Researchers from Erasmus University and KU Leuven have published a study in the Journal of Marketing that delves into retailers’ reactions when suppliers initiate direct sales channels to consumers, and the measures suppliers can undertake to preclude negative reactions from these retailers.

The research, set to appear in the Journal of Marketing, is titled “How Retailers Adjust Their Ordering Strategies in Response to Suppliers Initiating Direct Sales” and has been authored by Michiel Van Crombrugge, Els Breugelmans, Femke Gryseels, and Kathleen Cleeren.

A pertinent example is Sony’s recent strategy to sell PlayStation products through its PlayStation Direct online store in the UK, which involves products sold at major retail outlets like Currys and Argos. This strategy, known as encroachment, is seen with other companies such as Nike and Lego, which have also set up direct channels for consumers. While these channels provide suppliers with increased control and visibility over the customer experience, they can potentially alienate and upset retail partners who might see these channels as direct competitors.

This scenario prompts a critical question for suppliers: How will retailers react regarding their ordering strategies with suppliers who encroach on their sales territory? Will retailers withdraw and reduce their orders, leading to higher wholesale prices (an exit response), or will they seek to negotiate better terms, potentially leading to more favourable wholesale prices and increased orders (a voice response)?

The study explored these dynamics by examining the responses of nearly 2,000 retailers when a supplier introduced a webshop in the toy industry. Findings indicate that retailers predominantly opt for an exit response when confronted with direct sales channels from suppliers.

Van Crombrugge reveals that the typical retailer response is to disengage. This is reflected in a decrease in the number of different stock-keeping units (SKUs) ordered, coupled with wholesalers increasing prices to reflect deteriorating trade terms. Specifically, retailers cut back on the number of distinct SKUs by an average of 15 (or 18.75%) following the introduction of the direct channel. Due to these reduced orders, they also end up paying an average wholesale price increase of €0.79 (or 20.84%). Despite the rise in wholesale prices, the total value of orders from the typical retailer at the supplier drops by €399.50 (or 11.69%) in the first six months following the direct channel’s launch.

As noted by Breugelmans, the power dynamics between retailers and suppliers also play a crucial role. Larger, more powerful retailers are less likely to terminate their relationships with suppliers than their smaller counterparts. For the largest retailers, no change in order value is observed. Gryseels points out that this is likely due to the confidence these powerful retailers have in the continued support from their suppliers despite the new sales channels.

Specialist retailers respond differently from generalist ones. They are influenced by their higher switching costs and the direct channel, posing a more significant threat to their primary business, often leading to stronger emotional responses and a higher likelihood of disengagement.

Cleeren notes that, surprisingly, the relationship quality between the retailer and supplier has less impact on the retailer’s reaction than anticipated. Only in exceptionally strong relationships does it mitigate the retailer’s likelihood of terminating the relationship.

For Chief Marketing Officers, these findings underscore the complexities and risks associated with direct-to-consumer sales channels. While such strategies can bring suppliers closer to their end customers, the potential backlash from retailers, particularly smaller ones, can lead to significant order reductions. Suppliers must carefully manage their relationships with smaller retailers, possibly by offering specific incentives to boost confidence and encourage continued business relations. Additionally, suppliers could mitigate the competitive impact of direct channels by differentiating the products, prices, or services offered through these channels compared to what is available through traditional retailers, such as providing channel-specific exclusives or online-only personalisation options.

More information: Michiel Van Crombrugge et al, How Retailers Change Ordering Strategies When Suppliers Go Direct, Journal of Marketing. DOI: 10.1177/00222429241266576

Journal information: Journal of Marketing Provided by American Marketing Association