Amazon.com may yet turn a profit one of these years. But as each year passes colored with great gobs of red ink, it looks like a better bet that this company instead will go down in business history as a classic case study of great expectations gone awry. This despite the fact that amazon.com has achieved much of what it set out to do. It has branded itself into a household word in a remarkably short time. It sells a tremendous amount of merchandise to an astounding number of customers at attractive prices and great convenience.

So why can't this quintessential dot-com company make any money doing what it does so well?

Its problem, in a nutshell, is that for all its e-wizardry, amazon.com has not figured out a way to make its wares materialize out of a computer monitor. Instead, the company has found it necessary to tend to the grubby business of building warehouses, stocking inventory and filling orders. It's built what amounts to a retail distribution network that eats up cash almost as fast as the U.S. Treasury can print the stuff, and requires know-how that is quite different from Amazon's core expertise in e-marketing.

At some elevated level of volume its revenues supposedly will outpace costs, but every year the bar gets higher. In the heady days when Amazon's stock price was topping $100 mostly on the sale of books, one analyst calculated that the company would have to sell virtually every book purchased in the U.S. to justify its valuation. Right about that time its glorious stock price started to plummet to the sub-$15 range, where it stood at this writing.

One thing about amazon.com, though. It has succeeded in safeguarding themselves itself from rapacious middlemen. Its investment in warehouses and the rest of order filling infrastructure has been largely self-financed. Thus, Mr. Bezos and gang are experiencing the unbounded joy of splashing around by themselves in a sea of red ink.

Efficiency over sentiment

Amazon's experience is instructive for the PHCP industry. It serves as a reminder that no matter how attractive your products, no matter how productive your factories, no matter how much the marketplace clamors for your better mousetrap, it doesn't count unless you can distribute the goods efficiently.

Wholesale distribution is an industry lacking any semblance of glamour, or even much awareness that it exists as an industry unto itself. Brand names are found at the producer and retail levels, but not in between. To the extent that wholesalers enter the public consciousness at all, it is as those damned middlemen who are to be squeezed out of the action at every opportunity.

As well they should, if at all possible. I like you folks, but my prosperity has a higher priority than yours. If I can get goods delivered to me cheaper, yet just as fast and just as thoroughly without passing through an extra step of distribution, that's the way it should be. There is no moral imperative that says all wholesalers are entitled to earn a living. Economic efficiency takes precedence over sentiment.

Problem is, more often than not, attempts to cut out you middlemen prove to be shortsighted. It's relatively easy to sell around the wholesaler, but it's impossible to eliminate the functions of a wholesaler. Someone has to distribute goods to a mass marketplace. Someone has to offer credit and collect the money. Someone has to troubleshoot faulty products and process returns. Someone has to decide among a vast array of products which ones will appeal to the greatest number of people in a given market. Someone has to help market those products. Someone has to stock the goods and keep track of them. Someone has to introduce new products and train installers in their use. Someone has to recommend which products to use to customers who are unsure or don't care. Someone has to invest a ton of money in huge buildings, equipment and vehicles for these functions to get fulfilled. Someone has to employ the people who know how to get it all done.

None of these tasks has to be done by a bona fide wholesaler. Anyone can do it -- manufacturers, their reps, contractors, retailers. Some of them have tried it. A tiny percentage of them have even made it work, more or less. But none of them has really eliminated the wholesaler. They just became the wholesaler.

One of the biggest stories in the industry last year was Home Depot buying a PHCP wholesaler. This is a company that ranks at the top in merchandising savvy. They define the term "category killer" in having revolutionized the sale of home improvement products. They are used to buying direct and stocking huge warehouses with merchandise. If there is any nonwholesaler company that could successfully fulfill the functions of a wholesaler, it would likely be Home Depot. Yet, they felt compelled to buy a bona fide PHCP wholesaler instead, and if rumors are true, they may be on the prowl for others.

Home Depot understands that wholesalers still matter.

A third party point of view

Centuries ago most goods were custom-made by local craftsmen and artisans. The industrial revolution brought mass production, and quickly it became apparent that it made more sense to ship 10,000 pieces of this or that to a central warehouse than it did to send 10,000 wagons to deliver those goods to 10,000 doorsteps. Clever middlemen arose who specialized in making deals to purchase large quantities of desirable merchandise and sell them to retail customers or end users in smaller lots. Their profit margins were not very large, but they made it up in volume. Wholesaler-distributors have been around ever since, and they are not fading away.

To be sure, some are getting bigger and more powerful, but there is compelling evidence that consolidation will never be as overwhelming in the PHCP industry as in medical supplies, groceries or certain other sectors of wholesale distribution. Consultant Adam Fein laid it out at last fall's ASA Convention in Chicago. If you didn't hear him, you can find his 40-page study, "Winning Strategies for a Consolidating PHCP Industry," at www.PembrokeConsulting.com. I recommend doing so, because this tome provides the most credible evidence I've seen that PHCP wholesalers still matter.

There's been a lot of hogwash to the contrary floating around. One can become so mesmerized by the acquisition frenzy as to lose sight of the fact that the industry as a whole remains quite diffuse. The "Winning Strategies" study documents that the industry giants, the 10 or so PHCP wholesalers with annual revenues upwards of $500 million, account for no more than 19% of industry gross sales. That's only a little more than the 16% market share attributed to the 3,000+ independents selling less than $10 million a year. Most of the giant distributors also carry electrical and non-PHCP industrial supplies. Subtract that volume and the big boys' collective market share pretty much matches that of the smallest players in our industry.

Watching consolidation unfold has been like witnessing a 15-14 baseball slugfest and lapsing into the reverie that pitching is an inconsequential part of the game. Consolidation is, to be sure, a big industry happening, but hardly the whole story. PHCP wholesaling entails plenty of scratching and clawing for runs.

Independent wholesalers still have an important role to play in this industry. Dr. Fein and colleagues think that will be the case for the foreseeable future. They say consolidation is slowing down, and while it may pick up again somewhere down the road, there are compelling reasons to believe that small- and medium-sized wholesalers will survive indefinitely.

Contractor consolidation fizzles

"Winning Strategies" cites as the main reason the fragmented nature of your primary customer base. Almost 80% of contractors have fewer than 10 employees. People have tried to consolidate that sector as well, but they, too, have run into tough sledding. Contractor consolidation has many miles to go before that field is significantly defragmented. I doubt we'll ever see the day when any single contracting organization owns even as much as 10% of the total market nationwide.

The roll-up consolidators that made such a big splash five years ago have fallen on their faces operationally. Most have been acquired by or merged into still larger organizations. With one or two exceptions, they are still thrashing about.

There are by my count now seven contracting organizations doing in excess of $500 million in annual revenues, with another five or six knocking at the door. These include some utility subsidiaries aiming mainly at the commercial-industrial energy management market. Yet, collectively, even these industry giants own but a tiny share of the total PHCP construction and construction services market.

Moreover, the local units of these giants tend to operate with not much less autonomy than when independently owned. They are directed toward preferred vendors in a limited number of lines, mainly HVAC equipment, but there is little central purchasing and no exclusivity that I'm aware of. Preferred vendors are suggested to the branches, not shoved down their throats. Except for company-owned Lennox dealers, I'm not aware of a single contracting organization wedded to a given brand of HVAC equipment, and even Lennox dealers have leeway to install other brands in some circumstances.

In other words, wholesalers still retain quite a bit of ability to influence whose products get used on jobsites around the country. That's because contractors need flexibility to accommodate tight schedules and product availability. And, because this is still a business where relationships count.

An executive with one of the large PHC contractors told me recently that he has been looking into cutting deals with one of the national supply house chains, but pulled back after getting feedback from his field managers. "What we found out is their branch may be fine in one area and lousy in another. Some of our managers couldn't stand the company's salesman in their market. So we might get a 5% break by cutting a deal with the national office, but we'd lose 10% in availability problems and hassles," said the contractor executive.

Hanging out with contractors

The role of the wholesaler has not changed in the 17 years that I've been away from day-to-day contact with the PHCP wholesaling community. That's how long ago I left the staff of Supply House Times to help start up Plumbing & Mechanical, now the favorite magazine of plumbing contractors.

It's been fascinating to watch the industry from the contractor side of the fence. One of the things I've learned is there was never any question from contractors' perspective whether PHCP wholesalers still have a role to play in the industry. You were and remain their primary suppliers for orders large and small, for everything from the biggest fixtures to the smallest fittings, from tools and equipment to the heaviest PVF.

Oh, you can see a bunch of plumbing trucks in the parking lots of Home Depot and Lowe's stores at any given time, but this is of little consequence. When a service plumber runs out of a part and Home Depot is a few blocks away, that's where he'll buy it rather than drive across town to your supply house. This is only common sense, but such fill-in purchases are not going to make or break your business.

The big boxes have started to make a play for contractor business as part of a long-term strategy to compensate for a decline of the DIY market as our population ages. They've even started advertising in Plumbing & Mechanical. Still, I don't think you have much to worry about. They are attracting mainly the smallest of the small contractors -- along with deadbeats who have used up their credit at supply houses around town. Count your blessings when those folks leave the channel.

Make no mistake about it, wholesalers still matter in a big way to the vast majority of PHCP contractors. Oh, they'll fuss and cuss about your services or lack thereof, but bickering is common in all families. The best contractors understand they are partners with the wholesalers who supply them.

Return to the fold

I'll tell you one other reason to believe that wholesalers still matter. It's because we still believe they do.

"We" is myself and my colleagues at Business News Publishing Co., the proud new owners of Supply House Times since late January. BNP is not the biggest trade publishing company around, but it is an extraordinarily successful privately held business that has been around since 1926, and is now in its fourth generation of family ownership and management. To be sure, we had heard that wholesalers were "on the way out" in the PHCP industry. If we believed it, we never would have paid the going rate for this still influential publication. We did it because we believe to our marrow that wholesalers still matter, and it is our mission to show everyone in the industry why that is so.

For me, personally, it represents an exciting homecoming. I cut my teeth in this industry on the staff of Supply House Times from 1977 until 1983. That's when the late, great Charlie Horton selected me to become the first editor of his new magazine for PHC contractors, Plumbing & Mechanical. Two years after Charlie's death in 1989, his widow sold Supply House Times and Plumbing & Mechanical to different companies. Being reunited after 10 years is an unexpected treat, and it's absolutely thrilling for me to be named editor of this magazine.

I've never completely lost touch with the wholesaler side of the industry. From time to time I've attended ASA conventions, and even moderated a panel discussion at the Toronto meeting in 1998. It's good to be back in closer touch with many old friends from this side of the industry, and I look forward to meeting many new ones.

Most of all, I welcome this opportunity to spread a message you'll hear over and over. Wholesalers still matter. You matter to us, and you matter even more to the PHCP industry at-large.

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