Editorial...Why The "Middleman" Hangs Around
To my way of thinking, everyone is posing the wrong question. The key question is not: can the industry's traditional distribution channel survive? It's more pertinent to ask, how has it managed to survive for so long?
For as long as anyone can remember, everyone has tried to cut out what they view as the “middleman.” Adam Smith wrote about this more than 200 years ago. It's inevitable in any free economy. Yet, for some reason our industry's middlemen still hang around. The total dollar volume of plumbing and HVAC supplies sold through the distribution channel keeps increasing more or less at the rate of general construction industry growth. Channels of distribution proliferate, but that doesn't necessarily mean this one is deteriorating.
Why is this? The answer is, because it works. Our industry's traditional manufacturer-to-wholesaler-to-contractor channel has proven itself for over a century as the best way to supply construction, renovation and repair projects. Almost everyone who has tried to cut out the middleman has found out that it ends up costing them more than the 25% or so margin typically charged by wholesale-distributors for their services. It's a business they're not familiar with, and they find it difficult to cope with the myriad problems of transportation, warehousing, quotations, returns, technical support and everything else that our industry's wholesalers shrug off as all in a day's work.
Our industry's distribution channel doesn't work for everyone, in every situation, but it works in general. Consumers and some contractors find it more economical and efficient to buy certain plumbing and heating products from a Home Depot or Lowe's. This is what happens in a free economy, and we must respect their decisions. If certain manufacturers can't get the results they need from their distributors, we must respect their decisions to sell through other channels. If wholesalers can't get what they need from regular vendors, they will look to buy elsewhere. We ought to respect these decisions as well.
You hear a lot of people in this industry complain about lack of loyalty. Contractors gripe when wholesalers sell to consumers. Wholesalers accuse their vendors of betrayal when they sell through other channels. Vendors get mad at distributors who take on competing lines or establish private labels. Where's your loyalty, they all say?
Last year, I heard a distribution industry consultant address this issue by saying, “If you're looking for loyalty, your best bet is to get a dog.” Don't get me wrong. I understand that it often makes good business sense to protect your customers. For instance, most wholesalers are reluctant to discount too much when selling to consumers out of fear they stand to lose more by alienating their more numerous trade customers. That's a rational business decision, but it's not a moral issue. Although it's often described in sentimental terms such as “loyalty,” the real motivation is business self-interest.
The simple fact of the matter is that nobody in our industry's supply chain can afford to depend on others to protect their economic interests.
The companies that succeed in the long run will be those that rely on themselves to make money by delivering outstanding services to customers in need of those services.
I recently heard a contractor discuss what he called the increasing “velocity” of his business. He said sometimes they are awarded jobs even before the design is finalized. When the job gets underway, he doesn't have a bill of materials to present to a distributor. He might only have square footage and rough vision of the final project. When it finally takes shape and he can identify exactly what materials he needs, he needs them lickety-split.
How in the world does a distributor deal with customers who don't even know what they need until a few days, maybe even a few hours, before they need it?
It's a dilemma, to be sure - but also an opportunity. You can either sit back and say, hey, we need more time, or you can put on your thinking caps and figure out ways to cope with the increased velocity of your customers' business.
The essence of marketing is to identify customer needs and fulfill them. This customer was telling distributors what he needs - faster execution, whether that means pulling goods from a warehouse shelf or getting them into his hands quickly from someplace else.
Contractors also need quick and easy technical support, fewer mistakes and better documentation. Wholesalers are not just in the merchandising business anymore. They are also in the information business. Coming up with the answers their customers need, when they need it, is becoming as important as getting the materials to them on time.
If you can't deliver materials and information on a timely basis, don't expect either your vendors or your customers to protect your business interests. Distributors who are able to deliver the goods and supporting information will do just fine in the future.