Whose customer is it anyway?
- 27 October, 1999 12:56
While Compaq's retail strategy saga con-tinues to unfold with sections of the Australian channel flexing their muscles, strategic media leaks and subsequent media hype are keeping the channel community entertained in a way not far removed from the experience of Roman gladiatorial contests.
For one, the audience of confused resellers has already given the thumbs down to Compaq Australia's managing director, Ian Penman, accusing him of lacking strategic vision and of foul play. It is a given, though, that in this game "thumbs down" might not mean a literal death for the unfortunate combatant. But the threat of losing millions of dollars may well be compared to death in the "economically (over)rationalised" world of business where the bottom line has long ago become the only line worth remembering. And thanks to Harvey Norman's decision to ban Compaq products from its stores in response to the opening of Compaq's eight pilot retail outlets, Penman lost $50 million before he even had a chance to explain his strategy to the channel.
It is not surprising that retailers as big as Harvey Norman and Coles Myer would scorn Compaq's recent decision to take its SOHO configure-to-order PC line of Presarios and Prosignias direct to the market. After all, according to a report by the World Information Technology and Services Alliance, Australians spend close to $US6 billion on IT hardware a year and getting a piece of that sweet dollar pie would be on the mind of every Gerry Harvey (managing director of Harvey Norman) and Ron Harris (managing director of Harris Technology) on this planet. However, the truth is that only a fraction of that $US6 billion actually comes from selling hardware at the low end of the market. Moreover, both PC vendors and their mass-merchants and resellers are painfully aware that dwindling PC margins will soon make that market even less profitable than it already is. And in such an environment, ownership of the customer relationship becomes the key to sustainable profitability.
In this particular saga, Compaq has been careful not to invade the turf cultivated by its resellers. In fact, according to International Data Corp's PC analyst Bernard Esner, the majority of vendors who go direct exercise caution and try not to undercut their channel partners.
"Compaq's prices for its Presario range through its Connect stores are more expensive than in the Tandy store, which is their channel partner and confidante," Esner said.
"It's $1999 if you buy it direct from Compaq and only $1699 from Tandy. I understand it's a slightly different processor and configuration, but not $300 worth! If you were really going to go out there and screw the channel, you wouldn't have an uplift of $300. That indicates that there is still a degree of caution involved."
The central question of the Compaq versus retailers war, then, is not who sells the PCs, but in fact who owns the customer. And Compaq's efforts in establishing a direct retail presence seem to be pointing in the direction of retailers.
"The retailer owns the customer, absolutely," contends Peter Geer, national computer buyer for Myer/Grace Bros and one of the active players in the Compaq retail battle, which has been stirring channel emotions for the last two months. "[Retailers own the customer] in the sense that the whole provision of service and after-sale service, finance, the reality of having places where people can come in many locations make this relationship possible and that there is no question about who built that relationship."
Coles Myer "asserted" its customer relationship ownership rights by forcing Compaq into negotiations that, according to Geer, resulted in Compaq's decision to put its retail strategy on hold. "Compaq's decision not to open any more stores at this stage has more to do with getting a clarity of understanding of what the retailer can offer. I don't so much think of [the retailers' actions] as a 'backlash'. Having been involved in discussions with them, I realise that their plans were to some degree developed in isolation and there were a whole lot of different perspectives they hadn't considered well before they made that announcement," Geer said.
Rather than take major action, Coles Myer actually went down the road of highlighting what it was able to offer to Compaq and what made it relevant in the marketplace.
And it is obvious that, as IDC's head of research in the Asia-Pacific, Graham Penn, points out, while the customer ownership is not "an either/or situation", it is the relationship, not the brand, that plays a bigger role in the consumer market.
"In the business market, branding is obvious because it makes it easier to manage all devices in the organisation and consistency is important," Penn explained. "But in the consumer market, that is different, because [consumers] might buy a new computer every five years and they are not buying in multiples, so it is not necessarily going to be the same product."
In the mass-merchandising business model, IT manufacturers' roles are reduced to that of suppliers with no real brand power on the retail floor. According to veteran of the Australian retail industry and marketing strategist Allen Roberts, the degree of control a retailer can exercise over a manufacturer "depends directly on the power of their brand to attract sales in the retail outlet". At the same time, it is the retailer that decides on the amount of shelf space to be allocated to a manufacturer and it is the retailer that owns the relationship with the customer a manufacturer would like to call their own.
"Manufacturers simply supply the goods for sale in retail outlets, relying on substantially generic marketing activity directed at people with whom they have no interactive relationship to choose their pro-duct when they go into a retail outlet," Roberts explains.
"But manufacturers' customers are normally middlemen of some type, often a string of them, wholesalers, distributors, retailers and so on, yet they aim substantial amounts of marketing funds to attract the custom of their customers' customer to their brand in their customers' range. [It's] confusing, but that's the way it has always been. However, that paradigm is on the way out as new e-commerce models evolve."
According to Ben Reeve, Compaq Australia's manager for segment and channel marketing, a technology-related metamorphosis of the consumer market is exactly what made Compaq reconsider its options. "This is a proposition that gives our customers the channels they want," Reeve explained. "We call it a 'clicks and mortar' model, the model in which customers take the ownership back themselves and decide who their trusted IT advisor is going to be."
It would be easy to accuse direct selling vendors of high treason and insatiable greed, yet one has to understand that the very technology IT vendors invented is now forcing them to reconsider their priorities and to radically rethink their game. For, in the world where customer loyalty translates into economic power, IT vendors have always been beaten at their own game by allowing retailers to take the advantage of technology in collecting customer knowledge.
Coles Myer's Geer argues this was so because vendors have no skill in using their customer knowledge to regain the ownership of customer relationships.
"It's true to say that vendors have been collecting customer data for a long, long time through registrations and so forth," Geer commented, "but they have done absolutely nothing with it. In that, they demonstrated that their caring for their customers on an individual basis is actually pretty poor," he said.
Geer believes there are specific skills that are required both in the manufacturing and retailing sides and, as such, they are not necessarily transferable. "Being shopkeepers is not as easy as it might seem - you don't just start a shop and play with the cash register - there's a lot more to it," he said. "There is certainly an enormous value that we as retailers add to the supply chain, not the least of which is that we make a proliferation of options available to customers in one place."
Yet the lack of value-add seems to be the reason that pushed Apple, and now also Compaq, IBM, HP and others, to search for new distribution models in the first place.
Myrna Van Pelt, Apple Australia's corporate affairs manager, reveals Apple's decision to take its products direct to the market through its Apple Centres two years ago had a lot to do with the fact that "the retail experience was not as positive for our customers as we would have liked.
"These days, customers are a lot more demanding in terms of services and they've become a lot braver in terms of what they want. They are much more aware of their rights as a consumer and we must therefore do much more in terms of finding out what their expectations are," Van Pelt said. "We weren't able to guarantee the required customer service levels. You know, at the end of the day the mass merchants were telling us that it was easier to sell a PC than it was to sell a Macintosh. We would dispute that, but that was the debate and this is how it was resolved - by us deciding to go on our own."
According to Van Pelt, the strategy has worked equally well for the vendor and its resellers and she can understand why Compaq would want to try its own model of heavily branded stores in Australia. "I think what Compaq is doing, what they're experimenting with, is challenging the market. Globally, vendors are being challenged with sharper margins and how to best position their products in the market," she explained. "The receipt has certainly worked for us."
The world of IT sales is certainly changing and as Dell and Gateway have demonstrated, there are clearly vulnerabilities in the channel model. Combined with the need to reduce cost, this makes a fertile land for further fragmentation of the vendor-channel relationship. But, as market strategist Roberts points out, while the customer is up for grabs, the battle hasn't been lost, because "the one who builds a relationship based on the generation of value will be the one who owns the relationship".
Take it from Geer, who says that vendors will always try to cut prices by eliminating elements of their cost structure. "It's all about whether that element of the cost structure is adding value or not. So, it's beholden on us as retailers to continue to develop and add value and to explore how that way of adding value may change," he advised. "The point is to remain flexible and nimble enough and about what we can bring to the table to make their product more attractive."