Definition: Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, dealers, contractors and independent sales representatives, by selling their products directly to customers over the internet or through general marketing methods.
Channel conflict has been part of the building materials industry for a long time. As soon as big-box chains arrived on the scene, they created channel conflict with traditional lumber dealers and home centers.
If a building materials manufacturer sold to a big box, their current customer base of distributors, dealers, and contractors would be unhappy with them. As big boxes began aggressively advertising building products with low prices, contractors became unhappy.
There is also increasing channel conflict in commercial new construction. The growth of design-build, factory-built commercial buildings and more general contractors who are self- performing has led to more channel conflict.
More recently, we have seen channel conflict with the growth of online sales. If a manufacturer started selling their products from their website, it would make distributors and dealers – and even the big boxes – unhappy.
We’re entering a new period of increased channel conflict. It might not have affected you yet, but it’s only a matter of time before it does.
Off-site Construction and Online Sales Are Creating More Channel Conflict.
Off-site construction and online sales are bringing in changes that are difficult to avoid. Manufacturers and others will have to decide how to deal with them. Will they stay loyal to their current customers and distribution methods or will they participate in these new developments?
How Off-site Construction Is Changing Your Business.
The industry has yet to agree on a term for off-site construction. You’ll hear it referred to as panelized, modular, factory-built, or FIOSS (Fully-Integrated Off-Site Solution). To keep things simple, I’ll stick to calling it off-site.
We are seeing a big shift away from site-built construction in both residential and commercial new construction. That shift will shake up how building materials are selected, sourced and installed.
It’s not going to happen overnight, but it will happen rapidly. The biggest thing limiting the growth of off-site construction is the speed at which they can scale up.
Off-site construction companies like Katerra will buy directly from manufacturers, which will create channel conflict with distributors and dealers. If a building materials company refuses to sell directly to them, they will simply find another manufacturer who will.
There may still be a role for smart distributors, but it will be at a lower margin.
Companies who are already set up to sell private label will have an advantage. They will be able to continue selling their branded products to traditional customers while using another brand (or even no brand) to sell directly to these off-site builders.
This is already happening. After I wrote about off-site builders, a window dealer contacted me and said he just lost a $500,000 order to one of them. He is a well-established window dealer who is focused on selling higher end window brands that are not known for selling directly.
This dealer worked for more than a year to convince a builder to use a brand of windows that he represented only to learn that the builder decided to let an off-site builder build his homes. That off-site builder contacted the window company and bought the windows directly from them. This is a brand of windows known for its loyalty to dealers and not selling directly – at least, it was until they made this sale.
They faced a tough decision that will probably have short-term consequences for them. They cannot view this as an isolated incident – their other dealers will learn about it soon enough. They have crossed the bridge, and it will change the company’s future.
Every building materials company – of any size or scale – will soon be faced with the same dilemma.
How Online Sales Is Creating More Channel Conflict for You
The channel conflict caused by online sales has been small compared to what is coming. You used to be able to assume that a dealer in Columbus, Ohio would sell your product in that market. But enterprising dealers began selling on Amazon, encroaching on other dealers’ markets.
Big boxes woke up and shifted their emphasis from stores to online.
The online version of “category killers,” like efaucets, began drawing a lot of interest and sales. Build Direct is trying to be the Amazon for building materials. Seemingly complicated purchases like kitchen cabinets and custom closets can now easily be ordered online and shipped with no problem.
Your distributor, dealer, and contractor customers are being price shopped, reducing their prices and margins. They are also losing sales – as online sales grow, they may not even be considered.
Just like off-site construction is going to explode, so is the online sale of building materials.
Most building materials companies will ignore these changes until they are forced to confront them. Smart companies see them coming and are developing strategies that work for them.
Strategizing doesn’t mean you have to support these changes. Stihl chainsaws continues to do very well despite refusing to sell to Lowes or Home Depot. That’s because their strategy was more than just not selling to big boxes.
Their strategy also involved recognizing that a lot of chainsaw sales were going to go through big boxes and they had to find a way to counter that. In their case, they managed to do it by aggressively supporting independent dealers and staying loyal to them.
Larger companies face the greatest risk from these changes because they’re not agile enough to adapt to them. Instead, they are set up to optimize the status quo or to protect what they have instead of focusing on growth. They will only act when they are forced to, and they will probably make poor short-term decisions when they do.
Smaller companies are in the best position to take advantage of these changes. They have more to gain than to lose – if they find smart ways to adapt and respond.
There is no right or wrong way to address, benefit and protect yourself from these changes. You can choose to fully or partially embrace them. Or you can choose to stick with your current customers and the way you’re doing business.
These changes can look like just another bright shiny object, so it’s easy to either be immediately attracted to them or feel threatened and over-react. You could also wait to see if they are real. But trust me, they are, and they’re not going away.
Partial Changes to the Market
These changes will only affect part of the market. The way the building materials industry has traditionally worked, and the way buildings have been built are not going away anytime soon. But they will co-exist with the new approach.
I predict that factory-built and online sales will grow to something like 20% of the market within the next three years and continue to grow from there.
You can treat this like having advance notice of a recession: if your market just got 20% smaller, what would you do? It doesn’t have to be a death sentence: Stihl chainsaw’s market got at least 20% smaller, and they’re doing just fine.
Whatever you do, you need a strategy to address these changes. Oh yes, there will be more and new types of channel conflict, such as the growth of online installed sales. Your brand’s importance will be threatened by this new reality. You either need to recognize that the value of your brand proposition is changing or become more of a commodity supplier.
Addressing these changes will take strong leadership. It won’t be easy; there will be some very influential people within your organization who will resist dealing with these changes. If you listen to them, you won’t be the one who determines your future – the market will.
If you’re not proactive, these changes will lead to sales declines that may seem to come as an unexpected surprise. You will be forced to react quickly, and you will probably do a poor job of it.
What would you do if you had six to twelve months advance notice that you were going to lose your biggest customers? Would you work hard to find out why they are planning to leave and see if you can find a way to keep them? Would you develop a plan to replace their business? Or would you just accept that you have to get smaller and downsize accordingly?
1. Your reputation for channel loyalty is like trust: hard to earn and easy to lose. It only takes one direct sale to ruin your reputation with your current customers. Before you agree to that first tempting order, make sure you’re ready for the fallout. Once you have sold direct, it’s almost impossible to go back.
2. Make sure your strategy is clear to everyone, including your employees and your customers. If you don’t let them know, they will make up their own explanations for your lack of communications – and you won’t like most of them. Most likely, they’ll assume you are ignoring the market, are afraid of these changes or are planning to throw some of your customers under the bus.
3. Whatever you do, recognize that the change is here and develop a plan to deal with it.