Manufacturers’ Bold Move To Online Sales

‘We need to work through this.’

Miller has been selling online to consumers for a little less than two years; Lincoln Electric has been at it since late October 2014, just three months. The entry of these two welding equipment giants into the online arena has been the cause of some angst. In fact, a large percentage of distributors surveyed for the 2015 Business Forecast state that this move into online direct sales…some say to their customers…will be one of their biggest challenges this year. To get the full story, WGT asked representatives of both companies to answer a few questions about their strategies. The conversations took place by phone, and while they did not sit down together, the same questions were asked of each.

Is it a chess play to gain market share? An AmazonSupply copycat action? A well-intentioned move to drive business into the distribution channel? They explain the what’s and why’s…

Why are you selling online direct to end-users? What is your strategy?

Jim Appledorn: A consumer generally doesn’t seek out an industrial gas distributor to get a welder that he needs in order to do a small hobby project. Their choices are: Go online or go to a big box store that’s open on Saturday. If we can get product in their hands, the next move they have to make is to find a gas distributor to purchase gas to go with their new MIG welder. With the option to pick up product ordered online at the distributor location, we hope we’re driving customers to the distributor.

Sue Feldkamp: We’re trying to reach into a broader audience and connect with customers who don’t know that traditional distribution exists, especially first-time buyers of welding equipment. They can add the product to their cart, but we make sure that there is an awareness of the local store. Or maybe they just want to buy online, because that is how they shop. Then we try to create some kind of connectivity to the channel after that online sale occurs.

Scott Jenkins: We really have limited means to reach out to those end-users who traditionally have not purchased through the channel, or are first-time buyers. Chances are they know who Miller is and that we build welding equipment. They’re going to find us online and look at our website to learn about us. We prefer that they go to a local distributor, and they can find store locations on our website’s distributor locator. But there are some customers who, for convenience or lack of knowledge of what the channel is, are going to purchase online directly from us.

Bernie Beaudoin: Lincoln’s site is targeted to the home hobbyist, someone with a workshop in his garage, farmers, and other small purchasers. The majority of orders coming in are for welding helmets, gloves, and some Lincoln branded products.

Sue Feldkamp: There’s not a lot of benefit for an industrial customer to buy online from Miller. This buyer is looking for local support and wants the full gamut of services that a distributor can provide.
Scott Jenkins: It’s our hope that consumers will buy online and pick up the order in the store so the distributor has the opportunity to upsell gloves, jacket, electrode wire, etc.

There’s been a lot of talk that by selling online, you are bypassing the distributor and trying to gain market share.

Scott Jenkins: The product offering on Miller’s website is mainly smaller commercial equipment, items more geared toward personal users, small metal fabrication businesses. There is no industrial equipment, no automation, no filler metal. It really is geared toward a very small segment of the marketplace.

Sue Feldkamp: There are studies that show that when a manufacturer is selling direct, sales are raised across all channels. They all work together. The intent is not to open a new channel just to shift money from one to another. It’s to open a channel to grow overall.

Scott Jenkins: Miller is trying to reach a segment of the market that traditional GAWDA distributors are not reaching, for a variety of reasons. Often they are new buyers and people who don’t know the traditional distributor channel even exists. So they shop at big-box retailers. We’re trying to draw them to make them aware that there are other options. I think it’s important for us to reach that first-time buyer. But in terms of this being a key strategy for us going forward in terms of growing our business…not really. Our focus continues to be more on the channel and helping them succeed.

A lot of people shop online. Was it just a matter of time before they started buying welding supplies?

Jim Appledorn: The Internet is an emerging market as more and more people buy more and more things online. We’ve been watching from the sidelines and holding our breath, if you will. And while we’re doing that, others in the industrial space began to launch their own initiatives. Lincoln doesn’t get much credit for it, but we’ve waited as long as we could to jump into this arena to participate where others had already preceded us.

Higher Margins for Online Sales? Maybe Not

“In the Internet age, getting more online sales should be every retailer’s Holy Grail, right?Not exactly. Conventional wisdom says e-commerce sales boast higher margins than brick and mortar sales. But a look at the nuances of fixed and variable costs suggests retailers doing both should prefer sales on the shop floor. Simply weighing the costs of operating retail locations, such as rent and labor, against online costs such as shipping, incremental marketing and tech personnel, e-commerce sales appear to boast an advantage of about 10 percentage points of revenue, according to Simeon Siegel of Nomura. But moving sales online doesn’t dispense with the fixed costs of operating a store. Rent and utilities must be paid, so such costs should be allocated to online sales as well, cutting into higher margins. And online sales come with more variable costs.

So unless a retailer is closing stores in pace with expanding online sales, the latter are less profitable, Mr. Siegel finds. Retailers can’t ignore the online shift. But e-commerce isn’t a magic bullet for margins.”

– The Wall Street Journal, November 28, 2014

Sue Feldkamp: The landscape is shifting as consumers become multi-channel shoppers. The reality is that consumers’ expectations around online shopping and how they buy in general are not established in our industry. It’s the experiences people have outside of our industry that are carried into the shopping experience for welding supplies and equipment. Miller needed to adjust to those realities of customer demand. I don’t think any manufacturer goes after this saying, ‘Hey, we’re trying to take sales out of our distribution channel.’ It’s more about following the consumer and what their expectations are.

Scott Jenkins: It’s interesting how much more reliant customers have become about getting information from a website. Think about your own shopping habits or behaviors. Where do you go first if you’re looking to buy a television or a washer or dryer or something for your home? Chances are you do what I do…go online and look for information, find out as much as you can about the product, then go to a store to buy it. Consumers are depending on Miller’s website for product information, perhaps more than they are depending on the local distributor.

Sue Feldkamp: The first goal is brand – getting them interested in the Miller brand. Then it’s about where they want to buy, be it in a physical store, from a manufacturer online, or online from someone other than the manufacturer. It’s about helping consumers understand the products we have to offer and getting them interested in our brand of products. And then it’s just making sure that wherever they want to shop, we have an option for them.

If a consumer is searching online for welding equipment, your sites come up, along with those of distributors selling online, in addition to wholesalers and other industrial sites. Aren’t you competing with the distributor for that sale?

Jim Appledorn: We’re not competing for the sale. If someone googles ‘MIG welder,’ Lincoln will be one of the thousands of results that show up. Since we are the manufacturer and because of search engine optimization, we are ranked fairly high in search results. That’s pretty common. It’s important to note that if you search for “MIG welder” and click on Lincoln as a result, it doesn’t take you to the online store. It takes you to our main webpage where one of the options is to locate a brick and mortar distributor. We’re not trying to shoehorn people into buying online who may just be interested in product information.

Scott Jenkins: We have several distributors who sell online and we try to support them as much as we can. They view us as competitors, but honestly, we prefer that the distributor get the sale because they’re in a position to take care of that customer going forward.

You provide an incentive for orders placed online and picked up at the distributor location. How do you handle shipping and returns?

Bernie Beaudoin: If an order is shipped to a consumer’s address, there is a freight charge. If it’s picked up at the distributor location, there is no freight charge. There’s also a pre-paid return if it goes through the distributor.

Sue Feldkamp: We let the customer make the choice as to how they want to receive it: free shipping for in-store pick-up; delivery fee to send to a customer address.

How many of Miller’s online buyers choose store pick-up?

Sue Feldkamp: It falls around 80% home delivery; 20% in-store pick-up.

Jim Appledorn: When an order is picked up at the distributor store, Lincoln provides that distributor with a backend margin credit. We feel it’s a very generous margin credit. That also gets the customer into the store to purchase a cylinder of gas or grinder, disks, safety glasses, etc. When someone puts a product in their cart at the online store, store pick-up is the default option.

Bernie Beaudoin: If there is a return, the distributor gets a commission again, slightly less than the sale, but the distributor is compensated for the sale and is also compensated for a return.

Scott Jenkins: Miller also pays the distributor a commission on what we sell online.

This all sounds like a good deal. Why are distributors so upset about it?

Bernie Beaudoin: I don’t think we can generalize that the entire distribution channel is upset about this. When we did the pilot testing, a distributor said, ‘This is great. You’re sending customers to my store and I don’t have to do anything but load that machine into their truck and you pay me a pretty significant commission for that.’ Like anything else in life, when there’s a change some accept it, some don’t like it.

Jim Appledorn: Some distributors think it’s disintermediation, that these online sales are removing them from the selling process, while others have had a different reaction. They are putting information into customer brochures and advertising their business as the place to pick up their online purchase. There are distributors who ask, ‘If this is the way of the future, what do we have to do to adjust and adapt?’ I don’t honestly think that anyone who sells pressurized cylinder gas is worried that the internet is going to take that part of their business away. But industrial products shift and that market is going to evolve and change.

Scott Jenkins: We looked at price levels in the marketplace and wanted to establish what we thought was a fair market price, one that was not underselling the channel. It most cases, it was a few points above the average selling price at which the channel would have sold it. Plus, we charge sales tax on virtually everything. A few of Miller’s distributors selling online are not charging tax, and they’re deep-discounting in some cases. We’re not. The price is what it is. The online price is a fair price and is competitive in the marketplace. If distributors were selling at that same price level, their margin percentage probably would be above where most of them are selling today. We were very careful not to undercut them. We also knew we couldn’t be 10 points above the market either. That was a tricky thing, trying to arrive at a fair market price and not undercut the channel.

Bernie Beaudoin: We developed very clear guidelines on which to establish the selling price for these products, as we didn’t want to get into a price war online with our own distributor partners. We’re certainly not the lowest price out there in terms of gear. Customers can go to the distributor and buy products less expensively than what we have on the website.

Jim Appledorn: We also implemented minimized advertised pricing policies.

Scott Jenkins: There is legitimacy about a manufacturer’s brand online. Like it or not, people will buy online from that manufacturer because they trust the brand and they trust the manufacturer. That’s a hard things for a distributor to reconcile.

READ MORE ONLINE

AmazonSupply Keeps Getting Bigger
Currently offering free two-day shipping and a line of credit, AmazonSupply knows how to sell its almost 2.5 million products online. Read WGT’s interview with Amazon’s Prentis Wilson, vice president of industrial and scientific supplies.

How do you evaluate the success of your online store? Are there metrics so you know it’s working for you, for the distributor, and for the customer?

Jim Appledorn: We have metrics all over this in terms of what type of products are selling, how often people visit our site, what time of day they visit. We’re in it just a short while, but so far there’s a strong indication that these are people searching for products during non-traditional hours, on the weekends. And while we can measure order volume, we don’t know if that order would have found its way to us if an online store did not exist. You have to accept some of this with a little bit of blind faith that this is a channel that’s out there and is bringing in new customers.

Scott Jenkins: Miller tracks first-time buyers, store pick-ups, direct ships, when purchases are made. Over time, the trends have been fairly consistent. What would be interesting to know is the number of online buyers who make their second purchase from the channel, instead of online. We don’t track that.

Sue Feldkamp: Since we are trying to drive traffic into the storefront and hopefully create additional sales for the distributor, we follow-up and measure that. I can tell you that 100% of the time when an in-store pick-up occurs, the customer either made an additional purchase at pick-up or say they intend to do so in the future.

Final thoughts?

Bernie Beaudoin: A manufacturer has a responsibility to make sure that its brand is promoted. Lincoln’s online store provides us with new tools to promote our brand in a different way than we did in the past. And the more successful we are at promoting our brand and getting consumers to want the brand, the more successful distributors can be.

Sue Feldkamp: It’s safe to say that in order to have or maintain a competitive advantage, it’s very important to stay close to the shopper, engage with them and understand their needs. It’s difficult when those needs and expectations are set outside of our own industry. So we try to keep up with what buyers are doing elsewhere, and which ones fit the model we have. Online customers have a very high expectation of engagement. Continuing to engage with customers is going to be very important for our industry.

Scott Jenkins: I’ve said it many times to our channel partners, and I truly mean it. Miller’s go-to-market strategy has not changed since we’ve launched e-commerce. There are first-time buyers none of us are reaching. We have to reach them in some way and turn them to the channel so they can see the value it can bring them. I think we’re being judged on a very small part of our business. We’re selling online primarily because there’s a first-time buyer that we won’t reach otherwise. I wish distributors would say: ‘I’m going to trust those guys. I’m going to give them the benefit of the doubt’ and then step back and look at all the things we are doing to help them be successful.

Jim Appledorn: I think the future of industrial distribution is healthy. Online sales have not shut down car dealerships. Lincoln Electric has a blended channel strategy and has been selling direct for 118 years. Most of what we make and sell in the U.S. goes through industrial distribution, and we will continue to support and protect the relationships we have in the distributor channel. They are the meat and potatoes of Lincoln Electric. We are committed to supporting our distributor partners, but we can’t be blind to the changes that are taking place in the marketplace. We need to work through this.

Gases and Welding Distributors Association