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Trends in Distribution

Private label, demand-driven models gain traction

No. 1: Private Label
Adam Fein, author of Facing the Forces of Change: Lead the Way in the Supply Chain, says the use of private-label products will expand substantially over the next few years.

Benefits of a private-label strategy include capturing the manufacturer’s margin, and the ability to control profit from the top to the bottom of the supply chain. Customer relationships often improve thanks to lower costs.

Private label also differentiates a distributor by providing the ability to create product that may not exist in the market today. Arbill Safety Products, for example, works with customers to customize products – the company is able to tell its manufacturers to create a specific number of a customized product. Traditional suppliers typically won’t do this.

About a quarter of all Interline Brands’ sales are private label; as part of this, the distributor works with contractors to sell these products to their customers.

On the down side, private label adds responsibilities to the distributor, and adds supply chain risks. A distributor must learn about doing business in China or other countries with lower-cost manufacturing. Private label may also strain relationships with U.S. manufacturers because it is challenging the distributor’s traditional role.

"This is a fundamental change. You’re no longer a sales and marketing agent. You’re your own agent on behalf of the customer," Fein said.

The private-label trend affects building materials distributors more than those supplying contractors. Fein reports this trend is established in both MRO and OEM markets. More than one-half of MRO distributors and two-thirds of OEM distributors offer private label products.

No. 2: Demand-Driven
What Fein calls Demand-Driven Channels is the second trend he addresses in the report.

The idea behind demand-driven is that products are "pulled down" to the end user based on actual customer demand data. This is a sea change from the notion of manufacturers’ pushing their product to market.

To facilitate demand-driven channels, distributors and manufacturers are automating warehouses in order to better track product, sharing point-of-sale and product movement data upstream, and automating orders from distributors to suppliers. In the end this can boost sales for suppliers and distributors, he said.

"This transparency allows distributors to document and demonstrate they do add a lot of value," he said.

Demand-driven channels are coming to industrial and commercial markets. Fein estimates that by 2012, many distributors serving the MRO and OEM markets expect to share point-of-sale data with suppliers.

The demand-driven trend will have a smaller impact on building materials markets than any other market in Fein’s report. Contractor markets, however, will see an impact, thanks to their connection to MRO.

Distributors in retail markets are sharing data with more suppliers than in other markets, Fein says.

No. 3: New Profit Models
New Profit Models are developing, a third trend outlined in Fein’s report. Manufacturers are asking for more accountability from their distributors. One way to do this is through pay-for-performance compensation models, fee-based services and functional discounts.

In addition, many distributors are creating new profit models through fee-based services to customers. Fein says this trend should continue through most sectors.

"Fee-for-service is a reality now," he said.

To succeed in this arena, however, distributors must master the services business – which is different from product distribution. Distributors should also keep an eye on logistics companies and consider them as valid competitors in that area.

Fein reports that distribution executives in industrial and commercial markets expect shifts in the composition of their gross margins. The shift to manufacturer-led compensation is more prominent in OEM and production materials markets. MRO distributors are more focused on fee-for-service to customers.

In building materials, builder consolidation is creating opportunities for fee-based services to customers and fee-for-service logistics to suppliers.

Distributors in retail markets expect suppliers will take more responsibility for a distributor’s profit margin. But fee-for-service is more difficult in these markets.

No. 4: Connected Customers
Technology – notably the Internet – is affecting distributors in more ways than they may know. "The Internet has seeped into every aspect of our lives," Fein said.

Customers are connected. That’s the final trend addressed in Fein’s report. But aside from online ordering, which is what many think about when it comes to the Internet, customers are using the Web to connect with other customers.

"The Internet is not about buying and selling," he said. "We communicate with it. That’s the No. 1 thing we do."

Customers are connecting with customers online. For example, on ContractorTalk.com, a forum boasts 8,000 members and 26 group categories. Some of the topics discussed include "What brand of framing gun?" and other brand and company-focused queries.

"Online is just one more way to communicate. It’s not magic," Fein said. Customers are getting smarter.

Customers are also using the Internet to comparison shop. Distributors must have a plan for dealing with customers who approach them with a competing price quote found on the Internet.

Also, customers have started to connect with distributors via their Web sites and through online searches. It’s important to take email seriously, Fein said. One distributor employed someone full-time to field emails and ask salespeople to respond to those leads. That distributor has also taught its employees how to write an email, and use other online tools to respond to customers in a professional and efficient way.

Online collaboration tools, including work spaces and virtual trade shows, will become more common as ways to interact with customers, Fein said.

Emerging Trends
Consolidation continues to be top on the minds of many distributors, but Fein says few know how that will impact the industry.

Demographic changes will become front and center as the baby boom generation ages and distributors compete for the next generation of junior and middle managers.

High commodity price inflation has cushioned many distributors in recent years, making revenue growth easy to achieve. Distributors will have to start working harder for real growth as this commodity cycle shifts.

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