Study: U.S. Distributors Not Ready for the Net

A new study by international management and information technology (IT) consulting firm Cap Gemini Ernst & Young U.S. shows that while most U.S. distributors acknowledge the impact the Internet will have on their businesses, not all of them are prepared for the changes to come in the digital age.

According to 59 percent of the distributors surveyed, the Internet is changing the way they are doing business. However, 100 percent of their suppliers and 98 percent of their customers are confident that the distributors will not disappear -- or be replaced by new types of competitors -- during the next one to two years.

Loyalty Disappearing

"Once again, this is an effect of traditional distributors probably not yet understanding the magnitude of the shift brought by Internet technology. In most e-mature industries, the experience has been that increasing interaction over the Internet reduces customer loyalty as we know it," said Fabio Rosati, a leader in Cap Gemini Ernst & Young U.S.'s e-business practice.

Rosati added, "If the players don't do anything about it, increased Internet business volumes weaken the classic business-to-business (B2B) relationships between the intermediary and its business partners -- not the other way around."

The study examined suppliers, distributors and customers in a number of vertical industries, including manufacturing, publishing, financial services, professional services and retail . It revealed that 77 percent of distributors in the United States expect the Internet to have an impact on their business in some way, and that 18 percent of them currently do more than 50 percent of their business online.

Cost Reductions

Notably, while the cost benefits of doing business online have been highly touted by companies setting up B2B e-marketplaces, only two percent of the intermediaries surveyed cited price reduction as the primary Internet impact, and only six percent believe that price reduction will have a significant effect on the distribution business in the near future. Most of the survey respondents believe that the entry of new competitors will be the primary change brought by the Internet.

Suppliers and customers are only slightly more convinced that price reduction is going to be part of the new economy for distributors. Nineteen percent of suppliers and eighteen percent of customers cited price as the dominant effect the Internet would have on the distributor role.

Cap Gemini Ernst & Young U.S. says that even if distributors do not realize it now, the Internet will lead to price reductions in the distribution chain.

According to David Ridemar, head of the firm's strategic research group, "All players agree that the Internet will have a limited impact on the distributors' prices. At the same time, two-thirds of them expect the main driver for the Internet effects to be increased transparency and new competitors entering the market. That's a classic setup for price pressure and consolidation.''

Ridemar added, "It looks like the traditional distributors are in for the surprise of their lives when the price effect of e-procurement and vertical trade exchanges kicks in. You will probably see a 60-80 percent reduction of transaction costs for customers in the most e-mature industries -- and most of that comes from the intermediaries' part of the value chain. Only the best will survive.''

Positive Impact

So far, most distributors are reporting positive effects from the Internet. Eleven percent listed the Internet's main impact as the opportunity to sell more services; another eleven percent named the opportunity to broaden product ranges; and six percent said the Internet allowed them to improve delivery, flexibility and speed.

Distributors, suppliers and customers all believe that the traditional distributors' qualitative assets will make it possible for them to maintain price levels and fight new forms of competition. More than half of the distributors, suppliers and customers surveyed see relationships with suppliers and customers as the distributors' main asset, and do not see IT as an important factor for distributor survival either now or in the future.

Slower To Adopt

Even though intermediaries acknowledge the positive effects the Internet can have on their businesses, they still trail their suppliers and customers in Internet adoption by a slight margin. According to the research, 55 percent of suppliers and 45 percent of customers expect to conduct at least 25 percent of their business online in the next one to two years, as compared to 43 percent of intermediaries doing so.

Ridemar said, "Some distributors may be underestimating the potential demand for Internet-based services. Those who under-invest in Internet technology and strategy now will probably be locked out of major part of the business."