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First Do No Harm

How does a manufacturer take advantage of the Web without destroying its relationships with retailers?
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From the Front Lines

How does a manufacturer go online without destroying its relationships with its retailers?

I first really learned about the power of the Internet two years ago -- the same day, in fact, that I learned I was an unethical, two-faced liar driven by insatiable greed. I was taught both lessons by one of my most important retail dealers. He had just lost a sale over the Internet to another of our dealers, who had sold one of the leather sofas we manufacture for almost 30% below its normal retail price. The competing retailer was several states away and had a brand-new Web site on which he was offering the lowball price only to Internet shoppers not in his market area. He figured that any business from the promotion was gravy, so any margin was a good margin.

My nine-year-old company, American Leather, manufactures some 80 different collections of custom leather furniture (everything from sleeper sofas to recliners to ottomans, in 13 grades of leather and in more than 75 colors), which we then sell through select higher-end retail dealers throughout the country. As is the norm in the furniture industry, we provide each dealer with exclusivity on the specific collections that it carries within its market area. We've assiduously avoided selling our products through discount or price-oriented catalog operations in order to maintain the integrity of both our distribution model and our brand name. And we've eschewed any direct-to-consumer sales over the Internet, either through our own Web site, which we set up in 1997 to serve as an online brochure, or through the myriad dot-coms that are popping up like the springs in a seat cushion. The irate dealer, however, was convinced that we'd changed our tune and were now encouraging sales of our products online.

The incident was a wake-up call to me: with retailers flocking to cyberspace like birds flying south for the winter, how could we enforce our policy of dealer exclusivity? And perhaps even more challenging: how could American Leather itself take advantage of the growth opportunities offered by the Internet without destroying its relationships with its 600-plus retailers -- the very heart of the distribution channel that we at the company had spent our entire careers developing?

After fielding several calls over the next two weeks from other disgruntled dealers, we leaped into action and established an Internet policy. Purely reactionary, the policy simply declared that we prohibited the use of our name or images of our collections on the Internet by anyone other than ourselves. It would now be impossible, we reasoned, for dealers to conduct E-commerce with our products. But the irony of our victory didn't escape us: we were also telling our customers that they couldn't promote our brand over the fastest-growing, most revolutionary information medium in the world.

From a logistical standpoint, too, the policy was far from ideal. For starters, how could we police it? Even a full-time hire charged with surfing the Internet in search of violators would no doubt miss some references to us. And second, wouldn't such a stringent policy ultimately alienate the very dealers that it was designed to protect? After all, many of them had recently launched their own Web sites -- often at considerable expense -- and hoped to make their pages as content rich as possible.

To address those concerns, we redesigned our site to include more detailed product information -- descriptions of the leathers we offer, biographies of our designers, room shots of the different collections -- and an automated "dealer locator" that allows potential customers to quickly find the American Leather retailer nearest them.

Additionally, and at much greater expense (more than $500,000 annually), in January 1999 we began a Web-oriented advertising campaign through premium consumer magazines and newspapers such as Architectural Digest, Elle Decor, House & Garden, Metropolitan Home, and the Wall Street Journal. It was the first time that we'd stepped out of the trades and into consumer publications for advertising purposes. The aim was to drive people to our site in order to teach them about our products and then give them an easy way to get to the nearest American Leather retailer to sample -- and hopefully to buy -- the furniture. (We still subscribe to the theory that comfort is the single most important factor in purchasing furniture. In a recent Better Homes and Gardens survey, 83% of readers agreed.)

The results were exceptional and highlighted another great benefit of the Internet: in near real time we could see the results of the advertising campaign. Every time a new ad ran in a publication, there was a substantial -- and measurable -- increase in hits to our Web site. We went from several hundred hits a month to an average of more than 30,000 hits a month. Business rose concurrently: our sales went from $19.5 million in 1998 to $28 million in 1999 -- an increase of more than 40%, with largely the same dealer base.

All of that was occurring in a strange atmosphere in which start-up E-tailers with virtually no sales garnered valuations that defied gravity. Within the furniture industry, for instance, there are several new dot-coms whose valuations run in the hundreds of millions of dollars. One of them, Living.com, which is based in Austin, has been in business for less than a year. At its one-year mark -- with no sales and no Web site -- it sold an 11% interest in the company for $35 million. Do the math and you'll see that that equates to a $300-million-plus valuation. The current "veteran" of furniture E-tailing is Furniture.com, a two-and-a-half-year-old company based in Framingham, Mass., that relaunched its Web site in January 1999. Though Furniture.com didn't celebrate its first $1-million sales month until May, as of last summer it had reportedly raised more than $50 million in venture funding. Compare the numbers with those of Ethan Allen -- a rock-solid 63-year-old furniture retailer with annual sales of more than $700 million. Ethan Allen's total market capitalization is about $1.2 billion -- and it actually makes a profit.


I don't want to wake up one day to discover that American Leather's traditional distribution model has become obsolete.


Yet despite the allure of amassing a fortune from negative earnings, most new E-businesses will probably never achieve a level of sales or profitability to justify even their current valuations. But at the same time, because no one knows exactly how the boom will play out, I do feel compelled to think about new online distribution opportunities for my company. I certainly don't want to wake up one day to discover that American Leather's traditional distribution model has become obsolete virtually overnight.

Hence our next step is to consider selling our products directly over the Internet either through our own site or through a furniture E-tailer. Whatever we do, though, it cannot conflict with the sales of our existing dealers. One possibility is to offer our collections on the American Leather site at a normal retail (not a lowball) price. In this scenario the product would be delivered -- and the after-sale support handled -- by the dealer located closest to the buyer. We would then pay the dealers the approximate margin that they would have made on the sale if it had taken place in their showroom. Such an arrangement would give customers the convenience of shopping over the Internet while increasing sales for our dealers as well as for ourselves.

Here's hoping we get our next foray into cyberspace right.

Bob Duncan is CEO and cofounder of $30-million American Leather, based in Dallas.




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