In theory, this all works fine. The distributor stocks and supports the product: the dealer floors it, demonstrates it and installs it. The customer gets the widest choice of product combined with expert service and support – at a price. If each part of the chain is fulfilling its responsibilities, then it’s a workable system. But just like the chain that constitutes your system, this one is only as strong as its weakest link. As soon as any link in the chain starts to renege on the deal (as soon as dealers stop flooring products or distributors stop stocking and servicing them) it quickly starts to break down.
Keeping the cake…
The inherent exclusivity of the distribution model was already causing tension. As the number of manufacturers increased and flooded the market, swamping the established distributors, more and more of them were forced to adopt dealer/distributor partners. Rather than actually distributing that product, those dealers often chose to simply sell through their own store(s) giving them a double margin to play with – and inviting chaos in terms of relative pricing stability. These days it’s easy to compare the price of two products in their home market – and what it costs to actually buy them in yours
At the same time, market pressures mean that most manufacturers are producing fewer (often vastly) more expensive products. Retail logic says that once you’ve bought the demonstrator, you need to sell at least two of any product before you start to make any money. But stratospheric pricing makes this increasingly unlikely, which helps explain the number of ‘ex-demonstration’ units being offered, often on current or recently launched products. Most dealers can simply no longer afford to buy the most expensive, flagship products – let alone buy them from two or three different, competing manufacturers – while the very existence of alternative products at substantial discounts creates its own downward pressure on pricing, with the end result that profitability as a whole, starts to drop.
“There are no victories at discount prices.” – Dwigt D. Eisenhower
But aren’t margins so huge that dealers are still making money after discounting – and don’t customers therefore ‘deserve’ the discounts they demand? The harsh reality is that, real bricks and mortar audio dealers have substantial overheads which mean that in reality they are operating at around 5% profitability on turnover. Screw a 10% discount out of your high-street dealer and he’s losing money on the sale. There are ways of cutting overhead: you don’t need to be on the high-street; you can operate from home or online. You can stock fewer product lines or run an appointment-only business. But all of these steps come with their own challenges and associated costs. No store-front means increased advertising. Operating from home often means increased visits to customers – and the costs that go with them. Operating online means offering a returns policy, with all the issues that entails. But what all these steps have in common is that they erode the traditional role of the dealer. Margin and profit are not the same thing. As soon as profitability starts to drop, traditional dealers start to go out of business and before long, the whole house of cards is under threat…
