Pioneer Electronics (USA) has gingerly begun experimenting with something it has never done before: selling its products directly to consumers.
But with close to $US900 million per year in sales through a "maxed out" network of 1200 dealers and 15,000 stores, Pioneer will tread very carefully as it rolls out its first electronic commerce site on the Web.
Why risk alienating dealers? "Because our competitors are set up to be able to do this," said Mark Smith, vice president of strategic planning at Pioneer. And because existing channels "are relatively maxed out", he added. "Trying to boost revenue through dealers and retailers brings diminishing returns," Smith said.
Channel conflict can be a tricky issue for manufacturers looking to take advantage of the Web's potential for consumers sales.
To avoid upsetting its current retail network, Pioneer won't sell any of the products already being offered by dealers, such as cassette decks and car stereo systems, Smith said. Instead, Pioneer will bring in products from its Japanese parent company, such as a portable computer CD-ROM drive, and items it has been selling solely to manufacturers, such as computer speakers.
"Some of our sales team is concerned that we are going to hurt some of our smaller dealers," Smith acknowledged. That is why Pioneer has no plans to begin selling its flagship home audio products direct, he said. This fourth quarter, though, Pioneer plans to roll out some new products that will be sold simultaneously by dealers and on the Web, Smith said.
Richard Nardi, a consultant at KPMG International, said one client that he declined to name skirted the problem by referring all Internet sales leads to its existing reseller network. That company is more interested in increasing revenue than in cutting costs by eliminating the middleman, Nardi said.
"There are multiple ways to deal with channel issues," he said. "Nobody seems to know the right answer."
Smith estimates that the new electronic commerce site will gain less than 0.5 per cent of Pioneer's sales in its first year and won't turn a profit for 18 months. Nevertheless, he said: "it's something that's very important to the company".
The project has also forced Pioneer to learn about retailing and handling things such as product returns and bad debt. "It's shaken our company, believe me, to the core to deal directly with consumers," he said. "It's been really healthy and really eye-opening. It's given us a new perspective on what it's like to be a retailer."