Negative Impacts of the
New Online Direct Sales Model
The market is currently experiencing a shift from the traditional retail model¹ to the new online direct sales model² What does this mean for brands, retailers and consumers? Brands risk alienating themselves from their retail network as they forge new relationships directly with consumers. Retailers risk market elimination as manufacturers compete for consumer dollars, and consumers are left with less product variety and increased product prices. Needless to say, the effect of brands selling directly to consumers has profound economic consequences. The aftershocks of the new online direct sales model include: retailer elimination, market monopolization, brand elimination, increase in unemployment, and weakening of retail supported industries (media, industry publications, trade show organizations, advertising agencies, wholesalers, distributors, etc.).
Some manufacturers offer radical discounts, free shipping and free returns for products ordered on their websites. When you compare the deals offered by manufacturers and retailers, it is obvious that retailers simply cannot compete with the manufacturers highly competitive pricing. Logically, consumers choose to purchase from the brands website where they can buy the same product for much less. The incentive for brands to sell direct is greater profit; manufacturers maximize their ROI (see graph above). Overtime, as consumers bypass retailers to purchase directly from the brand, the retail system will become obsolete and reach the point of near extinction.
So why not replace the traditional retail model with new online direct sales? It is simple; the retail system is the glue that holds the market and the supply chain together. The retail industry is one of the largest industries in America, employing millions of citizens as sales personnel, sales associates, cashiers, retail managers, marketers and such occupations. Without a retail industry to employ them, these workers may face unemployment.
As more retailers are forced to close their doors, real estate vacancies will rise, leaving retail spaces empty and abandoned. Indirectly, the health of some industries depends on the health of the retail network. Without retailers, there will be no need for local advertisements, retail trade publications, trade shows, wholesalers or distributors. Effectively, several industries would be nearly eliminated, not just retailers. This behavior will result in catastrophic changes for the market and supply chain.
Another significant disadvantage of losing the retail grid is the loss of the multiplier effect³. When a consumer purchases from a local retail store, the money spent is then re-circulated throughout the community. In essence, the money spent locally supports local growth and prosperity. Without the multiplier effect, local communities could struggle through economic hardship.
Obviously, the new online direct sales model is devastating to the retail community and all of those directly or indirectly dependent on local retailers. But merchants are not the only ones affected by this massive shift. Smaller brands that rely heavily on retailers will either be bought out by larger firms, or be forced out of business as brands continue to cut retailers out of the market. The elimination of smaller brands can lead to the development of monopolies. Once monopolies are established, product prices will increase, product variety will decrease, and it becomes harder for new products to enter the market.
The new online direct sales model causes destruction down the supply chain and radiates into industries that are indirectly dependent on the retail system (see cause and effect graph above). Retailer eradication, brand elimination, and the establishment of monopolies are only the tip of the iceberg that brings massive economic down fall and annihilation.
Rodrigo Cano, BBA, MBA
Retailers Protected Council
Founder / President
Author / Publisher
Copyright © 2014 Rodrigo Cano. All Rights Reserved.