The Future of Selling via the Internet
The Online Progress of Disintermediation

[Editor's Note: We have extracted part of the keynote address given at Web Marketing 98 in Seattle, April 21, 1998. The speaker, Lester Wunderman, has been discussing disintermediation, the removal of layers of product handling between the manufacturer and consumer, and how this bears on the future of sales over the Internet.]

This article contains older information. Go here for newer information on ecommerce and selling online.

Traditional Retailing

With consumer goods it has recently seemed as if the mega retailers had finally mastered a new, more efficient technology of marketing. And, while such stores served to make available a wide variety of goods at low prices, they are not as economically efficient as they seem, neither for manufacturers or consumers. Keeping fifty thousand or more SKUs in stock when the consumer's weekly shopping list contains fewer than forty items is a waste of money and the consumer's time. This is becoming an even more critical issue as many families are beginning to experience a critical shortage of time. The marketing of the manufacturer's goods that these stores display -- let's take a can of tuna for example -- requires fourteen separate physical handlings on its way from the cannery to the ultimate consumer, and that doesn't include those who did the actual fishing. Fresh produce, such as tomatoes, requires seven intermediaries from the farm to you, unless you're lucky enough to live near a farm where you can buy them picked ripe and sold direct. And the handling by each intermediary adds to the cost and raises the price. For example, the farmer gets no more than twenty-five percent of the price you pay for his tomatoes at the supermarket. The balance goes to the intermediaries and becomes part of the cost of distribution. Branding would add an additional cost.

Retailing has become a science of controlling the consumer's movement and attention. The store has become a medium as well as a market. Stores have become a contradictory mixture of the virtual and atomic domains. What are displayed on store shelves are not the products themselves but the branded illustrated packages which we accept on faith contain the products they represent. Hence the name packaged goods. But even the products in the package are not those that we see in the brand advertising. The hot steaming coffee which a wide-awake family is drinking at breakfast is not in the box. Open the package and you will find only the atoms of ground coffee inside. The happy family lives in the virtual world of advertising. Nor are clean clothes to be found in the box of laundry detergent. They too, and the family who wears them, only inhabit the advertising.

So what's going on here? The physical, actual, atomic store is really stocking and selling virtual brands. Consumers have to make the connection between the stuff in the boxes and cans and the brands --- if they can. Such stores are rapidly becoming cemeteries of products which only come alive in advertising or in use. When you shop in these retail graveyards, you are expected to remember the living when you visit the dead. And because such stores subtract rather than add value to products, they are currently struggling to maintain profit margins of one to two percent. I believe that this inefficiency and contradiction of domains is opening the way for a new kind of marketing, and advertising and retailing.

Multi-Channel Marketing

Here are just a few of the key trends of the PostPresent. Single channel marketing must become multi-channel. Historically, most marketers have sent their goods to market through only one channel. They sold direct or though specialized intermediaries. They used either retail stores, door-to-door selling, or mail order. Groceries through grocery stores, automobiles through franchised dealers, drugs through drug stores, home furnishings, clothing, cosmetics through department stores. Travel through travel agents. Electronics through electronics stores. Books through book stores. Records through record shops. Videos through video stores etc. Retailers and wholesalers staked their claims to lines of products, and the manufacturers were stuck with their choices. Channel conflict became a dirty word and woe to the manufacturer who tried to escape the noose. That will change as consumers demand to buy products and services at outlets of their choice. Products and services will have to be sold through multiple channels wherever and however it is least expensive and most convenient for the consumer to buy them.

Disintermediation

Companies will eliminate layers of intermediaries. The first Industrial Revolution created mass production and new layers of distribution and communication intermediaries. The second created white collar workers and hierarchical layers of management. Both resulted in the institutional loss of information, service, relevance and dialogue. As a result, we are beginning to see the beginning of what the economist Joseph Schumpeter called the "creative destruction" of many of these redundant and expensive go-betweens left over from earlier times.

Disintermediation is already happening and it is increasing profit margins, reducing prices and providing consumers with more information and service. The virtual factory, warehouse or store, can be global, open twenty-four hours a day, seven days a week, even where local laws forbid it. Converting homes to workplaces and shopping centers are surely ideas whose time has come, even if the technology is still a work in progress.

One-to-One Marketing

We have, in recent years, created a new marketing lexicon of fashionable buzz words that are mostly being honored in the breach. Enough already ... it's show time! The false prophets of language have to give way to the real creators of profits on balance sheets. When we talk about one-to-one marketing, we must ask ourselves who and what do we really mean to leave out and how? We just can't close down mass communication and mass distribution? Somebody has to do the dirty work of making changes, but for that there have been too few volunteers or expert guides.

When we talk about relationship marketing, who is to relate to whom and why? Creating a relationship is hard and sensitive work not to be left to amateurs. Too many companies trying to do relationship marketing are creating stillborn or malformed relationships. Failed or botched relationships are worse than none at all. Most people have all the relationships they need and will enter into new ones only if and when there is a clear advantage to doing so. When we talk about data, do we mean to end up with information or knowledge? And to what use will it be put? Do we understand that neither our IS nor our Marketing departments may be qualified for the task?

The same holds true for the responsibility for a Web site. Are we dealing with information, advertising or marketing? Can the department which creates the site create the back-end systems to support it? Is the site a real marketing structure or just a false front like the facades of buildings on the sets of a Western movies? There is a new hierarchy to data. One that I call DIKS, that is Data, Information, Knowledge, Strategy. Leave out any of them and you're left with ASE, which stands for "A Stupid Expense." So, what is our strategic intent or have we neglected to have one? Why are so many Web sites not living up to the promises and expectations of those who created them? Where is the widely publicized flood of consumer direct marketing sales? Are they not now -- not yet -- or not ever?

Business-to-business sales on the Web have been a bonanza for the likes of Dell Computers, Cisco Systems, and Gateway. They manufacture only to order and according to customer specifications. There is a complete exchange of information before and after the sale. No inventory of finished products is warehoused. Relationships are built into the transactional system and not artificially created. They are a model for the companies of the future which will bring the concepts of mass customization and distintermediation to life. I believe that industry after industry will adapt the principles to stay competitive and profitable.

The Promise of the Virtual Store

Now look at the retail marketplace. The virtual store is on its way. Such stores will pay little rent and have fewer employees and no inventory. They will basically be information-processing centers. The virtual retailer, freed of the costs of physical inventory, high rent and the danger of over-stocking too many of the wrong things, can concentrate on the business of providing service.

If we supply the information, the virtual store will be able to know what each of us wants and when we want it. Thus, the virtual store can literally become a storehouse of information. It will be able to do almost anything we ask of it. And the most important part of that sentence are the words "we ask of it." We will be able to publish our needs. We will be able to locate primary sources and choose intermediaries only if they provide a necessary service. It is our needs which will become salient, and it is we who will be able to advertise them. Each of us will become a brand and each of our brands will be unique.

Amazon.com, BarnesAndNoble.com, CDNow and others have proven that books and records can be sold on the Web. A consumer can get more information from a Web site than they can from most retail stores for such categories of merchandise. And the current bandwidth of the Web is sufficient for such simple visual purposes. More tactile products such as fashions will need better display. Peapod, Streamline and others have begun to demonstrate that groceries and staples can also be sold and delivered through virtual stores. The Consumer Direct Cooperative, a consortium of thirty one organizations including retailers, wholesalers and manufacturers, predicts that fifteen to twenty million consumers will purchase package goods, groceries and staples direct by the year 2007 -- less than ten years from now.

Consumer Direct is described as a full service channel that enables consumers to order merchandise, usually through a personal computer and other automated ordering systems.

Not a Delivery but a Receiving Bottleneck

The problem is not selling or delivering. It's receiving! It's about time that the Postal Service and other well-advertised deliverers realized that their improved delivery systems have already outstripped our home receiving systems. The current small post box is left over from earlier times when a paper letter in an envelope was all that a household had to receive. The Postal Service, UPS, FedEx and others ought to realize that their capacity to deliver is limited by consumers ability to receive.

How long will it be before storage units for receipt of packaged goods, perishables, produce, frozen foods and hot prepared meals are part of apartment buildings, and private homes. It only takes an architect to design them, a builder to supply them and an entrepreneur to finance them. It will happen. You can bet on it. So what of the malls, the shopping centers, and the retail stores? 'They may continue to exist, but not too many years hence, they won't be absolutely necessary. Two major changes will occur -- they will become experiential and communal. People will leave home to seek entertainment and the society of others. Shopping will become again the social experience it once was. If all we need is a check-out counter, we won't have to go out to find it.

Copyright © 1998, Lester Wunderman. All rights reserved. Reprinted by permission.