Software That Can Cut Out the Middle Man

By Eoin Callan and Jenny Wiggins

Financial Times, November 2006

High Street retailers have enough problems without facing a fresh threat from new software designed to even further lower the barriers to becoming an online retailer.

The technology, although still at an early stage, is being developed by large companies such as Ebay and Google, as well as smaller start ups such as MeCommerce, to make it easier for companies selling consumer goods to go directly to shoppers.

Ebay will this autumn launch a new website in the UK catering for manufacturers that want to cut out the middle man and go straight to the customer themselves

It has already signed up Canon, the camera maker, and expects others to come on board. Reebok is also experimenting with technology.

Google is trying to interest manufacturers of big-ticket consumer goods, such as washing machines and dishwashers, with the potential to reach buyers through search-based advertising.

Among the most likely to embrace this approach are the music companies, which have grown frustrated with the trend in retailing that has limited shelf space to only the big hits.

The industry is also uneasy about the dominance of Apple and iTunes’ inflexible pricing model.

Several independent music labels have already signed up with Me Commerce, a San Francisco start-up that plans to launch a service in the UK by the end of the year that allows bloggers to sell music, books and DVDs directly to readers.

However, many large consumer good companies are likely to be slow to take advantage.

Simon Rawling, managing director of PIPC, a consultancy that helps businesses launch new strategies, says manufacturers will balk at bringing such a tricky element of their supply chain in-house.

Nestle Nespresso is one of the few consumer goods businesses that has been successful in developing an online presence. The group, which sells a range of high-end coffee machines and packaged coffee, is now one of the fastest growing businesses at Switzerland’s Nestle, selling 1.7bn coffee capsules in 2005 – a 29 per cent sales rise on the previous year.

The Nestle unit, which has always sold directly to its customers, started as a mail-order business and set up a website in the mid-1990s. It first sold coffee capsules through the website and, in recent years, has also been selling coffee machines. Online sales now account for about half of its total sales. The group has distribution agents in 42 countries, including the UK, but says it can ship its products worldwide.

Oliver Quillet, international marketing director for Nespresso, says it is difficult for traditional consumer goods companies to establish significant online businesses because they need to maintain a good relationship with retailers, their traditional sales route. “Retailers will see active internet sales as competition,” he says

Nespresso is in fact itself moving into traditional sales channels, having opened its first coffee “boutique” in France in 2001 and is no longer a completely virtual company.

The shops help the brand’s visability as well as its sale. “People are still very used to buying in classical bricks and mortar shops,” Mr Quillet says.

The group now has 42 boutiques, including one in London’s Knightsbridge.

Some consumer goods companies are also already struggling to manage their relationships due to the growth of so-called “hard discounters” and the increased sales of own-label products at other supermarkets.