channel conflict when is it dangerous

36 THE McKINSEY QUARTERLY 1997 NUMBER 3

MARKETING

Christine Bucklin and Pamela Thomas-Graham are principals in McKinsey’s Los Angeles and New York oƒfices, respectively. Liz Webster is a consultant in the Chicago oƒfice. Copyright © 1997 McKinsey & Company. All rights reserved.

Christine B. Bucklin, Pamela A. Thomas-Graham,and Elizabeth A. Webster

ACTION-PLUS

THE McKINSEY QUARTERLY 1997 NUMBER 3 37

Channelconflict:When is itdangerous?

MANUFACTURERS TODAY selltheir products through adizzying array of channels,

from Wal-Mart to the World Wide Web and everywhere in between. Sincemost manufacturers sell through severalchannels simultaneously, channelssometimes find themselves competing to reach the same set of customers.When this happens, channel conflictis virtually guaranteed. Such conflictalmost invariably finds its way back tothe manufacturer.

Conflict comes in many forms. Some is innocuous – merely the necessaryfriction of a competitive businessenvironment. Some is actually positivefor the manufacturer, forcing out-of-dateor uneconomic players to adapt or

Separating complaints from economic reality

When there is a conflict, there are eƒfective options

Don’t overreact, but don’t get paralyzed either

The authors would like to thank Tanuja Randeryand Nina Eigerman for their contributions tothis article.

perish. But some is truly dangerous, capable of undermining the economicsof even the best product.

Dangerous conflict generally occurs when one channel targets customer seg-ments already served by an existing channel. This leads to such a deterio-ration of channel economics that the threatened channel either retaliatesagainst the manufacturer or simply stops selling its product. In either case, themanufacturer suƒfers.

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 feedstores 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 undercutdistributors and sell direct to individualmechanics and installers.

Quaker Oats’ recent $1.4 billion writeoƒf fromthe divestiture of its Snapple business wascaused in part by channel conflict. Quaker

had planned to consolidate its highly eƒficient grocery channel supportingthe Gatorade brand with Snapple’s channels for reaching convenience stores.Snapple distributors were supposed to focus on delivering small quantitiesof both brands to convenience store accounts while Gatorade’s warehousedelivery 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 Snappleaccounts to Gatorade’s delivery system, Snapple’s distributors revolted. Theysaw the value of their Snapple business as an exclusive geographic franchisethat the split channel strategy would undermine. Several Snapple distributorstook legal action against Quaker. The company ultimately backed down, butthe dispute had created a considerable distraction at a time when competitionfrom Arizona and Nantucket Nectars was intensifying.

Identifying a threat

While it is clear that some channel conflict can be devastating, many manu-facturers have a hard time figuring out exactly which conflicts will pose athreat. We believe the key to spotting dangers ahead lies in answering foursimple questions:

First, are the channels really attempting to serve the same end users?Whatmay look like a conflict is sometimes an opportunity for growth as a new channel

CHANNEL CONFLICT: WHEN IS IT DANGEROUS?


Many manufacturers have a hard time figuring out exactly which conflicts

will pose a threat

reaches a market that was previously unserved. When Coca-Cola installed itsfirst vending machines in Japan, for instance, retailers objected. However, thecompany succeeded in showing that while the vending machines did indeedserve the same customers, they did so on diƒferent occasions and oƒfered dif-ferent value propositions. It was able to counter the retailers’ noisy complaintswith economic realities. In a similar way, companies like Charles Schwab areusing online channels to satisfy latent consumer demand for new approaches topersonal financial services, such as low prices combined with abundant, readilyaccessible information for the “do-it-yourself” customer segment.

Second, do channels mistakenly believe they are competing when in factthey are benefiting from each other’s actions? New channels sometimesappear to be in conflict with existing ones when in reality they are expandingproduct usage or building brand support. Nike, for instance, has forward-integrated into NikeTown flagship stores that have enhanced brand aware-ness and prestige and given the company more control over brand image.Though competing athletics stores balked at first, the new store is thought tohave boosted sales across all channels.

The collaboration of publishers with new Internet bookseller Amazon.com toenable books to be sold on line and reduce return rates has forced categorykillers like Borders and Barnes & Noble to enter the online arena. Althoughit is still too early to tell, this strategy may expand the market for books asconsumers enjoy easier access to the product and use tools such as EYES,Amazon’s browser, to obtain additional information on new titles.

In insurance, Progressive Auto Insurance has successfully introduced directtelephone sales alongside its agency channel. Auto-Pro provides a 24-hourreferral service to agents as part of the service. Avon appears to be followinga similar strategy in cosmetics: its soon to be launched Internet site willpermit both direct transactions and referrals to Avon sales representatives. Webelieve that eƒforts like these will actually enhance sales in other channels,not cannibalize them.

Third, is the deteriorating profitability of a griping player genuinely theresult of another channel’s encroachment? Poor operations, not conflict,may be the cause of a decline in a channel’s competitiveness. When a weakoperator is the only voice complaining about conflict, manufacturers shouldassess the likelihood that its business will fail and estimate how much revenuethey would lose if it did. They should then decide whether to support theplayer more actively or develop a migration strategy to replace lost profitsby using other, more viable intermediaries within the channel.

Selecting the right partner within a channel is oƒten as important a strategicdecision as determining which channels to use. To avoid becoming dependent



on unsuitable partners, manufacturers should monitor the operations ofchannel partners and work to develop their skills and capabilities. They mayalso find it helpful to switch partners from time to time.

Fourth, will a channel’s decline necessarily harm a manufacturer’s profits?Channels sometimes deteriorate because of economic shiƒts and changes inconsumer preferences. A case in point is the decline of uneconomic medium-sized cigarette distributors and jobbers in the United States during the 1970sand 1980s. These companies were relics of an era of highly fragmented salesand distribution. Cigarette brand leaders refused to prop them up, puttingtheir might behind larger, more economic players instead.

More recently, large pharmaceutical companies and their distributors haverefused to reduce their profit margins to support independent pharmacists.Instead, they have chosen to favor HMOs and mail-order pharmacies withcheaper prices for bulk orders so as to develop relationships with these newand increasingly important channels. Independent drugstores demandingequal treatment launched a federal court antitrust suit that is yet to be resolved.

If a channel is declining because of the emergence of a competing channelthat consumers prefer, the manufacturer’s strategic priority must be to alignwith the new channel. The trick is to do so without provoking the wrath of thedeclining channel, especially if it continues to carry significant volume. Inthe United States, specialty pet food producers are actively aligning with two emerging category killers, PETsMART and Petco, while simultaneouslysupporting the economics of small pet shops. These latter players are clearlyin decline, but still represent 60 percent of specialty pet food volume.Similarly, when Goodyear entered mass merchant channels, it kept inde-pendent dealers happy by introducing specially designed programs to driveshare growth in the tire replacement market.

When to actAnswering these four ques-tions gives manufacturers abetter understanding of whichchannel conflicts are trulydangerous. If a conflict isdestructive and a substantialamount of current or futurevolume passes through theoƒfended channel, manufac-turers must act to alleviatethe situation (Exhibit 1). Inmaking a judgment, manu-facturers should compare the



Exhibit 1

Decision-making framework

Prospect of destructive conflict

Importance of threatened channel in terms of current or potential volume or profitability

High (“fire”)

Low (“smoke”)

High Low

Act to avert or address conflict

Allow threatened channel to decline

Look for opportunities to reassure threatened channel and leverage your power

Do nothing

cost of preserving the volume and related profits of the existing channel withthe economic benefit of entering a new channel, taking into account thelikelihood of retaliation and the costs it might involve.

Scenario planning or game theory can be used to predict channel responsesand to estimate the cost of taking no action. However, as a general rule, achannel in distress that is not in decline and carries more than 10 to 15 percentof volume and/or profit needs attention.

Averting channel disaster

If a manufacturer determines that channel conflict is potentially dangerous,the next question is exactly what to do about it. Exhibit 2 outlines a variety ofways to tackle channel conflict at different stages in its development. Ifconflict has recently arisen between channels focused on the same segments,a supplier might respond by introducing separate products or brands tailoredto each channel.

Black & Decker, for instance, oƒfers three diƒferent ranges via three diƒferentchannels. For casual do-it-yourselfers, it markets the Black & Decker rangethrough K-Mart and similar outlets. The needs of serious enthusiasts are metby the Quantum brand, introduced in 1993 and stocked by The Home Depot.Finally, DeWalt products, launched back in 1991, are designed for theprofessional contractor or builder who purchases from trade dealers.

Similarly, Kendall-Jackson now oƒfers wine sales on the Internet in 13 of the 50American states. The wines sold on line, such as Artisans & Estates, are rarelycarried by K-J’s retail channels, which stock more popular brands such asVintner’s Reserve and Grand Reserve. The company also prices its Internet



Exhibit 2

Ten ways to manage channel conflict

Two or more channels target

the same customer segments

1.Differentiate channel offer

2.Define exclusive territories

3.Enhance or change the channel’s value proposition (eg, by building skills in value chain)

Channel economics deteriorate

4.Change the channel’s economic formula: •Grant rebates if an intermediary fulfills certain program requirements •Adjust margins between products to support different channel economics •Treat channels fairly to create level playing field

5.Create segment-specific programs (eg, certain services not available via direct channels)

6.Complement value proposition of the existing channel by introducing a new channel

7.Foster consolidation among intermediaries in a declining channel

Threatened channel stops performing or

retaliates against the supplier

8.Leverage power (eg, a strong brand) against the channel to prevent retaliation

9.Migrate volume to winning channel (eg, to warehouse clubs for packaged goods)

10.Back off

oƒferings at the high end of street prices to avoid channel conflict, and adds valueby providing guidance for prospective buyers. Its Web site includes over 150 pagesof information targeted at novice, intermediate, and advanced wine lovers.

Another company using a diƒferentiated brand strategy to serve multiplesegments simultaneously is Levi Strauss. It targets Britannia jeans and Levibranded casual wear to moderate-income families via discount chains such as Wal-Mart and Target, while aiming Dockers and Silver Tab clothing atfashion-conscious young adults who shop in department stores and specialtyretailers. Young professionals in search of business casual wear are catered forby Slates, on sale in Macy’s, Bloomingdale’s, and other upmarket departmentstores, while at the opposite end of the scale, bargain hunters can find over-stocks and seasonal, discontinued, or damaged merchandise from all rangesby shopping in Levi’s own outlets.

Alternatively, a manufacturer can create the illusion of diƒferentiation byusing diƒferent names and numbers for the same items and introducing minorproduct modifications. In the mattress industry, for example, major suppliersoƒfer similar or identical products through diƒferent channels under diƒferentnames. Customers are confused by what appear to be hundreds of diƒferentmodels – so much so, in fact, that savvy retailers compile lists of comparableproducts as sales tools.

Similarly, consumer electronics companies sometimes allocate diƒferent modelnumbers to the same product in diƒferent channels. However, this approachmay now be losing ground. Rather than relying on model numbers, consumersare increasingly using buying guides (many of them available on the Internet)to make objective comparisons of features and prices.

Another approach manufacturers might adopt is to divide channel roles sothat individual channels are confined to performing specific functions in thevalue delivery chain. That could mean allocating exclusive territories, orsimply improving the definition and enforcement of roles and terms within achannel, as copier manufacturers such as Kodak did to settle the war betweenvalue-added suppliers and brokers.

Manufacturers could also consider improving the economics of a decliningchannel, which oƒten improves its performance at the same time. They might,for instance, oƒfer rebates if an intermediary satisfies certain requirementsfor value-added service, or adjust margins between products to reflect theservices oƒfered by distributors.

In 1992, GE’s appliance division strengthened its dealer network and retailbusiness by introducing extensive support programs to help dealers andbuilders remain competitive. It adopted a two-tier approach. On the one



hand, it oƒfered its dealers similar purchase discounts to those received bylarge retailers, coupled with financial advice and inventory system support.On the other, it provided capital in the form of favorable loan programs tohelp dealers finance the remodeling of their stores. As a result, the GEdivision expanded its market share from 27 percent in 1992 to 30 percent in1996, despite intense competition. In a similar vein, Sears oƒfers appliancedealers in rural areas financing, systems support, and help in managingaccounting and inventory.

If overlap and falling channel profits are unavoidable, manufacturers mustassess whether they can withstand the retaliation of their channel. Oƒten,though, a channel will be reluctant to retaliate because retaliation would hurtit more than the conflict does. This is usually the case when it is the manu-facturer rather than the channel that really owns the customer. Leadingconsumer goods companies may also be able to leverage their powerfulbrands against a channel to prevent retaliation, as Procter & Gamble didwhen the new club channel emerged and took volume from grocery stores.

Alternatively, a supplier can accept that a channel will react, but limit theconsequences by accelerating the migration of volume to a competing channel.Airlines have pursued this approach by encouraging a shiƒt in sales volumefrom costly agency networks to direct channels and ticketless travel options.

In a few contentious cases, manufacturers have had no choice but to backdown. IBM’s PC group took this path when its attempts to sell direct weremet with vehement objections from its distributor network. The problem ofhow to go direct remains unresolved, but the hemorrhaging of IBM’s salesand market share has been slowed.

When Bass Ale piloted a home delivery service in the United Kingdom inNovember 1995, cash-and-carry warehouses and convenience stores protest-ed, fearing they would lose business. Nurdin & Peacock, a leading cash-and-carry operator selling to independent retailers, withdrew ten Bass beers fromits shelves and encouraged its customers to avoid Bass products. Bassabandoned the pilot.

Channel conflict is inevitable, but not all conflicts are equally dangerous.Understanding a conflict’s source and its true gravity lies at the core ofgood channel management. Genuinely destructive conflict is rarer thanmost companies suppose. The best manufacturers recognize destructivechannel conflict quickly, rethink their channel strategies, and nip conflict inthe bud. Less sophisticated players either overreact to minor conflict or,fearful of destabilizing their channel relationships, become paralyzed andfail to act at all.



channel conflict when is it dangerous

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