In
a recent conversation with a sizable PHCP distributor, the CEO of the
organization disclosed that he was moving his outside sales force to dual
roles. In essence, the sellers would work part time in the field and part time
in other positions. Not all the sales force was moving into this role, but many
were. His justification is as follows:
-
Sellers aren’t growing the business faster than inflation.
-
Many customers need some sales help, but many are far more value sensitive than
they were before the Recession.
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Many customers know what they want, the online orders are exploding and
customers seem satisfied using online capabilities.
In
addition, the CEO explained that for large customers who purchase similar SKUs
in bulk, he would drop-ship them container loads or partial container loads as
he imports the products. The upshot of the conversation, as I understood it, is
that this CEO was readily admitting something we’ve been saying for some time:
The cost of service is going down in wholesale distribution and the
contributing factors are e-commerce ordering, foreign “off-brand” products with
reduced price points, and value or “price” consciousness of the contractor. Of
course, I can write this in a column or blog all day long but it’s just one man’s
opinion, or is it?
Contractor buying patterns
In
my
March 2012 blog, I
lamented the lack of wholesale industry research that challenges and enlightens
the industry with empirical data. It seems the research done, within the
confines of wholesaling, serves to confirm the way business is done rather than
take a hard look at how things might be done better for better profits.
In
a recent survey of 500 contractors in the PHCP, electrical, building and maintenance
sectors, EMA Associates found several trends that wholesalers should note,
including:
-
Contractors are increasingly using hand-held devices to check price and availability.
Of the contractors who use these devices, 58% admit to using them for price and
availability information.
-
Contractors are increasingly moving tool purchases to big-box stores as pricing,
availability and choice were better than wholesaler offerings.
-
Contractors are picking up more A and B items from big-box stores as the price
was better.
My
consternation came when I mentioned these results to two large wholesalers and
was told that the contractors who visit the big-box stores are “trunk-slammers”
or something less than legitimate full-time business owners. I countered that
the survey had 500 respondents and follow-up personal surveys confirm that
larger, well-established contracting firms are picking up A and B, items from
the big-box stores, as they had better price points. I even sent them a link to
the written survey results, which can be seen at:
http://ecmweb.com/contractor/electrical-contractor-purchasing-practices.
I
never heard back from the two folks who were dismissive of the survey and my
guess is they don’t want to get confused because their minds are made up.
However, the exchange reinforces my belief that wholesalers aren’t really
seeking challenge. Hence, any research and publication should pass muster with
what they believe and not necessarily what the customer wants.
The
fact that technology allows contractors to check price and availability and an
overwhelming number are using hand-helds to make the purchasing decision should
rattle even the most confident of wholesalers that things are changing and
quickly. Wholesalers who are dismissive of the research are likely to be
dismissive of the technology and are just as likely to lose out.
It
also might help wholesalers to know that, in the past month, I’ve met with two
Fortune-rated manufacturers that believe their traditional wholesaler sales are
declining and losing out to other channels including online entities, low-cost
or transactional distributors and big-box retailers.
Where cost comes out
I
was not surprised that big-box retailers can, if they want, offer many items at
better price points than traditional wholesalers. Why? They don’t deliver the
items - for the most part - and they don’t have outside sales support, which
traditionally costs 25% or more of distributor operating expenses. The HVAC
distributor I mentioned at the beginning of this blog installment has figured
this out. I don’t think many other wholesalers have followed and, because of
this, they are likely leaking an increasing amount of sales to lower-cost
channels.
Cost
also comes out in foreign products where our research has found that direct
purchases of off-brand products has a 20% to 30% landed cost advantage over
domestic brands. Wholesalers,
especially larger entities, have developed global sourcing specialists and
rather sophisticated supply chains. They are using their sourcing advantage to
unseat smaller competitors who, too often, rely on buying cooperatives to eke
out a few percentage points from domestic brands.
Several
years ago, Grainger appointed supply chain professionals to develop its
private-label products with global sources and readily admitted that the
margins on these products were 20% to 30% richer than domestic brands. Unfortunately,
the cost advantage of private “off-brands” often ends up in the marketplace and
this reduces margin dollars, which has the effect of reducing operating income.
To compensate, wholesalers move to reduce service costs for a satisfactory
return.
Finally,
cost comes out as new models of distribution, called transactional, are
springing up in traditional wholesale product market sectors. We’ve written
about transactional distribution for some time and devote a chapter about it in
our new book
Building Value
at
http://www.benfieldconsulting.com/New_Book.html. Transactional
distributors combine foreign sourcing, transaction economics, e-commerce,
limited branch locations, etc., to get the cost out.
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They can typically go to
market for 20% to 30% less than traditional full-service distributors, and this
parallels the price advantage of e-tailers over brick-and mortar-retailers. We
consider Amazon Supply a transactional strategy and recent research finds they
are discounting the competition by 20% to 30% with their cost advantage.
Exploring the value chain
Wholesalers
who dismiss the outside research and new models of commerce may be playing with
fire. Considering one’s existing service value proposition beyond reproach may
be a recipe for significant and sustainable loss. My entreaty is for
wholesalers to read up, fund value-based research and challenge the existing
model of business. An increasing amount of research from the outside is
pointing to channels of commerce that heavily use technology and new knowledge
to strip out costs and give a reduced price point.
I wish I could be more
gung-ho about the prospects of traditional full-service distribution, but I
can’t. A few days ago, a leading intra-industry research body announced an
updated release of an old classic that lauds the role of the branch manager. My
bet is that the group didn’t know that one of the globe’s leading wholesalers,
Grainger, has quietly reduced its branches from 437 in 2008 to 368 by 2011, or
approximately 16% in four years.[i] Our
writing, including posts in this blog, has called for fewer branches in
distribution and less emphasis on the branch manager in order to get costs out.
Grainger is prospering in its organic sales with fewer branches, and we also
think Grainger has a heavy respect for Amazon Supply, which really doesn’t have
a traditional branch or complement of branch managers.
As if this wasn’t
enough, I did a bit of skullduggery using the U.S. Census and Bureau of
Economic Analysis for Durable Goods distribution. The sector has decreased from
close to 20% of the GDP in 1995 to 13.5% of the GDP in 2011 - a 33% loss. To be
fair, some of the loss is that the GDP has grown in sectors other than durable
goods including services. However, many service-based industries use durable
goods so it is not clear if the loss comes from a shift in the economy or a
loss by wholesalers to other models of business.
The
more disconcerting part of this research is that when I informed some of the
leading research bodies in the industry, they didn’t seem too concerned about
it. To me, the choice is clear, wholesalers can either engage tough research
and experimentation with low-cost value streams or they can put their head down
and “keep on keeping on.”
I
increasingly believe that those who win out will engage new thinking and new
ways of doing things to get costs out. They will provide a value proposition
more in line with a new generation of customers born into a world where
conducting business via e-commerce and installing products from around the
globe is the norm and not the exception.
[i]
From Grainger 10k’s 2008-2011Links
