We are a manufacturer, but we also sell direct and are trying to think through strategies for when more of our retail partners enter paid search driving up CPCs, especially bigger retailers like Walmart, Amazon, etc.
In this case, you have to pause and think about your overall goal. Let's assume it's "sell as much as possible". Let us further assume that "more marketing dollars is more better", especially when they're not your dollars. While it's true that your margins are better when you sell direct, you might consider a different market position than acting as a direct competitor to your retailers.
Rather, what if you focused on two components of your niche--brand and coverage?
If your retailers are missing something, or under-spending somewhere that has positive ROI, you have the highest margins of ANYONE selling your product, so you should be able to blaze trails into new audiences (either by opening new channels, or by boosting product niches) that your retailers would be less capable of entering. For products where your retailers are well established (big box or otherwise), it's unwise to try to compete directly with them--you increase both of your costs, without increasing demand for the product, and the net margin in the market is reduced (something you want to avoid in the big picture, for a lot of reasons).
However, you may want to participate with an "also-ran" bid on everything in your catalog. That way, if your retailers miss something, or undervalue a particular product or audience, you're there to pick up. This is amplified by the fact that while your margins are the best, your prices are probably the worst--most manufacturers try not to undercut their retailers for obvious reasons. This means that your conversion rate is going to be based mostly on brand, not bid.
Treat your brand like an ecosystem, and you might find that you're nurturing overall success, even while your partners (especially big box) are helping you succeed, despite them being non-human deterministic decision makers. In fact, the very fact they aren't emotional decision makers means you can predict their behavior, and use it to your advantage.
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