Channel Conflict: When Is It Dangerous?

Manufacturers today sell their products through a dizzying array of channels, from Wal-Mart to the World Wide Web and everywhere in between. Since most manufacturers sell through several channels simultaneously, channels sometimes find themselves competing to reach the same set of customers. When this happens, channel conflict is virtually guaranteed. Such conflict almost invariably finds its way back to the manufacturer. Conflict comes in many forms. Some is innocuous - merely the necessary friction of a competitive business environment. Some is actually positive for the manufacturer, forcing out-of-date or uneconomic players to adapt or perish. But some is truly dangerous, capable of undermining the economics of even the best product. Dangerous conflict generally occurs when one channel targets customer segments already served by an existing channel. This leads to such a deterioration of channel economics that the threatened channel either retaliates against the manufacturer or simply stops selling its product. In either case, the manufacturer suffers. The stakes can be high. Consider a few examples from the United States. Hill's Science Diet pet food lost a great deal of support in pet shops and feed stores as a result of the company's experiments with a "store within a store" pet shop concept in the competing grocery channel. In the auto market, ATK, the dominant seller of replacement engines for Japanese cars, lost its virtual monopoly when it attempted to undercut distributors and sell direct to individual mechanics and installers. Quaker Oats' recent $1.4 billion writeoff from the divestiture of its Snapple business was caused in part by channel conflict. Quaker had planned to consolidate its highly efficient grocery channel supporting the Gatorade brand with Snapple's channels for reaching convenience stores. Snapple distributors were supposed to focus on delivering small quantities of both brands to convenience store accounts while Gatorade's warehouse delivery channel handled larger orders to grocery chains and major accounts, leveraging Quaker's established strength in this area. However, the strategy backfired. As Quaker suggested moving larger Snapple accounts to Gatorade's delivery system, Snapple's distributors revolted. They saw the value of their Snapple business as an exclusive geographic franchise that the split channel strategy would undermine. Several Snapple distributors took legal action against Quaker. The company ultimately backed down, but the dispute had created a considerable distraction at a time when competition from Arizona and Nantucket Nectars was intensifying. Identifying a threat While it is clear that some channel conflict can be devastating, many manufacturers have a hard time figuring out exactly which conflicts will pose a threat. We believe the key to spotting dangers ahead lies in answering four simple questions: First, are the channels really attempting to serve the same end users? What may look like a conflict is sometimes an opportunity for growth as a new channel reaches a market that was previously unserved. When Coca-Cola installed its first vending machines in Japan, for instance, retailers objected. However, the company succeeded in showing that while the vending machines did indeed serve the same customers, they did so on different occasions and offered different value propositions. It was able to counter the retailers' noisy complaints with economic realities. In a similar way, companies like Charles Schwab are using online channels to satisfy latent consumer demand for new approaches to personal financial services, such as low prices combined with abundant, readily accessible information for the "do-it-yourself" customer segment. Second, do channels mistakenly believe they are competing when in fact they are benefiting from each other's actions? New channels sometimes appear to be in conflict with existing ones when in reality they are expanding product usage or building brand support. …