At the recent MDM Digital Distributor Summit, the speakers laid out a compelling case for digitalization, demonstrating a steady buyer migration toward e-commerce and the use of digital tools. However, a quick analysis of small distributors’ ability to meet this growing demand was troubling. Today, only 13% of small distributors ($10-$50 million in sales) have even started a digital presence. Even that very low number represents a 50% increase over the previous year.
The small- to mid-size distributor could be in a perilous situation. In many ways, it reminds me of those old movies where the hero is tied to the railroad tracks and sees the headlights of a train coming in the distance. Held down by the weight of rope and chains, our hero struggles, yet manages to escape impending doom.
The recipe for success in digitalization outlined by the experts is outside both the skillset and budget of most distributors below $100 million. In a world where all but the top 100 electrical wholesalers fall below that line, the typical (median-sized) automation distributor is $18 million. The vast majority of industrial, fluid power and power transmission distributors fall well below $50 million. Following the lead of the bigger companies is practically and economically impossible.
Does this mean death for these companies?
From my point of view, small- and mid-sized distributors have already shifted their business model to a combination of products and customer-centric services. Many of them have embedded themselves into their customers based on the services they provide, but most still need the “parts” business to make their model work. Clearly, they need to create an environment where customers can access their business digitally.
To create a reasonable digital model in-house, they would need to add more headcount than their profits allow. Reviewing my notes from the Summit, the new hires would include:
- E-commerce manager. Responsible for the execution of our strategy.
- Product content person. Creates, updates and maintains product content.
- Marketing lead. Oversees marketing via social media, sets product promotions and SEO activities.
- Creative lead. Designs the website layout and produces marketing content for the enterprise.
- Technology lead. Develops and maintains website, e-commerce site and all the technical things connecting them.
Upon reviewing this list, one distribution expert remarked these people in total would require an annual salary and benefits budget between $500,000-$600,000, depending on where they were located. None would be cheap hires. With the potential exception of the marketing person, all would be new hires for the distributor.
The Internet-Readiness Gap
We’ve already hit on the financial concerns, but let’s look at the other issues. Product data is not easy to create. Experience indicates 80% of supply partners lack enriched content to give to their distributors. The gap between pdf catalog files and internet-ready product data is massive. Each SKU listed online must be created by the distributor and this is both costly and time consuming. Assuming the conversion requires just five minutes per SKU, a relatively small supplier’s product offering of 15,000 SKUs would require more than 1,200 hours to create. Most distributors have dozens, perhaps hundreds of suppliers to convert.
There are some manufacturers who have developed and provide enriched content for internet use. While some see this as a panacea to distributor digitalization, problems still exist. First, the data received from each vendor is likely to be different. Dissimilar layout, different specifications selected, and configurations developed to meet the supply partner’s specific needs.
The result is a webstore containing a hodge-podge of unmatched items. Looking more like the collection of different manufacturer’s catalog pages found in one 1980’s distributor catalog I was given. As I browsed through the pages, my impression was the distributor had simply cut and pasted pages from a few dozen manufacturer’s catalogs into a common binder and called it their own. In the terms/jargon of e-commerce, the content was not normalized.
All of the content, whether created manually or imported from others, must be developed for easy search and customer navigation. As for normalizing, customers have come to appreciate webstore comparison features. Without a planned and well executed set of data, this simply isn’t possible.
To make it happen, a distributor might look to an outside service provider. Partner selection, however, presents a new set of issues. Most of those who provide these types of services are generalists, meaning they know nothing of the distributor’s industry/line of trade. This translates into a long and expensive learning curve. The distributor also has no control over the person doing their work. Organizations in the digitalization business often experience ebbs and flows in personnel; the designer working for you today might not be the same person doing the work in six months or year.
When the right partner is selected, their model provides a mechanism for better managing the investment. The cost of creating much of the framework of the webstore is handled, but there is more to it than just the webstore. Let’s discuss some of the issues:
- Does your partner have a background in your industry? Without a keen understanding of the specifics of your business, they will struggle to closely match their work with your customers’ expectations. They certainly will not be able to build the right tools to allow your team to integrate digitization into their daily customer interactions.
- Does your partner know your products and technology well enough to provide the right content for your customers? This includes not only the technical names but also common industry jargon and trade slang. For instance, from the electrical industry, a split bolt connector for wire is often referred to as a “monkey ball” and electricians call wire grips a “come-a-long.” The company providing the digitalized solution must have a deep knowledge of distribution as well as the industry in general.
- Does your partner have the right product content for your business? Content is king. Posting 30% of your products to the webstore will limit adoption and growth. Distributors with a “long tail” of products online do better at capturing additional business as well as satisfying their existing customers’ needs.
- Can your partner easily integrate with your ERP system? The best side effect of digitalization is improved productivity when existing customers chose to place their orders online rather than through the traditional and mostly manual order entry process.
- Does the partner have a keen understanding of manipulating data for good search results? Build a better mousetrap and the world will beat a path to your door. In the case of e-commerce this isn’t so. Without search engine optimization, your webstore will remain bright and shiny, yet unused. The outsourced company must have the capability to understand how to attract business to your website. Since most of these small- to mid-sized distributors operate in a defined territory, they aren’t trying to attract business from around the world.
- Is your partner capable of both providing the right product content and the webstore platform? Many distributors understand the potential for issues when two complex systems come together. Despite compatibility statements and testing conducted in a “lab setting,” software sometimes experiences issues. A partner who provides the complete package eliminates finger pointing and conflicts as the system grows and matures. Here, one-stop shopping is a good thing.
- Will you have a major “upfront” cost or does the partner provide a subscription plan? When your partner requires a massive investment at the launch, your cash flow suffers. Further, a large upfront cost “marries” you to a partner regardless of future performance. On the other hand, a subscription plan keeps future options open. If the partner lags behind on technology, product content or any of the dozens of other variables, distributors using their service can easily migrate to something better.
Training is Important
The uniquely different needs of small- and mid-size distributors require a special approach to employing a webstore. Customers need to understand the digital communications are simply another way to access the same level of specialized service. Whether they choose the digital path, email, phone or even fax, the support remains constant. Because they are the customer, they can use one or all of the communication tools available — at their convenience.
Training distributor employees on exactly how to message the customer is critical. Extending even further, training sellers on how to use the digital presence as a customized sales resource is even more important. Quotation quality can be improved using online digital data. Customers receive better descriptions, links to diagrams and even users’ manuals through such a practice. And, efficiencies improve throughout the distributor.
Tying It Together
There are three important things for small to mid-sized distributors to keep in mind:
- The sub-$100 million distributor plays an important role in the industry. The expertise, services and solutions they provide to their customers are important to the way industry works. They will survive.
- Solution selling is important to their survival, but so too is the parts business. And, the parts business is rapidly and undoubtedly moving to the web. Without a webstore, the pure product sales they make will suffer.
- The DYI model employed by larger distributors is too costly and requires too much additional expertise for them to go it alone. They need to find partners who understand their business. Selecting the right partner is not easy, but not impossible.
Small distributors will survive. Their ability to adapt and find the right solutions is unmatched. But, the best solution will be much different than those employed by their much larger brothers in the business.
Rémi Ducrocq is CEO and co-founder of KYKLO, an enriched product content and digital sales platform for wholesale distributors. He has served for many years on the front lines of the electrical and automation industry and, somehow, he ended up on the cutting edge of digitalization. His company has been named a Cool Vendor by Gartner for Digital Commerce and was featured in TechCrunch. He has been a featured techno-entrepreneur speaker on multiple continents and has been a key part of several Schneider Partner platform meetings. Reach him at firstname.lastname@example.org.
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