Channel Conflict

Channel conflict occurs when manufacturers (brands) disintermediate their channel partners, such as distributors, retailers, dealers, and sales representatives, by selling their products direct to consumers through general marketing methods and/or over the internet through eCommerce.

Some manufacturers want their brands to capture the power of the internet but do not want to create conflict with their other distribution channels, as these partners are typically necessary for a manufacturer to gain and maintain success. The Census Bureau of the U.S. Department of Commerce reported that online sales in 2005 grew 24.6 percent over 2004 to reach 86.3 billion dollars. By comparison, total retail sales in 2005 grew 7.2 percent from 2004. These impressive numbers are attractive to manufacturers, however they have not been able to participate in these sales without harming their channel relationships.

According to Forrester Research and Gartner, despite the rapid growth of online commerce, an estimated 90 percent of manufacturers do not sell online and 66 percent identified channel conflict as their single biggest issue hindering online sales efforts.However, results from a survey show that click-and-mortar businesses have an 80% greater chance of sustaining a business model during a three-year period than those operating just in one of the two channels. Among others, the reach will be enhanced by creating another selling channel. Nowadays, E-commerce wins in popularity as second distribution channel, because of the low overhead expenses and communication costs. Their advantage is at the same time their disadvantage, since consumers can communicate less expensive and more easily with each other too. Therefore, price and product differentiation is getting tougher than ever.

Channel conflict can also occur when there has been over production. This results in a surplus of products in the market place. Newer versions of products, changes in trends, insolvency of wholesalers and retailers and the distribution of damages goods also affect channel conflict. In this connection, a company's stock clearance strategy is of importance. To avoid a channel conflict in a click-and-mortar, it is of great importance that both channels are fully integrated from all points of view. Herewith, possible confusion with customers is excluded and an extra channel can create business advantages.

Manufacturers today sell their products through a huge array of channels, from supermarkets to the internet and everywhere in between. Since most manufacturers sell through several channels simultaneously, channels sometimes find themselves competing to reach the same set of customers. When this happens, channel conflict is virtually guaranteed. Such conflict almost invariably finds its way back to the manufacturer. This can also be termed as a situation when a producer or supplier bypasses the normal channel of distribution and sells directly to the end user. Selling over the internet while maintaining a physical distribution network is an example of channel conflict.

Conflict comes in many forms. Some are mild—merely the necessary friction of a competitive business environment. Some are actually positive for the manufacturer, forcing out-of-date or uneconomic players to adapt or decline. But some are truly risky, capable of undermining the economics of even the best products. Dangerous conflict generally occurs when one channel targets customer segments already served by an existing channel. This leads to such a deterioration of channel economics that the threatened channel either retaliates against the manufacturer or simply stops selling its product. In either case, the manufacturer suffers. This is also known as disintermediation which is ->

Finance: Elimination of financial intermediaries (banks, brokers) between the suppliers of funds (savers/investors) and the users of funds (borrowers/investees). Disintermediation occurs when inflation rates are high but bank interest rates are stagnant and the bank depositors can get better returns by investing in mutual funds or in securities.

Internet: Elimination (by the online sources) of the traditional middleman the intermediary between the seller and the buyer (such as an agent, broker, or reseller), or between the source and the recipient of information (such as an agency, official, or gate keeper).