Conversation With A German Wholesaler
Joe Poehling of First Supply is a friend of the Paulsen family, and was hosting a six-week visit by Lars this past spring to study First Supply's operations. I got wind of it and thought it might be interesting for our readers if I paid a visit to First Supply's Madison, Wis., headquarters to meet the young man and gain his impressions of PHCP distribution in his homeland and here in the United States.
What follows is a topical breakdown of our conversation, outlining similarities and differences.
OVERVIEWSimilarities - In most aspects, German PHCP distributors pretty much operate the same way and face the same challenges as their American counterparts. According to Lars, Germany's PHCP industry has one distribution giant with high market share competing against a number of mid-sized firms like Andreas Paulsen, which Lars described as one of the top three market leaders in its northern Germany region.
Trade customers, led by plumbing and heating contractors, form the backbone of Paulsen's business, just as with most U.S. firms. Andreas Paulsen does not sell to consumers, and operates showrooms with sales funneled through trade customers. Competition from large retailers is a major concern to them as it is here. “Also, sales over the Internet have become a very big problem,” said Lars. “People can buy almost anything via the Internet.”
Differences - One of the biggest differences remarked upon by the German wholesaler-in-training was the presence of large warehouses at all of First Supply's facilities. He noted that Andreas Paulsen operates only three warehouses to supply its 18 facilities. Of the remaining 15, eight are showroom sites while the other seven operate as self-service stores. These resemble American hardware stores with bins and shelves filled with inventory, except they are open only to trade customers. These stores typically carry around 8,000 skus.
OWNERSHIPLike most American wholesalers, Andreas Paulsen is a privately-held family enterprise - but with a significant difference. Lars' father is a doctor and his uncle a lawyer. Neither has ever worked in the family business, which is treated strictly as an investment, although they do inspect the finances regularly.
Another unusual aspect of the Paulsen family business is that it is jointly owned as a partnership not only by the Paulsen brothers, but also by another unrelated family. There may be similar arrangements in the U.S. PHCP industry, but none that I'm aware of.
In that extended family ownership presents its own lion's share of difficulties, the mind boggles at the complications that could arise from having two separate families owning a company. Apparently, such arrangements are more common in Europe than here.
PRODUCTSSimilarities - German distributors carry pretty much the same range of products as U.S. distributors do, spanning plumbing, hydronic heating (especially radiant), HVAC and industrial PVF. Like here, a minority of PHCP distributors also carry electrical products, though Andreas Paulsen doesn't.
Differences - Lars Paulsen was especially intrigued by First Supply's large inventory of fiberglass shower/tub units. According to him, this is not common in the German market, where contractors typically tile in shower stalls. It also has to do with the fact that new home construction is not as prevalent in Europe as in America, so a larger portion of their residential market is replacement and remodeling.
He also said that Germany has a fairly vibrant solar market, thanks to government subsidies. Andreas Paulsen sells a significant amount of photovoltaic equipment, which is typically installed by plumbing or heating contractors, Lars said.
He also was struck by the Kohler-dominated showrooms of First Supply. In Germany, he offered, distributor showrooms tend to display a wider range of vendor brands.
BUYING GROUP PRIVATE LABELSLike most U.S. distributors, Andreas Paulsen belongs to a buying group. Among the services offered by their buying group is a line of private-label products, which Lars said accounts for around 20% of Andreas Paulsen sales.
He explained that the private-label goods are made for Paulsen by major vendors such as Grohe. However, they are not outsourced to China or other low-cost producers. Instead, they are typically made in the same factories as other Grohe, et al, products, and are of the same quality as the branded merchandise. According to Lars, the vendors can provide them cheaper by saving on marketing expenses alone.
Another interesting aspect of the German buying group to which Andreas Paulsen belongs is that they provide vendors with credit guarantees. If one of its members can't pay its bills, the others are obligated to cover them. This is a very attractive incentive to vendors, but it puts a high premium on membership selectivity.
GROWTH POTENTIALI asked Lars where he expects his company's growth to come from in the future, and his response reveals much about the difference between the European and American economies.
“We will try to defend our position in market share, and try to increase it by doing a good job,” Lars replied.
This struck me as a staid response compared with the aggressive growth posture of most American businesses. During further conversation, Lars noted that there are limited opportunities for his company to grow more dynamically. Andreas Paulsen is headquartered only about 60 miles from Denmark, but said they had little interest in expanding across borders, because customers there don't know them and would be hard to woo - and, it would only invite Danish wholesalers to make forays into Paulsen's turf. He indicated this mindset is widely shared throughout the German PHCP industry. Wholesalers pay more attention to protecting what they have than aggressively going after new business.
I remarked that this seems to contradict the spirit of the European Union, and Lars simply smiled and shrugged his shoulders. “Maybe so,” he nodded. This offered insight into the European mindset, which values tradition and stability more than growth and risk.
Of course, it's not entirely unknown for competing distributors in America to respect unofficial border lines, but voicing such sentiments aloud might well bring heat from the FTC.
As they say in another of Germany's neighboring countries, Vive la difference!