Making The Middleman An Endangered Species

You've cracked your windshield and you need it replaced. So you call the 800 number on your in-surance policy to make a claim. You may not realize it, but that call is likely to connect you to one of several networks of glass installers, which are connected by computer to your insurance company. This electronic connection saves you time and your insurer big bucks because now it doesn't have to cut a separate check for every claim; it can pay hundreds at a time. The only party that doesn't benefit may be the local auto-glass shop: If it isn't part of such a network, it stands to lose a major chunk of business--and find its profit margins eroding because the insurers' buying clout has driven prevailing prices down.

Auto glass is only one of dozens of businesses where computers and communications networks are changing long-standing supplier-buyer relationships. By linking suppliers and consumers more directly, computers can help eliminate intermediaries, collapse inefficient supply chains, and send business directly to predesignated "preferred providers." Indeed, that is what's happening in health care. Today's managed-care networks, and the Clinton Administration's proposed regional buying co-ops, could radically rearrange how patients, doctors, hospitals, and insurance companies relate--and how much each gains from its dealings with the others.

UP IN ARMS. Such power can be upsetting, if not downright life-threatening, to established players. The glass networks, which began with a 1990 project by the Globe Glass & Mirror Co. chain for Allstate Corp., have hundreds of small shops in the $2.3 billion replacement-glass business up in arms. "What was good business for Globe turned out to be a nightmare for the small independent glass-shop owner," notes Philip J. James, president of the National Glass Assn.

Independent auto-glass suppliers, which have either been excluded from or chosen not to participate in the insurers' networks, have banded together to push legislation to outlaw compulsory use of preferred providers. They argue that insurance companies should not be allowed to tell policyholders where to get service. "Our biggest problem is we're being denied access to the insurance market," declares Ken Custer, a Minneapolis glass installer who also publishes an industry newsletter. Laws protecting the independents are on the books in two dozen states, including South Dakota, but most have had no bite. Allstate has sued to have the South Dakota law thrown out.

Information technology has hit the compact-disk industry in a different but equally momentous way. In 1991, a Hartsdale (N.Y.) startup called SoundScan Inc. began tracking CD sales electronically at checkout counters. Its tally, now covering 14,000 stores, was the first truly accurate accounting of actual sales. For decades, merchandise buyers, radio stations, and consumers gauged what was hot and what wasn't by Billboard magazine's weekly surveys. But its rankings, compiled from phone interviews with store owners, were subject to distortions, including attempts by record companies to influence results--and sales--by offering participants free disks, trinkets, and trips. Billboard Charts Director Michael Ellis says inaccuracies sprang more from haphazard reporting by stores than from influence peddling.

Now, Billboard and the rest of the record business are relying on SoundScan, and accurate data are having a powerful effect. One of the most striking discoveries has been that country music is far more popular than many record executives had assumed. As a result, they're promoting country singers much more heavily. Another change: Small rap labels, such as Priority Records that could never match the marketing spending of bigger brethren now can get rack space because the SoundScan numbers prove the demand is there.

In short, instant access to accurate data "totally changed the industry from a push industry to a pull industry," says John H. Marmaduke, chairman of Western Merchandisers, which supplies 1,000 Wal-Marts and owns Hastings BooksMusicVideo, a 92-store chain. "The labels don't run the business; the labels are running after the business." It's a prime example of how, as Glover Ferguson, director of research at Andersen Consulting, puts it, information technology can "help make marketplaces operate closer to how classical economic theory says they should"--by giving players better information upon which to act.

The change has actually been good for the record giants, too. They have been able to slash their return rates, and they no longer have to load up retailers with discounted disks. "We never truly knew what sales were at the counter," notes Lou Mann, senior vice-president for sales and distribution at Capitol Records Inc. "We probably continued to spend on a record two, three, four weeks after we should have." Even if the big labels have lost a little clout, their profits have been helped.

Just collecting data is only part of the new power equation, though. Supermarkets, for example, have been capturing scanner data for years. But it has been mass-merchandising chains that figured out how to use such data most effectively. Between 1985 and 1992, notes J. Mark Harran, a senior vice-president at Kraft General Foods Inc., outlets such as club stores, mass merchandisers, and deep-discount drug chains took seven to eight points of food sales away from traditional supermarkets--a massive shift in such a slow-growth business.

A major edge was information, and Wal-Mart Stores Inc. was the trendsetter, using computers to take the guesswork out of wholesale buying, slash inventory cycles, and keep popular items in stock. Wal-Mart turned the tables on the suppliers, telling them what products it wanted, where and when, and driving them harder than ever on prices.

Now, supermarket chains are hoping to emulate Wal-Mart's efficiency. Early last year, consulting firm Kurt Salmon Associates Inc. released a study concluding that grocers could cut their costs--and prices--by 11%, or more than $30 billion a year, by moving toward paperless links with their suppliers. The scheme, dubbed Efficient Consumer Response, would mean more effective merchandise assortments and store promotions and eventually a continuous replenishment of shelves based on what's actually sold each day.

It won't be an easy transition, however. The big players in the grocery business--particularly wholesalers--make much of their money by stocking up on discount merchandise that the manufacturers offer. Fleming Cos., for instance, a $13 billion food wholesaler, makes roughly a third of its profits through such forward buying. The big discount deals would be cut sharply under ECR. And even if ECR eventually brings Wal-Mart-like efficiency, nobody wants to give up today's profits first. That's a major reason why progress toward this much needed streamlining has been slow.

New information networks are likely to change power relationships in the air-travel market, too. While travel agents still sell about four-fifths of all U.S. tickets, it's becoming far easier for consumers to book their own reservations over the phone or through on-line services such as Prodigy and CompuServe. And airlines are eager to cut huge distribution costs.

BOOSTING THE SHARE. "Technology and the information highway will present travel providers with more realistic options and techniques for selling their products and services," declares Jeffrey G. Katz, president of AMR Corp.'s SABRE Travel Information Network, the marketing arm for SABRE, the largest travel reservation system. Those methods could include desktop computers and interactive television networks to allow consumers to book flights, hotels, and even entire vacations with the help of software that mixes full-motion video, data, and sound.

The American Society of Travel Agents is trying to put the best face on these developments. The group predicts that, rather than eating into agency business, the new technologies will increase agents' efficiency with customers and boost the share of tickets sold through agents. But Nicholas A. Athanasiou, senior consultant at Arthur D. Little, predicts that by the end of the decade interactive systems could cannibalize 20% to 30% of agency sales. "Agents have to find ways to add value in this new electronic environment," he says.

Travel agents have time to prepare for such changes. But as diverse industries from glass repair to recorded music are finding, the rules of the road can be transformed overnight when technology makes a wide turn.


Fewer intermediaries As consumers make more airline and hotel reservations themselves, using on-line services, they may not need travel agents as much.

Speedier decision-making Sifting through volumes of detailed sales data, retailers and grocery chains can determine what's selling best, and to whom, almost immediately.

Equal access to data Accurate, nonbiased information about recorded music sales is now available from an independent source that collects data from 14,000 retailers. Now the industry knows exactly what the hit songs are.

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