I had the privilege of addressing the audience at the GTMC’s domestic conference in London at the beginning of November. Over the summer, there has been a lot of debate around the value of indirect distribution, so it gave me the idea of exploring myth versus reality.
Everyone needs distribution right? Maybe not. Imagine you live in a house that is conveniently situated between Twickenham railway station and the 80,000-seat rugby stadium, which is just a short walk away. Like many an entrepreneurial resident of the area, you set-up a table selling hot breakfast baps in the front garden of your house. In this case, you probably don’t need a distribution strategy! But for everyone else, the challenge is: how to get your goods and services from the “factory gate” into the hands of paying customers?
Cutting out the middleman seems like a good idea to many. On the surface, it would appear that the manufacturer or service provider gets to keep all the profit – although it isn’t as simple as that. But direct sell strategies can work. Just ask Michael Dell. PC manufacturer Dell was a 1980’s direct sell poster child. Michael Dell explains, “I started the business with the question: How can we make the process of buying a computer better?” According to his book Direct from Dell, the answer was to “sell computers directly to the end customer. Eliminate the reseller’s mark-up and pass those savings on to the customer.” We’ll come back to Dell’s story later.
Let’s take a closer look at some of the commonly used arguments in favour of direct sell models from the wider business world.
Myth #1: My brand is so big it doesn’t need indirect distribution
Brands don’t get much bigger than Coca Cola. And even though the company spends more than three billion dollars annually on marketing their drinks, you don’t see them selling directly to consumers. The cost implications of such a direct sell operation would make it a non-starter. Instead, Coca Cola uses a network of third parties such as convenience stores, supermarkets, restaurants and vending machines. Why? A key reason is to ensure the drinks giant enjoys the widest reach through established channels and partners.
Myth #2: Indirect distribution means relinquishing control
In the distribution debate there is a tendency to oversimplify. Apple may have begun as a mainly direct sell operation, but their distribution strategy has evolved over time. Its flagship stores continue to offer unique experiences such as the Genius bar, but it now benefits from a diverse range of retail partners (in the UK these include PC World, Argos and John Lewis) as a complementary route to sales revenues. The Apple story shows us that one way to manage complexity is to use a hybrid distribution model. Avoiding the over-simplification of a ‘one-size-fits-all’ approach enables the company to benefit from established routes to market and fend off increasing competition in the consumer electronics sector. By working closely with channel partners it retains control.
Myth #3: The channel is broken
Despite the fact that more than two thousand bank branches are forecast to close in the UK over a 5-year period (according to a recent McKinsey forecast) there’s a new bank on the high street – the first in Britain for 100 years. Metro Bank has bucked that trend. It opened its first branch – or store at it prefers to call them – in London in 2010. The bank now has 40 stores across the city and the South East of England, open seven days a week. It aims to have 150 by 2020. The bank invests in making each branch customer (and dog) friendly. So what does the Metro Bank example show? It is often the way a channel is managed and not the channel itself that can make it look broken. While traditional high street banks have exited the high street, companies that can see the inherent strengths of a proven route to market will find competitive advantage in optimising those strengths.
An about turn
I’d like to return to the story of Dell Computers. In 2007, when Michael Dell returned to the company as CEO after a 3-year absence, he recognised that it had become overly reliant on direct sales. What led to that realisation? During the previous 3 years, Dell’s indirect channels had grown at a compound annual rate of 16%.
The indirect channel grew without any TLC or attention. Recognising the strategic value of indirect distribution, Michael Dell introduced a new sales programme. By nurturing the indirect sales channel it was soon returning 20% of total revenues. The lesson here is that the indirect channel may be contributing more than a company recognises. If all you see is the cost of a channel, it is easy to be blinded to its benefits.
Let’s bring it back to travel
When it comes to industry debate about distribution, my advice would be to shout about the vital role that travel intermediaries play in the distribution value chain. Don’t be tempted to ‘sit this one out’ and leave it to the GDSs and providers to argue it out. Rather than seeing Amadeus as a 3rd party distribution system, see us as the enablers of 3rd party distribution.
Both direct distribution and indirect distribution are legitimate strategies, each with associated costs. As the myth-busting examples show, some of the arguments commonly used in favour of direct distribution really don’t add up when you take a broader business perspective.
The bottom line is that TMCs (and other travel sellers) are delivering what travellers want: transparency, choice and value. They are in an enviable position. They know their customers, and can truly personalise their service, because they are closer to them than other travel companies. Taking the raw ingredients of an itinerary and adding a unique blend of customer insight, efficiency, and travel expertise, it’s easy to see why many travellers choose to book with travel agents. We see it as our job to enable their success by delivering as much content to their fingertips and as much efficiency into their operation as we can. Perhaps the real debate isn’t about distribution at all. The much bigger debate is about getting closer to the customer and building sustainable, mutually beneficial relationships.