Branded channels, revisited

Almost twenty years ago, I had the opportunity to work with a major automotive parts supplier that was looking to significantly expand their business in the repair parts aftermarket. They saw this as a global opportunity, and one of the assignments I had was to describe the aftermarket environment as it evolved from the then-embryonic markets of countries like China and India to the differentiated markets of southern Europe and Brazil to the highly efficient and organized markets of North America and Japan. The distinctions as you moved along those stages of evolution were indeed many. One of the important ones was a phenomenon which I called the development of “branded channels” in the most mature markets, strong and significant channel organizations (retailers, distributors, etc.) that had achieved levels of power and prominence at least the equal of the major parts manufacturers. In the North American automotive aftermarket, those organizations are familiar to most of us – companies like NAPA, Advance Auto, Pep Boys, and O’Reilly are examples.

“Branded channels” are quite different than “channel brands”. The latter have been around for a long time in most business and consumer markets, historically positioned as the “value brands” at the Good end of the Good-Better-Best spectrum, targeting the pure price buyer. “Branded channels” are organizations that have developed abilities, attributes and associations linked to the channel itself, as opposed to the products that it sells. When successful, the abilities, associations and attributes linked to a branded channel heavily influence the purchase decisions of customers, much as product brand abilities, attributes and associations do.

Several years later, working with a client in the paint and coatings industry, the importance of branded channels was reinforced. As part of this project, I had lengthy meetings with senior executives in a number of the Big Box home center organizations, which had by then become a major force in the North American landscape. One of these executives used the following story to make a point:

“Let’s say that next Saturday morning, as you are pouring your coffee, your wife announces that the kitchen needs to be repainted. So after some grumbling and perhaps a few extra cups of coffee, you two get into your car and shortly afterwards, pull into your local [name of his firm’s home center], or perhaps you get lost and by mistake pull into the [competitor home center] lot.

“From our perspective, at that point, as you walk into the store, you’ve made the only brand decision that will matter that day. Whichever of those home centers you walked into, a short time later, you are going to push a cart with paint and other supplies out the door and load it into your car. The odds are extremely high that you will buy paint there, choosing from across the rather rich selection of options and price points that you will find available in that home center.” My own experience and quite a bit of data accumulated across many industries leads me to conclude that he is right. Once you have made a choice of a channel, be it a retail home center as in that example or an industrial distributor or an office supplies firm or a supermarket, you are extremely like to make your purchases there.

In discussions with clients, I often give them the following pair of statements in the context of manufacturer-channel organization interactions:

1. “You know how important our product is to you, that our products bring a lot of customers to you.”
2. “You know how important our channel is to you, that our firm attracts the customers that are candidates to buy your product.”

The former of those statements is one spoken by a manufacturing firm executive to his counterpart in the channel organization. The latter statement is one spoken by the channel organization executive to his manufacturing firm counterpart.

In almost every manufacturer-channel relationship that I have observed, while it’s true that to some extent both statements are true at least on some occasions and for some customer segments, in the vast majority of instances, one of the two statements is far more true than the other. And that “more true” statement is the elephant in the room, the fact that dominates conversations, negotiations, pricing and margins, and relationships.

The former statement is the one that manufacturers make when their product brand is so critical to customers that it is a significant driver of their purchase decisions. Such customers will only consider channels that carry the product they favor. The latter statement is the one that is made by channel organizations that have successfully made the transition to becoming a “branded channel”. Their customers will choose among the products that are available from that channel organization. Years ago, I found far more instances in which the former statement was the “more true” one. Today, I find that the balance has shifted considerably towards the latter statement being the “more true” one.

While certainly not the only important factor, the concept and implications of branded channels have become in recent years important factors in both manufacturers’ channel strategy and in the competitive positioning of channel organizations. Some of the reasons for this are probably obvious from the examples above.

The manufacturer knows that if a channel organization has achieved a strong branded channel position, that organization has considerable leverage in negotiations and pricing. Even more concerning, such channels have the ability to successfully introduce other products that compete with those produced by the manufacturer. Many branded channels have in fact done so with their own channel brands and private labels, as anyone visiting a Staples or a Michaels’ can attest, and, in more and more cases, such channel brands are being introduced to compete at the “Better” and sometimes even the “Best” positions on the Good-Better-Best spectrum.

From the channel organization’s perspective, in numerous discussions, I’ve heard long-term executives say things like “When I first took this job years ago, my positioning strategy was heavily based on the products that we carried. We tried to build a strong product portfolio and ride on those brand coattails. But today, all of our positioning is about us. Our in-store service. Our delivery and installation capabilities. Our convenience. Our expertise. Our price commitments. Our loyalty program. It’s all about us, and for our competitors, it’s all about them. Times have changed.” Another familiar example of this change again draws upon the automotive industry. Not too long ago, every car ad on television or in the newspaper was product centered, communicating why a certain brand of car was the one to buy. Today, you can see a TV ad for CarMax, Auto Nation, or even some of the major “auto malls” that never mention a single make or model, that simply promote themselves as the place to go to buy your next car. Times have indeed changed.

All of the above considerations remain important factors for manufacturers and channel organizations, along the lines briefly outlined above. But my reason for including “Revisited” in the title of this article is that significant changes are continuing to occur that make another dimension of the “branded channel” concept one that must take center stage in the strategy decisions of both manufacturers and channel organizations.

My perspective on these changes and their significance was first motivated by the work I have done along with my colleague David Hartman on the changing competitive environment. In a series of articles1, we have argued that the future competitive landscape will be dominated by firms from emerging markets like China that have learned in the middle markets of their home countries how to produce “almost-as-good products at a great price point”. Many of these firms have global ambitions, and many are finding that that competency not only enables them to gain market share at home and in other emerging markets, but that it also enables success in the developed markets of North America, Europe, and Japan. It is a global truth that there are large middle market segments everywhere that are attracted to “almost-as-good products at a great price point”. For those that aren’t yet studying the success stories of emerging market firms like Huawei, Mindray, Sany, Haier, and others, we point to the much more familiar success story of Southwest Airlines, another firm that has figured out the “almost-as-good product at a great price point” formula. We believe that these competitors will become a dominant force in market after market for years to come, even in those industries where they haven’t yet today established a significant beachhead.

One of the factors that will determine the speed and degree of success of firms from emerging markets will be their ability to find channels to market. A few of them got a head start by becoming contract manufacturers for channel organizations, producing to spec the channel brands and private label products mentioned earlier. More and more of them are taking steps to go beyond that position, to either establish their own product brands or to convert their relationships from contract manufacturers to legitimate suppliers of branded products. The willingness of channel organizations to embrace such offers is a key determinant of success for such firms, and it is the branded channels that are most likely to be open to such discussions.

I offer another example from the automotive industry. For those old enough to remember, it took quite a while for Volkswagen to establish its position in North America. A bit later, Japanese carmakers like Toyota and Honda also arrived in North America, and while they were more quickly successful than Volkswagen had been, it was still a long climb. More recently, Hyundai moved at what must have appeared as lightning speed to the people from Volkswagen and Toyota. As in the earlier examples, there were quite a few forces at work, but I think all would agree that the ability to develop dealer channels was among the important factors in shaping Hyundai’s relatively quick success. It was far easier for Hyundai to sell the owners of an auto mall on adding a Hyundai storefront than it was for Volkswagen or Toyota to build a dealer base in the era of “Chevy dealers” and “Ford dealers”.

The branded channels, including the auto malls in the above example, have good reason to be open to new suppliers. They know that it is their own abilities, attributes, and associations that are driving customer purchase decisions, and that they can bring in new product brands (or substitute new product brands for ones previously carried) with relatively low risk. If those new product brands are attractive from the perspective of allowing the branded channel to make more money, they will get a hearing. And those emerging market firms that can produce “almost-as-good products at a great price point” have a very compelling story to tell to the branded channel. The existence of strong branded channels in market after market is among the reasons why we see frequent quick successes for these emerging market competitors.

But that’s just part of the equation in terms of the growing importance of branded channels. In the past, reflecting on the automotive aftermarket and painting and coating industry examples I provided earlier, all of the players involved were in fact “part of the industry”, or, as one client commented, “were on the usual suspects list”: Sometimes such firms were new market entrants, but in most industries, the new retailers and distributors were a lot like their counterparts already in the industry. Even the Big Box home centers shared a lot of characteristics with long-term industry players like hardware stores and lumberyards. The new entrants (and some evolving long-term players) all had new value propositions that they hoped would propel them to leadership positions, and many of those that have successfully became branded channels did in fact have winning ideas about what to do differently.

That familiar faces and “usual suspects” reality has changed radically. I think that most business executives, if asked to reflect and come up with a list of the most significant branded channels of today and tomorrow, would come up with a list that includes Amazon, eBay, Alibaba in China, and, in business markets, firms like Amazon Supply and Google Shopping for Suppliers. None of these firms were, for most market segments, at least until very recently, “on the list of usual suspects”. But they are now often on the short list of competitive worries for many manufacturers and channel organizations, each with a different set of concerns, but all with concerns that are rooted in the competencies and strengths of branded channels and amplified by the emergence of new firms able to produce “almost-as-good products at a great price point” that have the potential to become the partners of these branded channels, in many cases sharing a similar perspective about pricing.

Manufacturers and other suppliers contemplating meetings with these new Internet-based branded channels know that the elephant in the room will be wearing a banner reading ““You know how important our channel is to you, that our firm attracts the customers that are candidates to buy your product.” This is true whether the product to be discussed is baseball cards (2,829,297 listings on eBay, with the usual suspects (card stores and card shows) on the endangered species list) or nail guns (469 products on AmazonSupply.com vs. 95 shown in the Grainger catalog). The list of such frightening comparisons grows daily.

The power and potential of these new branded channel firms cannot be underestimated. In an earlier article2, I cited examples of the appeal that these non-traditional competitors have, drawing upon learning from other market environments, seizing leadership advantages in the use of Big Data concepts, developing best-in-class logistics capabilities, developing Internet tools that offer a superior customer experience, and putting together a supplier base and business model that enables them to not only compete on price, but that in many instances denies the old adage “Better, Cheaper, Faster – Pick Any Two”. I have talked with many customers of these new branded channel competitors that have said “I didn’t have to choose, they gave me all three”. These firms are not just building upon the branded channel concept. They are in fact in many ways redefining it.

For quite some time, I have believed that the branded channel phenomenon is one that is critical to strategy and competitive positioning, for both manufacturers and channel organizations. My “revisited” perspective not only reinforces that belief, but raises it higher on the list of themes that must be addressed in order to ensure future success.

Most of the manufacturers and channel organizations that I work with are still debating whether these new branded channel participants in their markets are friend or foe. There are already enough examples to allow a quick answer of “both”, but I see more and more examples that fall on the foe side, despite some friendly offerings such as eBay’s stores and Amazon’s third-party marketplaces. Many of the foe examples that I see achieve that status by a combination of the ability of these new branded channel entrants to own end customer relationships, their out-in-front competencies in areas like Big Data and best-in-class customer experience, and their ability to win on price. In the future, I think more foe outcomes will occur as these new branded channels pair with new suppliers that offer “almost-as-good products at a great price point”, making the price competition even more intense for the “usual suspects”. The advantages of the new Internet-based branded channels are already clear, with many examples already visible. The additional advantages that will be built upon relationships with emerging market suppliers are ones we will see more and more often in the future, rather than significant current realities.

I think that over time, examples will surface in different industries and for different customer market segments that will fall into both the friend and the foe categories, but to me, that possibility further underscores the need to figure out how these new branded channels fit into strategy and go-to-market plans, identifying those situations in which they can make a contribution to growth and profitability as a friend and those other situations in which a response is required to avoid losing badly to a powerful new foe. My advice is to put that consideration high on the planning agenda.