- MARKET SECTORS
- Dan Holohan: Heating Help
- Morris Beschloss: The Beschloss Perspective
- Hank Darlington: Showrooms
- Jim Wheeler: HVAC
- Rick Johnson: Distribution Management
- Dick Friedman: Tech Tips
- Mike Miazga: In Closing
- Safety Columnists
- ASA President’s Letter
- Josh Brown: Generation Y Insights
- PVF OUTLOOK
- WEB EXCLUSIVES
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 DilemmaOne 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 ComingWhat 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.