In a recent phone conversation with a friend and
colleague, I was told there were no bookstores in Nashville, Tenn.
At first, I couldn’t believe the statement as I’ve been to Nashville a handful of times, know the city
and its demographics. Nashville
is a progressive Southern city of some 650,000 population in the city limits
and 1.5 million in the metropolitan area. Nashville
has a top-notch university in Vanderbilt and the city is growing. But the idea
that the city has no bookstores set me back until I did some Web research and
got a picture of what was happening.
It seems an author was to be
scheduled, by her publisher, to promote a new release at local bookstores in
her hometown of Nashville.
The problem started when the publisher went to schedule the signings. They
could find no new book sellers in Nashville.
They found some used bookstores, but no one selling new books. It appears that
the new book sellers in Nashville began to disappear in the last decade as,
guess what, e-commerce became the preferred means to review and purchase new
books.
Of course, in the present,
we all know that Borders has closed down most of its stores and the other brick
and mortar booksellers’ stock prices are getting hammered. Too, we know that in
the most recent quarter Amazon’s sales have risen rapidly despite a slow growth
economy. Why? It’s cleaning up as the brick and mortar locations die - that’s
why!
A little over a decade ago,
there was a book, “The Experience Economy,” which entreated retailers to make
the customer shopping experience memorable. This precipitated retailers, like
Borders, to put in coffee and snack kiosks and big comfy leather chairs for
their customers. By making the customer experience enjoyable, giving them a
place to sip their favorite flavored bean and read a book, the shopping
experience would be so unforgettable that financial success was like falling
off a log.
Today, we know that book
buyers would rather sit at home in their worn out dungarees or floppy work-out
clothes, drink their own coffee, recline in their personal La-Z-Boy and read
until they doze off. What happened to the great shopping experience of going to
the local bookstore with all the added accoutrements of Frappucinos, big
leather chairs and wool pile rugs over commercial linoleum? It was a bunch of
thin hype as customers would rather order what they needed without the added
hassle of a trip to the bookstore and associated distractions.
The Wholesaler Dilemma
One might wonder what bookstores have to do with
PHCP wholesalers. Books don’t look anything like a 20-ft. stick of pipe and
contractors aren’t usually bookish types who sip little cups of strong coffee
with pinky extended. The similarity is that many contractors would welcome the
chance to buy online, get their material accurately shipped and delivered in a
timely fashion, and not have to put up with a lot of sales calls, product
promotions or other so-called marketing collateral.
They simply want to order
the products they’re familiar with, get them shipped accurately and on time and
go about their daily business. They don’t necessarily need a sales guy coming
in selling pipe, lots of presentations on new products that solve niche
applications and a bunch of other marketing fluff.
The problem, heretofore, in
getting a low-cost, e-commerce solution is that wholesalers have bundled their
services in a largely one-size-fits all offering. The problem, in this model,
is that there are 40% of customers who pay for everything including 60% of
accounts that are losers. Not only are six out of 10 accounts losers, but the
distributor puts outside sellers and marketing time into the relationship
which, again, is paid for by 40% of the accounts. If distributors could figure
out how to unbundle their service offerings, accurately cost them and offer an
e-commerce solution with minimal sales support, they could gain significant
share from the one-size-fits-all competition.
Offering a low-cost
solution, however, requires accurate costs of unique services, a robust
e-commerce model, and knowledge of how to define services and consistently
maintain their quality. E-commerce has developed over the years to where,
today, most wholesalers have some type of solution. The costing of services has
been around for 15 or more years but the old models were complex and often
difficult to use or way too simplistic with concepts like average order size,
which really tells you nothing.
Recently, there has been a
renaissance in cost-to-serve modeling and several of the models are extremely
accurate. We have a patent-pending model that typically uses 12-18 transaction
types and can say, after five years of field testing, that there is a
significant difference in the cost of differing order types. Consider three
variations of a stock order below:
1. Stock
Order-Outside Sales Assigned-Order Writer-Delivered
2. Stock
Order-No Outside Sales-Order Writer-Delivered
3. Stock
Order-No Outside Sales-E-Commerce-Delivered
All the orders are stock products, the first is
assigned an outside seller while Nos. 2 and 3 aren’t, and the first two have
inside sales assistance while No. 3 is e-commerce. All three orders are delivered
to the customer. What is the typical fulfillment cost of the three order types
with one invoice and three lines?
Now, here’s the fun part. Consider that the
average order is $325 at a 22% gross margin with $71.50 in margin dollars. The first
order loses (-$86), the second order makes
around $6 and the third order makes $20.
Furthermore, you can’t tell by looking at the top-line sales number, margin
percent or even margin dollars which order makes money! Too, the top-line sales
of the order, the gross margin dollars and the gross margin percent don’t
matter all that much! All that really matters is how much profit the order
generated vs. how much cost it took to fulfill it. We call this Transaction ROI
and it is simply the profit of the order after fulfillment costs are taken into
effect. For the e-commerce order
(No. 3) the Transaction ROI is 39% ($20/$51). Finally, if a wholesaler really
wants to, he doesn’t have to price by sku anymore but he can price by order
size and type. For the e-commerce order, if the wholesaler wants a Transaction
ROI of 50%, he simply drives the profit on the order to $25, which means that
the top-line sales would need to go up $5 (1.5% increase) to $330 and
consequently the margin dollars go to $76.50 and the margin percent to 23.2%.
Imagine a world where the
wholesaler has this kind of information, sets a Transaction ROI at 20% for the
order type No. 3 and tells his contractors that they can pay $315 or $10
less. Imagine this world if the contractor
buys roughly the same material, over and over again, 1,000 times for $10 less
each time. Do you think he would get excited by saving $10,000? Do you think
he would miss his outside seller and inside seller and wouldn’t want to place
orders via e-commerce? Suppose the wholesaler could
double the order size to $650 and keep the
fulfillment price at $75 or less for order type No. 3? What would
happen then?
The material costs would be
approximately $506, the order would make $69 and have a Transaction ROI of
($69/$75) or 92%. Or the wholesaler could keep the Transaction ROI at 20%,
which means the transaction would need to make $15 and the wholesaler could
reduce the price by $54 (8%). Again, imagine making the offer to the contractor
that by doubling the order size, he could save $270,000 (500 orders x $54 per
order) but would have to place his orders via e-commerce and he would get
minimal, if any, sales support. Do you think the contractor would turn this
offer down, in a slow growth economy, because he wanted a full
one-size-fits-all service? What if the contractor was one of the top 40% of
customers who paid for their wholesaler’s desire to put sales coverage on
losing accounts and was given this offer by the competitor?
It's Been a Long Time Coming
What you’ve just read is a probable scenario in
many distribution markets. In essence, with detailed and accurate knowledge of
transaction costs and the use of e-commerce, wholesalers can greatly reduce
price, drive investment returns and give the customer a much better deal. Even
better prices await if the wholesaler and customer can agree on larger order
sizes of similar transactions.
The likely casualties, if
the model catches on, will be the leagues of inside sellers and especially
outside sellers. They are upended by new knowledge of transaction costs and
transaction economics as well as the preferred use of e-commerce. The customer
no longer will get a lot of sales visits, chat with his favorite inside seller
or receive a lot of marketing collateral. He can receive, however, one great
price and a simple, no-hassle service. Too, the model can be enhanced if the
wholesaler streamlines his supply chain and secures the best global price on
commodity products.
Like bookstores that no
longer exist in Nashville, the numerous bricks and mortar branch wholesaler
replete with lots of sales and management costs is in for a rough time. The
knowledge to take the cost out of the model and give the customer a much better
deal is here to stay. Furthermore, the things that wholesalers have measured
their businesses on including sales, margins and margin percent aren’t really
measures at all;
they are counts
in a time period. The future
measures that ensure higher returns will be value based: capital
returns/capital outlays. Lastly, I’ll have a book out that
describes this new world later in the year.
In the end, the old-style,
full-service wholesale model of business is just too costly. It won’t be put
out of business like the bookstores in Nashville,
but it will consolidate and there will be a significant change in the business
platform in the next decade.
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