Egghead Distribution Channel Strategy BA 266 February 2000

Remote Channels Distribution channels may be classified roughly in terms of the remoteness of the EUI The EUI of remote channels typically are at some distance that precludes personal contact unless a sales person calls EUI which the consumer primarily – visits on a personal basis are proximate channels – interacts through communication modes other than personal contact are remote channels

Characteristics of Remote Channels Characterized by the method of operation Catalog and mail order Telephone order with call centers Direct computer connections including EDI The Internet Remote locations limit –merchandise descriptions –immediate access to goods Fulfill through commercial transport or mail

Remote Channel Advantages Advantage: when end-user demand for both logistics and information service are low Exception: assortment breadth –Strong demand by end-users for assortment breadth creates high costs for proximate channels because of low turnover –Remote channels possess cost advantage Supplier-remote channel may gain advantage from production postponement, customization

Remote Channel Disadvantages Service levels have a mean and variance – The variance indicates the extent of the risk – The expectation for delivery from a remote channel is higher than for a proximate Remote channels have long been perceived to be much riskier than proximate channels Remote channels may offset this risk by extensive guaranties, i.e., lifetime returns

Remote Trade Offs Remote channels trade off – Lower operating costs and broader assortments – vs. the inability of end users to obtain immediate delivery visually inspect and test product for quality and fit receive personal insurance of product’s quality customize EUI service to their particular needs easily return unsatisfactory products Marshal local resources to obtain redress

Price Pressures Remote channels provide information that often permits end users to compare prices readily The easier it is to compare prices, the greater the propensity to switch Margins for e-merchants are likely to be excessively sensitive to price pressures, seriously impairing profitability

Egghead’s Historical Baggage Egghead comes to the Internet – with a limited stash of capital to offset several years of probable early losses in getting established – with a weak profitability image that hinders its ability to raise capital – without any retail store base to help drive patronage to the web cheaply

Egghead’s Cyber Problems The sale of expensive computers and parts exacerbates the margin effect and places a premium upon logistic efficiencies – Egghead cyber-margins were diminished relative to those obtained in terrestrial-stores – The narrow margin problem forces companies to grow rapidly in order to attain profitability – Early period of losses sustained without a clear picture of long term potential

Egghead’s Fulfillment Use of distributors to drop ship small orders to individual consumers – Distributors’ operations may not be optimized for small order business, raising fulfillment costs – Use of distributors provides no unique logistic advantage over other entrants – Fast delivery raises delivery costs

Egghead’s Dilemma Several competitors offer similar services plus catalog retailers are adopting web sites Personnel have limited experience in remote retailing technologies Egghead’s available capital is likely to be insufficient to cover losses until profitability As cash diminishes, the going value of the company declines

Channel Design and the Remote Systems (CS) Hybrid Direct Sale Fulfillment Houses Pure Indirect Channel Hybrid LFM* MLT** System Pure Direct Channel Information Needs Logistical Needs High Low RS LFM* *LFM = Limited function middleman **MLT = Multi-level transit system CS = Catalog channel system