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Saturday, April 18, 2009

American Airlines view of distribution (aka she's at it again....."


As I ponder American Airlines' stated view of the future of distribution, I can't help but go back to my original analogy of distribution economics. Indulge me Mr. Arpey. And please, tell me where I have missed the mark!

Imagine if you will, a manufacturer of goods - a soap manufacturer will do nicely for this story.

For years and years, decades in fact, I manufacture my soap, focusing on the quality of my product. It cleans well, it smells nice and it softens your skin, or makes your clothes soft or makes your floors squeaky clean. I have a "frequent cleaners" club that makes people loyal to my soap, wanting to amass frequent purchaser points to use just my soap.

For years, Walmart, Target, grocery and drug stores have sold my products. Only in rare occasions, in major cities, did I have a "City Soap Store", where my own staff serviced and allowed customers to pick up the soap that was purchased by phone. The soap was exactly the same price, whether or not it was purchased by phone or from a retailer, or picked up at a City Soap Store. In fact, the US government regulated the price of soap and the sale of soap through any intermediaries.

By the 90s, the cost of labor and the high cost of the real estate in the City Soap Stores causes me to close nearly all of them, so I'm forced to rely heavily on my retail network that sells nearly 85% of my soaps.

Enter the Internet. I figure out that I could not only sell directly to the customer, but I can actually shift their behavior to only want to buy through me, bypassing those pesky retailers and the distribution costs of placing the soap in their hands for sale 7x24.

In fact, before I even retrain consumers, I think I'll just stop paying the retailers any commission for selling my soap. Yes, that's the ticket to higher profitability. The retailers will just have to charge their customers a service fee for buying my soap to make up for the lost commission. No one can be without my soap, so surely they won't mind.

But wait.... to get the consumers soap business online, I will have to discount the soap, just like other online retailers are doing. Well, I can make it up in volume. Yes, that's the ticket to higher sales.

OK, it has been nearly a decade now. Surely the consumers have learned by now, so I will now actually institute a charge to the retailers to sell my products. I do after all have the best soap in the land.

Oh, you say that with my soap used to come a wrapper that kept the soap from flaking and it used to have beautiful graphics on the box and on the bottles and now it looks just like the discount, generic brands. Well, who will notice that we have had to cut here and there over the years to make up for the loss in profitability from selling for a lower price online.

Oh, you say that the retailers are still selling over 77m of my domestic soaps and 32m of my international soaps and getting on average $380.48 per case domestically and $883.76 internationally.

Wait a minute, online I'm only getting $275.40 per case domestically and $556.71 internationally. Hey, Finance! Are we making it up in volume????
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