For 54 years, Industrial Distribution magazine has conducted its Annual Survey of Distributor Operations to identify major trends affecting distributors. This year's survey is the largest ever, with more than 900 owners and executives of distributorships across the country responding.
The study clearly details the myriad changes taking place. Consolidation has slowed down considerably. The Internet is changing the way distributors bring products to market.
Integrated supply is not growing as fast as it had been, according to our survey, but customers are continuing to decrease their distribution base. At the same time, the traditional industrial customers have been replaced by newer, even more demanding buyers. Here are some of the study's highlights broken out by specific categories.
The InternetThe use of the Internet continues to soar. Not surprisingly, more than 90% of the distributors with sales of more than $20 million have Web sites. Even more intriguing, however, is that 45% of distributors with sales of $5 million or less have sites, up from 40% a year ago.
The Internet is becoming a vital tool for distributors. More than a third of the respondents say they have bought industrial supplies over the Web. More importantly, distributors report that more of their new orders are coming via the Web.
The spread of dot-com B2B business providers is prevalent, and about 14% of distributors have signed on with such companies to sell over the Web. This is the first year we have asked this question. Several industry observers predict that number will be going up sharply this year.
Despite this boom, most distributors indicate they do not have a formal e-commerce strategy in place. A majority of distributors (more than half) who have Web sites say they established their sites because of competitive pressure but don't know what to do with them. They're willing, however, to put money into developing and expanding their sites for e-commerce applications.
Not having a clear policy in place is fraught with danger, according to Steve Epner of BSW Consulting, an expert in e-commerce strategy for the distribution community.
"Distributors have to be careful not to jump into the Internet without knowing its ramifications," Epner says. He points to the problems of Toys'R'Us, which sold toys over the Net last Christmas and then couldn't fulfill the orders. "Be careful what you wish for. You might get it."
Epner believes that distributors must bring electronic ordering into their existing systems to avoid processing them manually. "There are a lot of extras that go into electronic ordering," Epner says. "Unless you integrate your electronic ordering, it can ultimately cost you money."
It seems ironic that Internet use has grown so sharply; an Industrial Distribution survey conducted seven years ago showed that only about 68% of distributors were even using computers. Today, nearly 90% of the respondents to our survey have access to online services. Most access the Web on a daily basis.
ISO certificationOnly a few years ago, it seemed that ISO 9000 registration was a must for distributors. Our survey shows, however, that only 18% of the respondents are ISO-9000-certified. Only another 18% say they want to become certified in two years. Sixty-three percent of the respondents say they have no intention of becoming certified.
Of those distributors who have become certified, most say they did so to stay competitive or because customers demanded it. They also say that becoming certified has had a positive impact on their businesses. Only 4% say it has had a negative impact.
Clearly, for those who have become certified, it has worked to their advantage, while many others say it is not worth the time or effort.
Outside salesIt was only a few years ago at a major industry convention that a keynote speaker predicted that the Internet would eliminate the need for many outside salespeople. But that doesn't seem to be the case, according to our study. About 48% of the respondents say they have more sales representatives today than they did two years ago. In fact, 65% of distributors with more than $20 million in sales have increased their sales force, and almost the same number expects to hire more sales reps this year.
Many distributors who reported increased sales in 1999 say a major reason was the decision to increase their sales staff. "We hired experienced salespeople who know our product lines," one distributor said. "That led to increased sales and an expansion into new geographical areas."
Despite the increased use of salespeople, distributors still are lacking a formal training program. For example, most distributors (61%) report having "informal on-the-job training" for new employees. About 29% say they have formal training programs for inside salespeople; remarkably, only 8% indicate they have a formal training program for outside salespeople.
It seems clear that if distributors are going to grow their businesses - and create more professional employees - training is a critical area. Whether it's product, sales or management training, distributors have been slow to respond to that need.
Mergers and acquisitionsFor years, distribution has been engaged in a high rate of mergers and consolidations. In fact, it was one of the major trends during the '90s. That may be cooling off, however. This year, only 4% of respondents say they have been either acquired or merged in the past six years. However, 30% say they would welcome an acquisition offer. That is especially true of distributors with less than $5 million in sales: Two out of five say they would be willing to sell their businesses.
Not surprisingly, it is the large distributors who are on the prowl for additional companies. More than half (51%) of distributorships with sales of more than $20 million indicate they are looking to acquire distributorships to expand their geographical reach.
Integrated supplyUnless you've lived in a cave for the past few years, you've heard about integrated supply. And it's more than just a fad, many experts have said. It's a new way of selling products to a changing and more demanding customer base that is looking to reduce its number of distributors.
But our survey shows that integrated supply is not seeing the huge growth once expected. Only about one-third of the distributors who responded to our survey say they have integrated-supply contracts with customers. In 1997, 39% of distributors had such contracts, as did 37% in 1998 and 27% in 1999.
Larger distributors - those with $20 million or more in sales - are especially involved in integrated supply. About 60% have such contracts, averaging anywhere from four to 10 integrated supply agreements in place.
Smaller distributors, however, are second-tier distributors, selling products and services through the integrators servicing these accounts.
The new customer baseOne of the knocks on distributors many years ago was that they were nothing more than smokestack chasers. They serviced the big industries, such as automotive and aerospace. In fact, a survey done by ID some 10 years ago showed that those two industries comprised the bulk of sales for industrial distributors.
However, that has changed. The largest segment of the industrial customer base is "general industry," followed by machine/job shops. About 57% of the respondents sell to construction, while 56% sell to utilities and government. Other markets include food, 52%; institutions, 49%; automotive, 49%; the chemical industry, 43%; and aerospace, 32%.
Summing it upThis year's survey shows that distributors are optimistic about the future. There are concerns, however, about the Internet and how (or whether) it will change the role of the distributor in the future.
"We're looking at the Internet as a tool," one distributor told us. "It's opening up new markets for us. But at the same time, I'm worried that manufacturers, because of the Internet, will sell direct. The only way we can ensure future growth is if we provide services for our customers that can't be matched by anyone else. That's the future for our company and for distribution in general."