our internet sales." This suggests that Crane will forego 2-step distribution and sell only to consumers or high-volume retailers. They leave the door open to the possibility that some Crane distributors can stay in the game by warehousing and shipping Crane products to Crane's customers, perhaps on a fee basis; but they won't be buying and selling Crane parts. Traditional WDs and Speed Shops are out the door. Believe me, Crane certainly isn't the only manufacturer pursuing this strategy; they are just a little less sneaky about it.
The future for the performance industry as a whole is bleak and filled with "marketing-quakes" of unimagined intensity. Traditional mail order retailers and the new internet giants are beginning a war for market share using a business model of massive volume, perfect operations efficiency, and razor-thin (if any) profit margins. The manufacturers are entering the battle and can blow the doors off any retailer when it comes to a price war. Even the magazine publishers like McMullen/Argus plan to become retailers of performance parts and accessories. If everybody is going to sell over the internet we won't need WDs, Jobbers, or Manufacturers Reps. The next couple of years are going to be filled with turmoil as some "leaders" in our industry try their best to destroy it.
My Predictions
In the 1970's I subscribed to a magazine called "The Futurist"; kind of a trade magazine for people paid to predict the future. These weren't psychics and mediums. I'm talking about economists, scientists, sociologists, and other highly educated researchers utilizing scientific methods. From time to time I take out the issues I saved for a good laugh. Not one thing they ever predicted came to be. With that in mind and knowing that I am not a Ph.D., I offer my own predictions of how I think disintermediation may play out in the performance market over the next two years and how you can survive as well as prosper.
Manufacturers, e-tailers, and mail order companies are going to engage in a price war for market share with a number of today's big brand names. As they achieve an ever greater market share, many Jobbers and Distributors will go out of business as they see sales drop due to noncompetitive pricing. After the first wave of traditional performance businesses go under, we will begin to see direct selling brand name manufacturers go under. They will lose the support of the traditional distribution system and find out just how difficult it will be to take, process, and ship thousands of individual orders every day. What they thought were going to be big margins will disappear as they sink in the quicksand of an operations swamp. Some will make it in the new strategy. Most will not and some will disappear forever. You'll know when it begins as you start to see industry consolidation through strong manufacturers buying out their competitors.
The e-tailers will be around just long enough to screw things up because their basic business plans are simply not economically viable. Think about it for a minute or two. Those companies are throwing millions of dollars and hundreds of computer programmers into building e-commerce sites. Investors expect that investment to be returned with interest! The products they sell are drop shipped to the consumer by a manufacturer or, more often, a distributor. E-tailers face a customer service nightmare and can't control distribution costs. That's why Amazon is building it's own state-of-the-art distribution centers and dropping the drop ship business model. Most big e-tailers plan to capture the market by selling with little or no gross margin. When their investors tire of the losses these companies will begin to raise prices to get higher margins and see their sales growth stop. Then the investors will start to abandon the company. This is where buy.com finds itself today. No large e-tailer has been able to grasp the unique technical needs of our industry. Just try calling or e-mailing any of the large e-commerce automotive sites and asking the most basic technical questions consumers ask you. When you here the answers you'll know these guys can never last.
The big mail order guys are going to be the big mail orders buys until they stumble on their own. They got to be big by building highly efficient operations that can prosper on small margins. But they never last forever. Remember the J. C. Whitney ads in the 50's and 60's? How about the Honest Charlie ads in the 60's and 70's? They come, they go. You've always faced that competition and you always will. Disintermediation and big e-tailers will effect them just as much as you.
Those of you left standing when the dust clears will be strong and smart. You'll be based in bricks and mortar with a web site adds to your base business. You'll give great customer service with the same great technical advice you've always given the consumer, have a highly efficient operation, and sell products from manufacturers with a pricing model that lets you earn a good living.
Why won't disintermediation succeed?
First, one must always remember that the internet is simply another channel of communication. You and I can communicate to the marketplace on the pages of a magazine, through a television show, or on the pages of a web site. You and I can communicate with the marketplace by e-mail or by phone. Customers can place orders by mail, phone, or fax just as easily as typing it in on a web page. There is really nothing new about the internet; just a different technology for delivering information and communications. The only true difference is the potential for a lower cost of communication. See the internet for what it is and use it for the things it does best.
Secondly, you must consider the experiences of other retailers and manufacturers on the internet. The dirty little secret of the web is that product e-tailers don't make money, pornography distributors do. You can drive the e-tailers right out of business. No manufacturer has yet been able to make the internet consumer direct business model work. Levis began to sell their products direct to consumers over the internet and then aborted the mission shortly after launch. In announcing the shutdown, Levis said the reasons for doing so were the expense and difficulty of building and maintaining an e-commerce web site. I've worked directly with the same software and technology used by Levis and can attest to the validity of their reasons. But, left out of the press release was the news of the pressure put on Levis by the distribution channels. If Levis was going to sell direct to the consumer, then the retailers were going to carry someone else's jeans! You can stop the manufacturers from going direct just like the distributors and retailers did with Levis. Internet sales are not all that they are cracked up to be.
Finally, the basic truth of mail order is that the majority of consumers want to see what they are buying and take it home with them when they buy it. Mail order works best when that is the only way a consumer can find a certain product. Sears made a fortune selling stuff to people in rural areas when those people couldn't buy the same stuff locally. Now that there is a Walmart in every town larger than a single intersection and it only takes 15 minutes to drive into town, Sears is out of the mail order business. When there were a lot of speed shops in the United States, mail order retailers were relatively small. Now there are many fewer speed shops and some of the mail order retailers are huge operations. The internet will never be able to reach every consumer and the majority of consumers it does reach will still prefer to come in your store to shop for and buy the products they want.
Protect Yourself
Without going into the marketing issues I covered in earlier columns, here are some things you need to do. Don't buy from competitors when you can avoid it. Never give aid and comfort to the enemy. When a manufacturer or WD starts selling direct to the consumer find another brand to sell or another warehouse to buy from.
Demand that performance and accessory manufacturers provide you with product and price data in a standardized format that can be easily integrated into a searchable database for your web site. You wouldn't believe the man hours I've poured into writing understandable descriptions and reformatting data to put a manufacturer's product line up on a web site. This is really a job that SEMA could facilitate. Put the pressure on SEMA and the manufacturers.
Hunker down, save money, and invest judiciously in your operation. You'll need a reserve to survive the lean times. And, don't let the internet robber barons take you to the cleaners. A really nice, though small, e-commerce web site can be put up for just a few hundred dollars. A full blown industrial version with tens of thousands of parts on it can be done for thousands. It doesn't take the millions that the big e-tailers are pouring into their sites.
Before I leave you, let's review a little computer history. In the mid-1980's, mainframes were dead. Sales people didn't need a simple terminal to do order entry all day; they need an expensive box with the power to do engineering drawings on their desk for order entry. Hey, we all bought in to it at $2000 to $5000 a copy! What's the next great thing for the millennium? Simple terminals hooked to a mainframe! In 20 years we got all the back to where we started. Remember multimedia? It was another "next great thing" that never was. The internet arrived just in time to make us forget all the money we lost on multimedia stocks. Now the Internet is the next great thing! Before you begin to think I'm just another neo-luddite, think it though for yourself. The internet is changing things and will continue to do so. But not to the degree that the dot com gurus would have you believe; and not to the degree that some people in our industry are counting on.
