Investigation of how seven different entrepreneurs found distribution the key to maintaining a competitive edge.
Investigation of how seven different entrepreneurs found distribution the key to maintaining a competitive edge.
As the stories of these and other smart companies show, how you distribute your wares can be as important as what they are and how you price them. In some cases your distribution channel can be your whole competitive edge
Who, really, are your customers? What's the most efficient way for them to shop? How do you earn their loyalty?
Entrepreneurs, unencumbered by their industry's traditions, are finding fresh ways to answer those questions. They're looking for market penetration at the lowest possible cost, and they're willing to take risks as they investigate new ways to garner customers. They know that having a distribution channel that isn't already clogged with competitors can make all the difference in the world.
It's tempting to dub these peripatetic adventurers "channel surfers," namesakes of TV's notoriously finicky and restless viewers. Always on the lookout for imaginative ways to expand markets, they reject complacency, and their search for a more productive channel of distribution is never over. Creative distribution is their growth lever, and their commitment to keeping ahead of the competitive pack shapes the very nature of their businesses. Here is a sampling of company owners who, in their relentless search for better channels of distribution, just can't lay off the remote.* * *
Fresh Coffee to Go
Product: Coffee beans
End-users: Supermarket shoppers
Conventional channel: Food brokers
Fresh approach: Direct to supermarkets* * *
When Philip Johnson acquired Millstone Coffee from his employer, in 1981, he had already secured distribution for the company's coffee in 125 supermarkets. Since then Millstone has adhered to a simple but expensive strategy: in contrast to the way its competitors' ground coffee is sold, lined up in vacuum packages on supermarket shelves, Millstone Coffee's beans are presented whole, in bins, and grocery-store customers grind and package exactly the amounts they want. The Seattle-based company outfits each supermarket with the displays and the grinders, and the company's route-delivery drivers refresh stock on a regular basis.
In the jam-packed coffee marketplace, Millstone's fresher roasted coffee gave supermarkets a tactical reason to carry yet another brand. And, once they were installed, the display bins and grinders anchored supermarkets to Millstone for the long term by making it difficult for a competitor to lure Millstone's supermarkets with a less expensive product.
By 1986 the market was heating up, and Johnson and his managers wondered whether Millstone could afford to pursue its capital-intensive distribution strategy nationally. It costs Millstone $75,000 to get a single truck and driver on the road. Johnson pondered other options: food brokers, a network of roasters who'd need training, and franchising. "After three solid months of debate, we agreed that it was in our best interests to keep distributing the coffee ourselves," Johnson recalls. "If we went through distributors, our coffee could get lost among the 10,000 products in their warehouses. We weren't going to buy the best beans and roast them to perfection only to have them languish on the shelves and be ruined."
Johnson realized that the slow growth implied by his choice could mean leaving territories vulnerable to aggressive competitors. So he focuses on squeezing the maximum return from each truck-and-driver unit. Johnson continually fine-tunes his formula for choosing the ripest markets. He prefers metropolitan areas with more than two or three dominant grocery chains. (The business generated from a single chain can't justify the expense of a truck.) Johnson has also made it his business to know all about by-the-cup coffee consumption across the United States. That's why, for example, the Midwest, where coffee drinking is high, gets more attention from Millstone than the South does.
Because so much of the company's success hinges on how well stores are stocked with fresh beans, Millstone drivers' compensation package includes a performance incentive. And Millstone does everything it can to enhance its drivers' potential for success: Johnson spent several million dollars on a computer system that permits drivers to use their laptops to report bin-by-bin inventory directly to headquarters, where the data govern roasting and shipping schedules.
Millstone now sells its coffee in 42 states, sales are up to $72 million, and the company is profitable.* * *
Big Rock-Candy Mountains
Product: Penny candies
End-users: People with a sweet tooth
Conventional channel: Supermarkets and sweetshops
Fresh approach: Discount club stores* * *
During the 1980s candy giant E.J. Brach was clobbering Chiodo Candy Co., based in Oakland, Calif., in the war for supermarket shelf space. By 1988 Luis Chiodo was casting about for alternative distribution directions.
"Club stores were new on the scene then. They were stealing supermarket shoppers away," he recalls. Club stores had no shelving fees and were receptive to new products. Chiodo pitched holiday candy displays to club-store purchasers, arguing that they would cheer up the drab stores. "After we moved the holiday candy, we talked them into handling candy year-round," says Chiodo.
In keeping with club stores' demand for large packages, Chiodo developed a plastic tub to hold up to two pounds of penny candy. Soon club buyers were ordering more than 8,000 tubs at a time -- considerably larger orders than those from Chiodo's conventional retail customers, who usually called for only a dozen or so cases of seven-ounce baggies.
Still, the new channel posed some difficult problems. Club stores were so new that suppliers like Chiodo were in no position to know which players were reliable. To his dismay, Chiodo was soon to find out.
One store, gushing red ink, told Chiodo to take back all its unsold inventory of jelly beans and promptly -- in complete disregard of a signed contract that precluded such refunds -- deducted the cost of that excess from its next payment to Chiodo. A second chain attempted to avoid paying for a huge order of chocolates that had melted for lack of refrigeration -- in the chain's own warehouse.
Despite such setbacks, Chiodo's business with such outlets as Costco has continued to grow. Costco's 1993 merger with Price Club, he feared, might jeopardize his strong relationships with Costco's buyers. To his relief, though, as Costco and Price Club melded their operations Chiodo's Costco contacts remained in charge of purchasing.
Chiodo Candy's decision to pursue discount-club markets has taken business away from its other distribution channel, small sweetshops. Those shops now buy from club stores -- it's cheaper than buying direct.* * *
It's in the Mail
Product: Catalog of residential building plans
End-users: Professional residential builders and developers
Conventional channel: Classified ads in builders' magazines
Fresh approach: Direct mail* * *
Dennis Brozak, founder of Design Basics, needed to reach professional house builders and show them how his architectural plans surpassed run-of-the-mill designs.
When Brozak started his company, in 1986, most residential-plan publishers introduced their catalogs at trade shows and advertised in building-trade magazines. Those pages were already thick with competitors' promotions, and Brozak, then only 25, recognized that "I could hardly pass myself off as an industry expert and speak at trade shows." He decided to make presentations -- less personally -- through a direct-mail newsletter, in which he could effectively demonstrate the uniqueness of his designs.
Back then, when direct mail was still pretty new and its volume was lower than it is today, people in the construction trades received it with considerably more enthusiasm than they do now. Brozak invested nearly $10,000 in his first direct-mail effort, cobbling together a list of 30,000 single-family-home builders. To show builders he understood the challenges they face, every issue of his newsletter featured a notorious problem common to architectural designs engineered by nonbuilders. The solution to each of those problems? A Brozak plan.
Today, Brozak says, 85% of Design Basics' $4 million in annual revenues come through direct-mail solicitation. Recently, as a result of an influx of direct-mail competition, Brozak raised the stakes. He has launched a quarterly "magazine," which he circulates to more than 100,000 builders. The larger quarterly publication pitches house designs and the Design Basics catalog, and its special focus on the business basics of the building trades makes it doubly attractive to its readers.
"The magazine has extended the shelf life of our direct-mail pieces from a few days or weeks to a few years," says Brozak. The first issue cost Design Basics more than $70,000 to produce, but it paid for itself within six weeks and has earned Brozak a 550% return on his investment. These days Brozak is busy leveraging his profitable direct-mail channel -- he's introducing another designer's catalog. Design Basics will publish and mail the new catalog to its own subscribers. "This is a win-win deal because the architectural style of the plans in the new catalog is different from that of Design Basics' plans," explains Brozak. "This way we offer our customers a wider selection."* * *
It Runs Hot and Cold -- Who Wants It?
Product: Combination mini refrigerator and microwave oven
End-users: Dormitory residents
Conventional channel: Distributors and manufacturers' reps
Fresh approach: College-dormitory and army-base housing directors* * *
Bob Bennett had his business all figured out -- on paper, anyway. His research indicated that large-appliance distributors were hungry for new products. Their customers, mass merchandisers, had started to bypass them, going directly to the large manufacturers. Independent distributors, Bennett believed, had a reputation for "paying vendors quickly, and they had the trucks and needed new products." So he lined up 170 sales representatives from 17 independent distributors to carry his new product, the MicroFridge. "Theoretically, we had three-quarters of the country covered," muses Bennett, CEO of the Sharon, Mass., manufacturer.
The MicroFridge, a combination refrigerator-freezer and microwave oven that plugs into standard electrical outlets, is a gizmo designed for dormitory living. Bennett's distributors, however, had no contacts at colleges or army bases -- places with large concentrations of dormitories. They foisted the appliances on mass marketers, who had no idea how to move them.
By August 1989 Bennett had been in business for five months, and 3,500 units were languishing in the mass-market distribution pipeline. With his company on the verge of going under, Bennett rustled up some investors and hired four full-time sales representatives to focus on college and army-base housing directors. Those prospects quickly grasped the virtues of the product. They could rent the MicroFridge to dorm residents and, over the 10-year life of each unit, earn annual profits of $50 to $70.
In 1990 MicroFridge sold 11,000 units, in contrast to the few hundred units the independent distributors had peddled during MicroFridge's first few months in business. Revenues climbed to $3.7 million. Today 50% of the units that make up MicroFridge's $14 million in sales move through the college-and-university channel, and 25% go to military bases. Bennett is now opening up two new channels: premium hotels and senior-citizen homes.* * *
The Medium Is the Message
Product: Customized collections of state and federal rules and regulations
End-users: Corporate-regulatory-compliance officers
Conventional channel: Direct mail
Fresh approach: On-line through the Internet* * *
When, four years ago, Counterpoint Publishing sent out the first direct-mail solicitation for its original product -- subscriptions to federal regulatory data on CD-ROM -- there was no faster way for businesses to keep up with government regulations. Nothing is faster than change, though, and two years ago the Cambridge, Mass., company added the Internet to the expanding list of media -- CD-ROMs, daily faxes, and on-line databases -- it uses to carry the latest regulatory information to its customers. Today 25% of Counterpoint's subscribers get its publications over the Internet.
Company president Sandy Friedman explains that considering the mass of the potential market -- millions of people are affected by the changes reported in the daily Federal Register -- testing the channel was worth the gamble. Counterpoint had already invested in the software and hardware to set up a "gopher," or information-exchange station, and so the company was well positioned to distribute its electronic library of information to Internet customers.
Internet protocol precludes broadcasts of promotional electronic mail. Protocol doesn't, however, prevent Counterpoint from shrewdly posting announcements where suitable prospects can easily discover the company's services.
A person searching Internet gopherspace for "federal register" or "government-related information" will come across Counterpoint Publishing and its E-mail address. Another way Internet users find Counterpoint is through specialized mailing lists of Internetters with a common interest -- for example, law librarians, government-document librarians, and corporate librarians. A question sent to such a group prompts a Counterpoint response. Each day, Hal Kingsley, Counterpoint's Internet account manager, answers 200 to 300 such queries for regulatory information by forwarding short descriptions of Counterpoint's subscription services, and he arranges 30-day trial subscriptions for those who express further curiosity.
So far competitors haven't marketed on the Internet, leaving Counterpoint an exclusive audience. Friedman anticipates that the power of the Internet will continue to grow as commercial on-line services like America Online make E-mail a routine communication medium.* * *
Before Their Very Eyes
Product: Idiosyncratic sportswear
End-users: General consumers
Conventional channel: Retail stores
Fresh approach: Television shopping channel* * *
Mark Sneider's newfangled Warmup Scarf (which incorporates a heating element) and Cooldana (a bandanna with a cold pack attached) did not budge from retailers' shelves. Scantily paid department-store clerks had little reason to promote the unusual product line. Explains Sneider, "When they did demonstrate it, it would sell, but they weren't motivated to do much besides ring the cash register." Furthermore, his start-up company, Personal Comfort Corp., in Orlando, had no resources for print or television ad campaigns.
Sneider was growing frantic for a way to promote the virtues of his innovative sports garb when, finally, a manufacturer's rep who understood Sneider's marketing challenge proposed a solution: television. QVC, for example, books orders for products while they are being demonstrated before 53 million viewers.
Sneider managed to hook up with Frank Montemuro, an agent who knows his way around the network. "You need a rep who is respected by QVC buyers and who isn't more than a few minutes from its headquarters," advises Sneider.
QVC required Personal Comfort to stock the network's warehouse with 5,000 units before airtime. Sneider also agreed to take back all unsold inventory. By the end of the first 15-minute show, 2,500 Warmup Scarves and Cooldanas were already history. Since then Sneider has appeared nearly 100 times as a guest host, and he consistently outsells QVC hosts by 200% to 300%. And since that first show, more than 250,000 scarves and bandannas have been sold through the channel.
The success of Sneider's foray onto QVC has had a wider impact. "Now department-store buyers think there is demand," says Sneider, whose promotional inspirations continue along rather unorthodox lines. The Weather Channel, he says, is perfect for heightening interest in his weather-challenging gear.* * *
Dialing for Dollars
Service: Custom software
End-users: Large corporations
Conventional channel: Branch sales offices
Fresh approach: Telesales* * *
Sure, $12 magazine subscriptions move over the telephone, but what about custom software priced at $100,000? Ashok Trivedi figured it was worth the cost of a few phone calls to find out. In 1988 his cash-strapped start-up, Mastech Inc., couldn't afford to open branch offices to market the temporary services of its software programmers.
"We needed to differentiate ourselves from the competition," Trivedi explains. "One way to do that is telesales. The customer gets the savings we earn in lower overhead, and that makes us price-competitive in the marketplace." It also allows Pittsburgh-based Mastech to canvas "off-Broadway" cities like Battle Creek, Mich., and Wichita, where even wealthy competitors don't open branches.
In remote regions, demand for programmers can far exceed supply. Under such circumstances, a potential customer with an urgent need for, say, a new billing system is often willing to forgo the formalities of a face-to-face meeting.
Trivedi says, "Most prospects have nagging doubts about working with a company over the phone. Eliminating those doubts is our challenge." To do so, Mastech salespeople systematically gather information on sales leads from industry-research firms, trade publications, customer referrals, and the company's own 900 full-time employees around the country. When Mastech sales reps make calls, they already know the size and scope of potential projects for which the company's programmers are suited, and they are prepared to propose solutions.
Mastech's telesales force does not rely on a script. Because salespeople specialize in industry segments, they are familiar with the idiosyncratic needs of their particular markets. Their knowledge helps them earn prospects' trust, despite the remote approach. "At the end of the day we must deliver on what we promise," says Trivedi. "That's how you really build rapport. We invest heavily in training our programmers on the latest programs. We know they can deliver." The formula works. Just seven years after ground zero, about 60% of Mastech's $70 million in 1994 revenues were from sales closed over the phone by 16 telesales reps.