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Background: Years ago Amana Refrigeration canceled Cooper Distributing (The then NY/NJ/Fairfield County Connecticut Amana Distributor and went factory direct.
Problem: Buying groups and large dealers in New York supported the factory taking over from Cooper, because they assumed they would obtain a lower cost without a distributor in the middle.
Action: Cooper brought lawsuit and Under the New Jersey Franchise practices act, they prevailed VS Raytheon Corp, which owned Amana at that point. The courts clearly saw that when distributors invest heavily in inventory/showrooms/sales training materials/pre-arranged training seminars/highly trained service/sales specialists, that you cannot just come along one day and say you are canceled. Cooper was held to be a franchise, under New Jersey law, and rightfully so.
Knowledge gained from this experience:
Cooper could distribute for a lower cost than the factory could, and here is why:
1. Cooper had other lines that created "an economy of scale" (Dacor, Hardwick Stove, Blanco Sink, Insinkerator, Northland Refrigeration, Russell Range). For a salesman to visit a dealer (at that time) cost about $50 per visit, and Salesman were expected to make 5 to 7 calls daily. Because of multiple product lines, it made in possible to spread this expense over many products. That salesman held more importance to a dealer, as he represented multiple product lines. The salesman was viewed as vital to the dealer’s sales success.
2. Cooper had to pay for warehousing and shipping, and so did Amana factory.
3. Cooper maintained an office for a bargain basement cost (they owned the building), and also maintained a beautiful showroom, and a fabulous service/parts department. The factory had to add staff, back at their headquarters who did not have the familiarity with the various dealers in the marketplace.
Cooper had administrative expenses, and credit and collection expenses, and so did the factory. However, after taking over from Cooper, the showroom went goodbye, as did the level of product training, that made Amana worth more in the marketplace, when selling features, advantages and above all benefits. Amana was a premium line, and a salesman really needed to know why it was worth more than a GE et al other lines.
Cooper’s expenses were lower, because they owned the real estate outright, and again they spread this expense over several lines of products.
4. I was part of the legal process at the time, and learned in court that Amana sales declined markedly for the many years the trials went on. Why did the factory do so badly, after dropping Cooper? They brought in out of town salesman, and worse they did not immediately go after business, upon learning they had legal clearance. They lost share to other competitors. The real key to understanding why they did less business is that they canceled Cooper in order to gain Cooper’s profits, and the dealers thought that by eliminating distribution, the cost to them would be lower. This mis-conception, that factory direct automatically translates into lower prices for a dealer is the additional answer, as to why business fell.
When the dealer is not handled by a known entity, who catered to their customers with "special local decision making" on credit and other things (RAs for damages/defectives etc) there is something valuable lost. Amana was the biggest loser here, both in Federal Court, and in the final outcome.
Distribution is mis-understood by the average appliance dealer. Less market protection, less local decision making, far less training, less visits by professional salesman, all adds up to less sales. The proof is in the numbers from that period of time.
Miele knows how to make vacuums. They know how to make dishwashers. They even know how to make Cooking products. They haven’t a clue how to sell appliances in Northern California.
The Tatros have forgotten more about the Northern California market than Miele will ever learn. Product sales to dealer businesses are all about relationships. The Tatros built relationships. If you tell a dealer you are going to reduce his expenses by eliminating the need for him to warehouse, deliver or even finance the sale, you forget he is already doing that with other brands. Taking that cost away on your brand doesn’t reduce the fixed cost he has for a warehouse, warehousemen and delivery men on other brands. The fixed cost doesn’t go away, the dealer just can’t leverage that cost anymore against your brand.
I know Mike Tatro and his brothers. Miele made a mistake.
Is there anything to the fact that Miele is not new to this rodeo?
They’ve launched this form of distribution around the world.
The US is only their latest direct market.
We have to factor in their experience with this form of distribution.Losing the relationships that distribution has created, over many years of doing business, is to lose a great deal. Miele will regret canceling distribution.
Experience doesn’t replace critical mass. Miele is a relatively small volume appliance manufacturer, in terms of overall volume and market share. Consequently, they need distribution (2-step or direct) to fulfill the needed functions to get their product to market. As a high-end product, Miele is not a product that dealers will stock in depth in their warehouse, especially with cooking products or high-end refrigeration. Consequently, most dealers will buy Miele as they sell it.
1. Someone has to warehouse it (locally). (If the dealer doesn’t stock it, the distributor must. Consumers won’t wait for it to be shipped from a factory, or central U.S. distribution point)
2. Someone has to deliver it, from warehouse to dealer (and dealer to consumer, if the dealer doesn’t provide this function).
3. Someone has to finance the inventory (at the warehouse level) and then finance the display at the dealer level (especially with brands that demand floor space).
4. Someone has to train the dealer sales force. (As well as other channels of distribution, such as architects, designers and kitchen dealers).
5. In addition to training, someone has to incent designers to spec the product and incent dealers to make the sale. If a dealer allows spiffs, someone has to pay them. Otherwise, some other form of incentive program should be implemented.
These distribution functions (to name a few) are necessary. Manufacturers look at distributor gross profit margins and think they can provide these functions cheaper, but they don’t have the critical mass from other brands to leverage these costs. Manufacturers also feel that they can have greater control by going direct and they often overestimate the power of their brand’s demand.
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