Business Law International

the 2001 Conference of the IBA

Channel Conflict or E-Commerce Avoidance: Successful Examples for an Integration of

Suppliers and/or Sales Intermediaries in an Internet Sales Channel

Michael M. SaxB.A., B.C.L., LL.B., LL.M.

Barrister & SolicitorTrade Mark Agent

Success Factors for On-Line SalesSuccess Factors for On-Line Sales

How well the target market of the product matches the demographic profile of Internet users.

The efficiency of using the Internet as a sales channel, such as the ease by which the sales transaction can be conducted on-line, and the proportion of shipping expenses relative to the value of the product.

The degree of consideration required to make the purchase.

INTRODUCTIONINTRODUCTION

Two Additional FactorsTwo Additional Factors

The ability of the consumer to pay for on-line purchases through the existing payment mechanisms; and

The ability to successfully manage conflict with existing offline distributors while attracting new purchasers of the products and services concurrently maintaining existing ones.

Success Factors for On-Line SalesSuccess Factors for On-Line Sales

What we will Cover TodayWhat we will Cover Today

Examine Channel Conflict arising between Supplier and its offline Distributor.

Decision process – should supplier go online or even permit its intrabrand distributor to go online.

Look at decisions made to go alone, to go together, not go or not permit the channel distributor to go online – Examples

The legal ability of suppliers to restrict intrabrand distributors to offer their product or service online or favour one over another.

Channel ConflictChannel Conflict Some businesses will find it difficult to conduct e-

business because of possible channel conflict Computer hardware manufacturers Compaq and IBM

ventured cautiously in order to avoid the ire of their retail distribution channels. Even in international markets, some may find that on-line orders may fall into the territories of their existing distributors in other countries.

Some retailers have by-passed the issue completely by using the web to engage people and get them into showrooms, actually or virtually, like GM Buypower web site, which moves customers along the sales cycle by referring them to local dealers  

Channel ConflictChannel Conflict

GM Buypower Web SiteGM Buypower Web Site

Channel ConflictChannel Conflict

A large proportion of sales at the retail level could be displaced by e-tail sales.

Retailer' s perceived or actual vulnerability can provoke retailers to refuse or threaten to refuse to sell the manufacturer's products. (Home Depot)

Selling online can prompt retaliation from offline retailers that significantly and possibly permanently lowers a manufacturer's revenues and market share. (Compaq)

For manufacturers who sell through a sales force whose compensation is based only on the performance of offline operations, selling online may cause low morale and high turnover.

Selling On-Line Conflicts and RisksSelling On-Line Conflicts and Risks

Types of Channel ConflictTypes of Channel Conflict

Direct Channel Conflict

Is created by manufacturers who launch a new channel that they own and who currently sell through an offline channel that they do not own such as independent dealers or retailers in the case of auto manufacturers or clothing retailers. These manufacturers are at greatest risk of retailer retaliation.

Types of Channel ConflictTypes of Channel Conflict

Internal Channel Conflict

Is created by manufacturers who sell through their own web site and through an offline channel that they also own. An issue of cannibalization of offline sales by the online channel lowers the compensation of the company's offline personnel. e.g., Dell avoided this problem.

Types of Channel ConflictTypes of Channel Conflict

External Channel Conflict

Occurs when a manufacturer owns neither its online nor its offline channel. This form of channel conflict is the least frequent and the least threatening to retailers.

Factors – Whether or not to Sell OnlineFactors – Whether or not to Sell Online

Does selling online make economic sense

What is the manufacturers’ market position?

Is the industry as a whole moving online?

The degree of dependency or interdependency

Factors – Whether or not to Sell OnlineFactors – Whether or not to Sell Online

StandleyStandley

Strategic Choices for SuppliersStrategic Choices for Suppliers

Some suppliers may wish to ban all sales by distributors/retailers over the Internet out of concern for maintaining the integrity of their distribution system.

Some suppliers may wish to market and sell over the Internet directly to retailers and end users, in addition to maintaining their traditional sales channels through distributors.

Some suppliers reserve some or all Internet sales to themselves under their distributorship agreements.

CONFLICT: Sell Online Without Making CONFLICT: Sell Online Without Making

Any Concessions to their Offline ChannelAny Concessions to their Offline Channel

CONFLICT: Sell Online Without Making CONFLICT: Sell Online Without Making

Any Concessions to their Offline ChannelAny Concessions to their Offline Channel

Are the economics of selling online favorable? Yes unless tactile, visual or audio senses are important to the consumer and that outweighs price advantage

Is the manufacturer a market leader? Yes they are the benchmark in many products.

Is the industry moving online? Yes Is the offline channel dependent on the

manufacturer? Yes the brand is strong.

Spin-OffsPrice DifferentiationProduct DifferentiationMarket SeparationShare

AVOID CONFLICT: Sell Online and AVOID CONFLICT: Sell Online and

Appease their Offline ChannelAppease their Offline Channel

AVOID CONFLICT: Sell Online and AVOID CONFLICT: Sell Online and

Appease their Offline ChannelAppease their Offline Channel

AVOID CONFLICT: Sell Online and AVOID CONFLICT: Sell Online and

Appease their Offline ChannelAppease their Offline Channel

AVOID CONFLICT: Sell Online and AVOID CONFLICT: Sell Online and

Appease their Offline ChannelAppease their Offline Channel

AVOID CONFLICT: Sell Online and AVOID CONFLICT: Sell Online and

Appease their Offline ChannelAppease their Offline Channel

Offline customers will shop on their competitors' sites.

May lose market share May lose a valuable opportunity to improve

their profitability. Lose the opportunity to engage the customer

and have millions of potential customers visit a site annually at a fraction of the cost of trying to use other media to get the same exposure.

Choose Not to Sell OnlineChoose Not to Sell OnlineAvoiding E-MarketAvoiding E-Market

Risks Risks

In Canada, authorities place low priority on cases of low economic impact

Cases in Canada have been dealt with indirectly - Polaroid Canada Inc. V.  Continent-Wide Enterprises Limited

Section 75 “Refusal to Deal” - Chrysler Canada Ltd. V. Canada ( Competition Tribunal)

Legal Ability of Suppliers to Legal Ability of Suppliers to Restrict Intrabrand DistributorsRestrict Intrabrand Distributors

In the US,-United States v. Colgate Co. A Manufacturer can defend Internet restrictions on

two levels manufacturer's unilateral Colgate right to deal only with

those distributors it wishes in the absence of an intent to monopolize ;

a manufacturer can show that its non-price restrictive contracts with distributors are pro-competitive because they promote efficient delivery and a stable supply of goods and services for the consumer, and increase interbrand competition by enhancing the ability of manufacturers within an industry to compete for customers

Legal Ability of Suppliers to Legal Ability of Suppliers to Restrict Intrabrand DistributorsRestrict Intrabrand Distributors

Legal Ability of Suppliers to Legal Ability of Suppliers to Restrict Intrabrand DistributorsRestrict Intrabrand Distributors

EU– Will be covered by Heiko Tietz, M.B.L.-HSG