COMMENTARY | COLUMNISTS | PHIL BAKER

Getting new products into the stores

We all admire the stories of how a hard-working entrepreneur overcomes the obstacles, perseveres, brings his invention to market and is rewarded with great success. While we like to think that this is more likely to happen in America than anywhere else, it is becoming more and more difficult for small companies to bring high-technology consumer products to market.

One of the biggest challenges these companies have is finding cost-effective distribution -- getting the products where perspective customers can see, examine and buy the product. Without good distribution, most products will become a commercial failure. Few customers, after hearing about a new product, will go out of their way to find it. If it's not in their local store or online store, they'll bypass it or buy a substitute.

It's almost impossible today for a small, single-product company to walk into the buying offices of a CompUSA or Best Buy (NYSE: BBY) and convince them to take their product. That's one reason why venture firms have shied away from funding consumer product companies and why so many companies with good products have failed. Distribution has become more difficult in recent years as a result of several trends: greater consolidation of retail establishments, shorter product life cycles and fierce competition, particularly from China and Taiwan.

Today most of the independently owned retail outlets are gone, replaced by large retail chains, mostly comprising superstores, chains such as Best Buy, CompUSA, Wal-Mart (NYSE: WMT), Staples (Nasdaq: SPLS), Fry's and Office Depot (NYSE: ODP). These chains much prefer doing business with the large product distribution companies, who not only sell products, but who also handle much of the logistics such as inventory management, warehousing, detailing, ordering and just-in-time delivery. One good example is Belkin (www.belkin.com), a privately held company in Compton, Calif. They offer a line of 20,000 consumer and computer electronic-related products with sales of $460 million last year. Almost 20 years old, Belkin initially provided computer cables and has branched out to include everything from cell phone cases to wireless routers. In some of the superstores they have hundreds of products in dozens of categories. It is easier for the stores to work with just one company like Belkin to purchase thousands of items. Chains would much rather take a new product from an existing supplier than a new supplier, even if the product is not as good.

Large companies can also use their financial resources to keep their competition from gaining distribution. It's not uncommon for some to make large payments to a chain to maintain their exclusivity and to provide huge funds for advertising, in-store displays and other promotions.

With shorter product life cycles, often as little as three to six months, quick and broad distribution is critically important. If you announce a new product and get the attention of competitors before you gain strong distribution, you may be squeezed out by a knock-off product before you get established. With the word of a new product traveling at Internet speed, and with computer automated design tools, a similar design can reach the market in just a few months. Chinese and Taiwanese companies are experts at fast implementation with costs that can significantly undercut the original product.

While this presents a real challenge for startup companies, there are some options. I often advise clients that rather than fight, work with one of the major product companies to private label your product. These large multi-product companies are often receptive. It becomes a win-win situation: they add innovative products with no development cost, and the small company gets broad distribution with little marketing or sales costs.

This approach is now being used more and more; many of the innovative products sold for PDAs and computers are made by smaller independent companies and sold under the brands of the larger companies. For example, Anoto (www.anoto.com), a Swedish technology company, provides its Digital Pen to Logitech. The device remembers everything you write and can then be downloaded into the computer. While Logitech designs most its own products, the pen provided an opportunity for Logitech to test a new product category quickly, without a long development time and high cost.

Another way to address this problem is to start selling on your own Web site. With some moderate success you may find one of the larger companies willing to take on the product. An example is LapWorks Inc. (www.laptopdesk.net) of Rancho Cucamonga, Calif., which created a cleverly designed tray that goes between your lap and notebook computer to prevent your lap from getting hot. After substantial success selling from their own Web site and strong reviews, the large computer accessory company Targus added the product to its line. While going through an additional step in the distribution results in lower margins, there is an enormous savings in the marketing and sales costs, as well as the benefit of selling a higher volume than could otherwise be done.

In short, you need to be as creative in the distribution process as in the invention process.


Baker is San Diego's Ernst & Young Consumer Products Entrepreneur of the Year in 2000 for successfully bringing to market Think Outside's folding keyboard for the Palm and other PDAs. He also has developed and marketed consumer and computer products for Polaroid, Apple, Seiko and others. He is the holder of 30 patents. He can be reached at phil.baker@sddt.com.

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