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Creating and Capturing Value: The Need for Strategic Marketing in Wholesale Distribution

November 6, 2009
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In a recent presentation to a Top 20 PHCP wholesaler on pricing, I was asked by the reigning CEO, the second generation patriarch, about my background. Consulting fees are expensive and, to fork over a lot of money, this owner/operator rightly asked about my credentials. Along with the usual discussion of degrees, consulting projects and work history, I mentioned that my work centered around many areas including sales, operations and marketing. My first love, however, has always been marketing and specifically marketing strategy as it relates to profitable, consistent growth. After citing this, the patriarch was confused. 

“Marketing?” he muttered with a sour look, “what does a wholesaler need with marketing?”

Of course, with this statement, I didn’t get the work and left shaking my head with the only satisfaction being that this industry stalwart would be left in his current soup of poor earnings and tepid sales because he wouldn’t force himself to understand what marketing really is and how it is indispensable to profitable growth. After a decade of field consulting, I can honestly say that far too many wholesalers don’t really get marketing and, because of it, they needlessly suffer low returns and slow growth.

Marketing is not simply sales promotion

Most wholesalers confuse marketing with sales promotion. What is sales promotion? It is what I call “buy this, get that,” or the trip programs, spiffs and gifts, given to customers or sellers as reward when hitting a sales goal. Sales promotion is a useful discipline but it is only a small part of marketing. Sales promotion is tactical, not strategic, which means it is short-term and you can win some skirmishes with it, maybe a few battles, but almost never a war.

I’ve done plenty of sales promotion over the years and it can be successful if targeted correctly, planned, measured and followed up on. But sales promotion in distribution is too-often poorly done. I am reminded of a comment from a rare and brilliant wholesaling marketer who was forced by the son of the boss into doing a spate of buying group sales promotions for vendors. He rightly called the exercise “bull_ _ _t because the products are commodities!” This statement gave me a glimmer of hope as that there was at least one person who was thinking before they spent marketing funds.

In case you don’t follow the logic, the definition of a commodity is that it is differentiated by price. Hence, anything other than becoming a low cost producer really doesn’t work and realizing one has to become a low cost producer to sell commodities is thinking like a marketer.

Good marketing is process and great marketing is a creative act

Marketing, done well, is a process. In essence, marketing’s role is to have the product(s), pricing, segmentation, service and sales promotion lined up before the seller hits the street. Qualified marketers should understand product management, product development, proper segmentation, service measurement, service quality, new service development, pricing strategy and sales promotion. These disciplines should be planned and integrated to drive the sales effort toward higher profits.

Most wholesalers eschew marketing and charge their sellers up with rah, rah seminars and negotiating skills and send them out to drum up orders. Over the course of years, this results in a sales driven marketing strategy where there are few ways to coherently plan the business since the served segments are all over the place, the majority of customers cost more to serve than they generate in margin dollars, and pricing is like a gazillion rats’ nests where three equally sized customers can call in for a quote on a given day for the same product and same quantity and get five different prices.

Once you load up a thin margin business with a bunch of sellers, pay them on margin dollars and have them pulling in a bunch of orders from all over the place with little to no preceding direction on product, channel, price, service and promotion, it is not long before the business platform becomes screwed up. And, once this platform becomes the norm, the firm is locked in a quagmire of low earnings and fleeting sales successes. Furthermore, unscrewing this mess takes a tremendous amount of effort and is akin to unscrewing a 10 penny nail from a 50-year-old block of Southern Yellow Pine with a pair of hand pliers.

Good marketing is best started early but this is rare in distribution and explains why many wholesalers, when they get over 100 million dollars, tend to become a mess fairly quickly. If you don’t get marketing right and early in your growth, it is very difficult, but not impossible, to get it right when you get mega-sized. 

Marketing process can be taught and good students, with experience, can become competent marketers. Most wholesalers have competent marketers somewhere in the organization but marketers aren’t given the clout of sellers and they have to be subservient to the class who would rather be gunslingers and fly boys winning solo combats, mano a mano, than part of an orchestrated game of marketing warfare where wars are won and competitors dominated. Most sellers don’t believe the preceding statement but it’s my experience that the best sellers come from the best marketing firms. In short, they know their limits and they welcome expertise that targets the customer, plans the product, and helps with setting the price.

Great marketing is a creative act where one actually creates value. In essence, the firm, guided by marketing, creates a product or service that customers willingly pay a profit to secure. The creative process is made better by coursework and an understanding of the marketing basics but there are instances where marketing is innate and the growth strategy of the firm is set by a gifted marketer who may not be able to spell the word but understands the discipline because it’s deep to the marrow and given at birth. Many wholesale firms don’t use good marketing to help create value and, consequently, their growth is ugly, marginally profitable, and difficult to plan with any accuracy. To see if you create value with good marketing, ask yourself these questions?

  • When did we last introduce a new product or service with success? What is our product launch process? What is our service development process? When is the last time we developed a unique, profitable and replicable solution to a customer need?

     
  • What segments are most profitable and contribute the most to operating profit of the firm? How does our marketing and sales investment align with our segmentation?  

     
  • What are the key components of our pricing system? How do we price consistently, commensurate with our value and maximize profitability? Do we have anyone in the organization who can trace the pricing system architecture and how it fits with good marketing practice?

     
  • What channels do we market through and how do we manage channel partners? What makes a good channel partner and when should we change them? Are there alternate channels where we can add value?

     
  • What are our best uses of co-op funds for sales promotion? Do we have a sales promotion plan and can we accurately measure the financial progress of the promotion?

     
  • How does service quality translate into marketing success and financial success? How do we measure and improve service quality while getting paid for it?

If you have trouble answering questions, then you likely have trouble creating new and unique value streams and don’t adequately capture the value in good pricing practice. It doesn’t mean you can’t become a top notch marketer; it simply means you have an opportunity to learn and get better.

Why marketing keeps getting discovered and the time is nigh

In recent blogs and my newsletter, I’ve come out against the rampant buying and selling of wholesale firms in an attempt to create value. Whether the buyers are the ailing Wolseley PLC or the hemorrhaging Private Equity firms, the idea that we can consolidate our businesses into prosperity is mostly bunk. Why? Countless studies have found that the long run success for mergers and acquisitions in adding to shareholder value is a mere 25%. Looking at this another way, 75% of acquisitions fail to add shareholder value in the long run.

In today’s and tomorrow’s forecasted environment of slow growth and limited lending, wholesalers will have to grow, if they want to grow profitably, by creating value with good marketing and capturing it with good pricing. There are many that will read this piece and place it in the round file as they believe that the buying and selling of businesses and wheeling and dealing of super-sellers is the way to a profitable future. I don’t see any of that kind of growth for a long time. Too many have tried to super-sell and finance their way into prosperity and we are enduring a Great Recession because of it.  

Solid marketing strategy undergirded with good operations is the way to create lasting value streams. It’s not sexy but it works and it’s the kind of growth and management that is sorely needed in wholesale distribution. I am optimistic that wholesalers, who want to grow a business over time and are tired of super-selling and acquisition will rediscover marketing and begin to create and capture value for lasting and consistent profitability.

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