Wholesalers who dismiss outside research and new models of commerce may be playing with fire.

In a recent conversation with a sizable PHCP distributor, the CEO of the organization disclosed he was moving his outside sales force to dual roles. In essence, the sellers would work part time in the field and part time in other positions. Not all the sales force was moving into this role, but many were. His justification is as follows:
  • Sellers aren’t growing the business faster than inflation.
  • Many customers need some sales help but many are far more value sensitive than they were before the Recession.

  • Many customers know what they want, the online orders are exploding and customers seem satisfied using online capabilities.

In addition, the CEO explained that for large customers who purchase similar SKUs in bulk, he would drop-ship them container loads or partial container loads as he imports the products. The upshot of the conversation, as I understood it, is that this CEO was readily admitting something we’ve been saying for some time: The cost of service is going down in wholesale distribution and the contributing factors are e-commerce ordering, foreign “off-brand” products with reduced price points, and value or “price” consciousness of the contractor. Of course, I can write this in a column or blog all day long but it’s just one man’s opinion, or is it?

Contractor buying patterns

In myApril 2012 blog, I lamented the lack of wholesale industry research that challenges and enlightens the industry with empirical data. It seems the research done, within the confines of wholesaling, serves to confirm the way business is done rather than take a hard look at how things might be done better for better profits. In a recent survey of 500 contractors in the PHCP, electrical, building and maintenance sectors, EMA Associates found several trends that wholesalers should note, including:
  • Contractors are increasingly using hand-held devices to check price and availability. Of the contractors who use these devices, 58% admit to using them for price and availability information.

  • Contractors are increasingly moving tool purchases to big-box stores as pricing, availability and choices were better than wholesaler offerings.

  • Contractors are picking up more A and B items from big-box stores as the price was better.

My consternation came when I mentioned these results to two large wholesalers and was told the contractors who visit the big-box stores are “trunk-slammers” or something less than legitimate full-time business owners. I countered that the survey had 500 respondents and follow-up personal surveys confirm larger, well-established contracting firms are picking up A and B items from the big-box stores, as they had better price points. I even sent them a link to the written survey results, which can be seen at:http://ecmweb.com/contractor/electrical-contractor-purchasing-practices.

I never heard back from the two folks who were dismissive of the survey and my guess is they don’t want to get confused because their minds are made up. However, the exchange reinforces my belief that wholesalers aren’t really seeking challenge. Hence, any research and publication should pass muster with what they believe and not necessarily what the customer wants.

The fact that technology allows contractors to check price and availability and an overwhelming number are using hand-helds to make the purchasing decision should rattle even the most confident of wholesalers that things are changing and quickly. Wholesalers who are dismissive of the research are likely to be dismissive of the technology and are just as likely to lose out. It also might help wholesalers to know that, in the past month, I’ve met with two Fortune-rated manufacturers that believe their traditional wholesaler sales are declining and losing out to other channels including online entities, low-cost or transactional distributors and big-box retailers.

Where cost comes out

I was not surprised that big-box retailers can, if they want, offer many items at better price points than traditional wholesalers. Why? They don’t deliver the items - for the most part - and they don’t have outside sales support, which traditionally costs 25% or more of distributor operating expenses. The HVAC distributor I mentioned at the beginning of this column has figured this out. I don’t think many other wholesalers have followed and, because of this, they are likely leaking an increasing amount of sales to lower-cost channels.

Cost also comes out in foreign products where our research has found that direct purchases of off-brand products has a 20% to 30% landed cost advantage over domestic brands.  Wholesalers, especially larger entities, have developed global sourcing specialists and rather sophisticated supply chains. They are using their sourcing advantage to unseat smaller competitors who, too often, rely on buying cooperatives to eke out a few percentage points from domestic brands.

Several years ago, Grainger appointed supply chain professionals to develop its private-label products with global sources and readily admitted the margins on these products were 20% to 30% richer than domestic brands. Unfortunately, the cost advantage of private “off-brands” often ends up in the marketplace and this reduces margin dollars, which has the effect of reducing operating income. To compensate, wholesalers move to reduce service costs for a satisfactory return.

Finally, cost comes out as new models of distribution, called transactional, are springing up in traditional wholesale product market sectors. We’ve written about transactional distribution for some time and devote a chapter about it in our new book “Building Value” athttp://www.benfieldconsulting.com/New_Book.html. Transactional distributors combine foreign sourcing, transaction economics, e-commerce, limited branch locations, etc., to get the cost out. They can typically go to market for 20% to 30% less than traditional full-service distributors, and this parallels the price advantage of e-tailers over brick-and mortar-retailers. We consider Amazon Supply a transactional strategy and recent research finds it is discounting the competition by 20% to 30% with its cost advantage.

Exploring the value chain

Wholesalers who dismiss the outside research and new models of commerce may be playing with fire. Considering one’s existing service value proposition beyond reproach may be a recipe for significant and sustainable loss. My entreaty is for wholesalers to read up, fund value-based research and challenge the existing model of business. An increasing amount of research from the outside is pointing to channels of commerce that heavily use technology and new knowledge to strip out costs and give a reduced price point. 

I wish I could be more gung-ho about the prospects of traditional full-service distribution, but I can’t. A few days ago, a leading intra-industry research body announced an updated release of an old classic that lauds the role of the branch manager. My bet is the group didn’t know that one of the globe’s leading wholesalers, Grainger, has quietly reduced its branches from 437 in 2008 to 368 by 2011, or approximately 16% in four years. Our writing, including posts in my blog, has called for fewer branches in distribution and less emphasis on the branch manager in order to get costs out. Grainger is prospering in its organic sales with fewer branches, and we also think Grainger has a heavy respect for Amazon Supply, which really doesn’t have a traditional branch or complement of branch managers. 

As if this wasn’t enough, I did a bit of skullduggery using the U.S. Census and Bureau of Economic Analysis for Durable Goods distribution. The sector has decreased from close to 20% of the GDP in 1995 to 13.5% of the GDP in 2011 - a 33% loss. To be fair, some of the loss is that the GDP has grown in sectors other than durable goods including services. However, many service-based industries use durable goods, so it is not clear if the loss comes from a shift in the economy or a loss by wholesalers to other models of business.

The more disconcerting part of this research is that when I informed some of the leading research bodies in the industry, they didn’t seem too concerned about it. To me, the choice is clear, wholesalers can either engage tough research and experimentation with low-cost value streams or they can put their head down and “keep on keeping on.”

 I increasingly believe that those who win out will engage new thinking and new ways of doing things to get costs out. They will provide a value proposition more in line with a new generation of customers born into a world where conducting business via e-commerce and installing products from around the globe is the norm and not the exception.