Media Zone: Disintermediate This!1 Oct, 2011 By: Peter Koeppel Response
Disintermediation is the elimination of intermediaries in the supply chain — the so-called cutting out of the middleman. Amid intensifying economic pressure, the practice has gained traction. Media fragmentation has made it more difficult for brands to establish a presence, and that has played into the ability of a handful of multi-national retailers to call the shots.
Big-box retailers have shrewdly cultivated consumer loyalty with an enticement of low prices and reliable quality products. A byproduct of this goodwill is that these players regularly tap the public’s affinity for them by selling products directly imported from manufacturers under umbrella brands such as Costco’s Kirkland or Home Depot’s Husky — brands that give the retailer better margins. In response, a number of well-known mainline advertisers have turned to direct response television (DRTV) as a means of establishing their own direct-to-consumer channels. But the story of disintermediation and DRTV isn’t as simple as a series of chess moves and counter moves, because the use of the practice creates complexities and, ultimately, benefits to all participants in the supply chain.
Take the grill category, for example. The market for barbeques is controlled by the two major home improvement chains, a few major discounters and club stores. One leading retailer began putting up SKUs for bid, whereby they would specify BTUs, number of burners, wheels, side shelves, etc. Naturally, the ensuing auction drove wholesale prices down. Add in allowances for co-op advertising, returns and other programs, and the margins begin to get thinner than the flimsiest stainless steel veneer.
Then the retailer began importing its own grills with a name consisting of a portmanteau of other brand names that sounded vaguely familiar. Throw in the public’s trust in the retail mother brand and, if the price is right, the public makes the leap of faith to the no-name brand, to the detriment of the brand manufacturer. The latter needs a decent margin to provide adequate promotional support and drive sell through, but far too often sacrifices those profits under pressure to produce top line volume.
Enter DRTV, which allows brand advertisers to open up a direct sales channel with consumers and disintermediate the retailer. It works like this: in the “best” case, the manufacturer has a profitable TV campaign and whets the appetite of the retailers, putting the manufacturer in a stronger position to negotiate when they are ready to go mass.
“Better” is a self-liquidating advertising program that allows the manufacturer to make enough profit on their direct sales to break even, while they educate consumers about their product’s superiority. That way, when that buyer is faced with the cheaper choice at retail, they opt for the superior branded product despite the premium.
In the “Good” scenario, the manufacturer partially offsets the cost of advertising with direct sales replete with better margins — a benefit they simply would not get from a sunk-cost, general ad campaign. The DRTV helps accelerate distribution of the product from savvy retail buyers who have experienced the power of As Seen On TV-style promotion.
Ironically one of the ways that those buyers know how potent DRTV can be as a marketing tactic is that a number of the same retailers mentioned here — including Best Buy, Home Depot, Target and Sears — have used DRTV themselves to promote house and exclusive brands such as Craftsman and RIDGID to do precisely what is being discussed: teach consumers about product differentiation, and then drive them to retail shelves! The point here isn’t to vilify mass retailers — they are operating in a free market system. And to be sure, when a manufacturer does open up a direct channel, it usually ends up at retail, where the big brick-and-mortar players will reap their share of benefits.
But the reality is that in today’s marketplace, manufacturers have become retailers and vice versa. No matter the perspective, all would agree that part of what propels the marketplace forward is a knowledgeable consumer ready to buy. One reliable catalyst: DRTV. ■
Peter Koeppel is president of Koeppel Direct, a full-service media buying agency based in Dallas. He can be reached at (972) 732-6110, via E-mail at email@example.com or on Twitter @DRTVBUYER.