How do you set up good distribution channels?

[ack]

I hear an important aspect of a line's success is setting up proper distribution channels... What does it take to do this? What are the parameters for success?

I also hear a lot of bad things about current distributors who end up undercutting their own dealers by selling direct, becoming dealers themselves, offering poor service, etc. Some important lines are suffering from poor distribution channels in the US, like MBL, Gryphon, etc; which forced MBL to set up its own shop just days ago...

What about manufacturers who sell direct, also undercutting their dealers and distributors?

Thoughts?

 

[mep]

Manufacturers normally only sell direct to customers when the customer lives someplace where the manufacturer has no dealer representation. Of course, depending on the manufacturer’s financial health, how far away you are from the nearest dealer and whether or not you truly aren’t covered in that dealer’s area/territory can become *fuzzy* and the manufacturer may sell to you directly even though he should have passed that sale on to the dealer. This can be very tempting for a manufacturer who is under-capitalized because he will double his money by selling direct to the customer vice selling to a dealer. This is even more tempting on big ticket items.

As for the perfect distribution model, someone like Gary can speak to this. I would think that you would want excellent dealers in every major city to carry your product so you have coverage across the entire U.S.

 

[garylkoh]

It's difficult - and there is no one model that will work for everyone. Genesis is a very small company - compared to Wilson, Magico or Martin Logan and the likes. As a result (and I don't have accountants riding on my shoulders, just my sister) I can do things and make decisions a larger company that HAS to have revenue to sustain operations cannot.

In the US, my typical conversation with a potential customer goes like this - because I have so few dealers:

Customer: "Why don't you have a dealer near me? I live in xxxxx"
Gary: "Well, which of the dealers near you would trust and would like to work with? If they are really good, I'll be happy to work with them based on your testimony."
Customer: "Err.... I don't trust any of them. Why can't you sell it direct to me and give me a discount."
Gary: "No. I would lose the trust of my dealer network if I do and would rather lose a sale than a dealer."

My problem is that I have to work with dealers on a day-to-day basis. So, I work with dealers I like and I can trust, those who have a passion for music and what they do, and yet have the business acumen succeed, and the ability to close a deal. To meet all of that criteria is very rare.

I would love to have excellent dealers in every major city in the US, but many of the better dealers are already invested in other major brands and don't have the space, time or money to take on another brand. We will never be the "flavor of the day" because we don't advertise as I would rather put the money into the product than on the pages of a magazine. It is unfortunate that Genesis essentially left the market from about 1998 to about 2005. Once a dealer, even an ex-Genesis dealer, takes on a competing brand, he cannot take on Genesis again unless he grows sufficiently that he needs another brand or loses a brand.

If he is successful with that competing brand, it is also not in my nature to put down that brand, and I would rather wish him all the best and hope that he grows enough to take on my brand than to wish him any harm. Enough good dealers have closed down over the past 3 years. I don't wish to see any more carnage.

Without a dealer in every major city, I do look at my existing network of dealers to travel to service a customer. Last year, one of my dealers drove over 2000 miles to service a customer I refused to sell direct to that I gave to him. Because he was my customer, I drove nearly 1500 miles from the opposite direction to meet in the middle. This customer was one who swore off (and swore at) every dealer that he had ever worked with because of poor service. But now, everytime he wants something, instead of going online, he will call my dealer. That's the kind of customer and dealer relationship that's very rare.

My dealers will also call me (or even each other) when there is a customer shopping around calling them from outside their territory. They know that no one - not the customer, not the dealer, and not the manufacturer - will be served if they discount each other to death. Unfortunately, some customers don't think like that, and I wish them all the best and hope that they will buy another brand of loudspeakers.

A dealer network has to have sufficient business and profit to stay in business. It has to trust and respect the manufacturer, and the manufacturer has to trust and respect it. Most of all, the dealer network has to earn the trust and respect of the customer, and the customer also has to trust and respect of the dealer for an equitable relationship.

I think it all boils down to trust and respect. Without either, there is no reason to hand over your money, and there is no basis for a relationship. While you won't have a relationship with the check-out clerk at Walmart, the high-end dealer/hobbyist needs this to survive.

 

[JackD201]

The distributor that undercuts his dealers may as well put a gun in his mouth and pull the trigger. A manufacturer that does that to his distributors might as well do the same.

To me, it's a matter of communication. The terms and area of coverage must be clearly defined.

As an example, I carry a brand of loudspeakers that makes one model that is available factory direct only. That would be VSA and their VR-33. Magnepan did the same some time back with the MMG. The distributors and dealers of both companies were never peeved because VSA and Magnepan first and foremost came out with these factory direct models that didn't compete with anything else in the regular lines directly. Secondly, they did not make any exceptions by supplying some dealers and not others. Lastly, these were both strictly confined to the US market leaving international dealers unaffected. Considering that in this day and age, exports to Europe and Asia comprise a huge amount of the total output of US based manufacturers, this becomes very important.

Like Gary says, the difficulty is when there is no dealer in a particular area. I think the best compromise, one that will not tick off dealers, is to give a discount but it be limited only to the cost of freight and insurance from factory to the customer's door. A cost typically shouldered by a local dealer. The discount is big enough to be felt and appreciated but not so big that should the buyer intend to sell gray into a dealer's territory somewhere else, the discount will automatically be negated or the monetary gain so small as to not be worth the effort. Everybody's happy.