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Changing Channels

New research suggests that traditional distribution is losing share. But wait --

The internet has done much to democratize the global marketplace over the past twenty years, first by making product information widely available and then by becoming a nearly universal medium of exchange. In so doing it has also substantially disrupted the established rules of commercial engagement. No one knows this better than those who market swimming pools and hot tubs.

One of the consequences of the recent economic collapse has been the demise of large numbers of builders, retailers and pool service firms. Taken as a whole, we estimate the total loss to be about 18% - 20% of companies in business as of 2005. This means that nearly one in five of these firms either succumbed or at least exited the category to pursue other lines.

At the same time, more and more pool and spa owners and would-be owners have turned to the internet to research, to shop and, frequently, to buy. This was probably inevitable. Americans have become conditioned by their online experiences with everything from Amazon to eBay to social media. Yet the combination of significantly less 'street presence' and the move toward greater consumer independence is ominous.

As much as we have taken ecommerce for granted, it's sometimes hard to remember the past. But even as little as 10-12 years ago the consumer online experience was largely limited to what people could scavenge from portals such as CompuServe and AOL courtesy of glacially-paced dial-up modems. Few would have actually thought of buying anything online for their pool, save perhaps for a float or toys: certainly not a new pump, replacement filter or an automatic pool cleaner. Such purchases required the help of a living, breathing expert.

The extent to which the internet has democratized the shopping experience has been well chronicled. Among pool and spa owners the balance of power has clearly shifted. Whereas historically pool and spa purchases were largely a matter of referral, now shoppers can avail themselves of all manner of detail and thus become their own experts.

But beyond the dissemination of information is the subsequent disintermediation. Pool and hot tub owners are no longer content to just browse online; they are also buying there as well, currently to the tune of some $270 million a year by our calculations.

They're not alone. Many pool and spa products dealers are beginning to follow suit. And why not? The standard lament has become, "My customers are buying online cheaper than I can from my supplier."

It's tempting to speculate on the long-term consequences of the emerging direct channel and to pronounce the demise of traditional wholesale distribution. But that's not likely to happen anytime soon and for good reason. Wholesalers perform a variety of valuable services that transcend ecommerce. For example they remove much of the friction of seasonal, big-ticket product movement by providing warehousing (much as old fashioned capacitors still "warehouse" electrons in printed circuits). They use technology to leverage innovations in logistics. And, through scale, they drive greater efficiencies for their retail customers.

Still, this is not the time to be sanguine. While extinction doesn't appear imminent, it might nevertheless be high time to revisit the business model.

Case histories abound with stories of just-in-time transformation. Former CEO Andy Grove related how Intel had to reinvent itself when its DRAM chip business became an overnight commodity thanks to new competition from Southeast Asia. IBM is able to celebrate its 100th anniversary this month thanks to its many transformations, from punch cards to tabulating machines to mainframes and now to technology-inspired business services. And today record companies such as Warner and Universal face daunting challenges in keeping music distribution profitable in the era of cloud computing. They are finding new ways to make the internet work to their advantage. Stakeholders in the pool and hot tub business can, too.

To the extent that the "modern" pool and spa era began in the 50's and 60's, we are now in our third generation of owner and prospective owner. Yet the fundamental business model that launched this industry is essentially unchanged. Think about how the next Apple would do spa retailing or how another UPS might handle pool and spa product logistics. Consider how Amazon has totally transformed the business of book selling, one of the oldest industries in the world.

Over the past two decades, global enterprise has done much to shape what has become today's internet. The question is: will the internet in turn shape the future of the pool and spa industry?

All data in every issue of Waveline is from reports available in our Pool & Spa Report Library: www.pkdata.net/PKData/library1.htm

Waveline™ is a periodic report by P.K. Data, Inc. to inform decision makers in the swimming pool and hot tub industries about noteworthy trends that we uncovered during our recent research. If you no longer wish to receive this publication, please reply to this email with the word UNSUBSCRIBE in the subject field. You will then be immediately removed from the Waveline™ distribution list. We otherwise welcome your comments and suggestions. You may contact the authors by emailing info@pkdata.net.

The contents of this report are (c) 2011, P.K. Data, Inc. 3675 Crestwood Parkway, Suite 220 Duluth GA 30096. All rights reserved. This information may not otherwise be used without P.K. Data's express permission.