Distributors need to consider new approaches to doing business and differentiating themselves in what’s been referred to as the “new normal.” As Publisher Tom Gale wrote in a recent issue of MDM, market-leading distributors are rethinking their models for 2010 and beyond. They are focused on building a leaner, productive operation, built on the strengths and the values that made them successful in the first place.
“If you want to get back to 2007 revenues, you have to identify where that business will be because the drivers of 2007 will not be the drivers of 2011,” says David Gordon of Channel Marketing Group.
Every distributor will approach this strategic task differently, but most recognize they cannot be everything to everyone without stretching their limited resources. So they are recalibrating their organization’s mindset and building a strategy to capitalize on shifts in the market and meet changing definitions of value at the customer level.
The backdrop to this talk of changing customer values is price. Can distributors meet the growing and shifting demands of customers and still maintain margin?
Joe Gallagher, president of Gallagher Fluid Seals Inc., King of Prussia, PA, says in current conditions if he can provide the service and meet the timeframe the customer needs, “you don’t have to have the low price.” Customers who are ramping back up quickly on limited resources just want a quick response.
But rewind 12 months, when distributors were in the midst of a rough and aggressive pricing market. Many distributors were taking whatever business they could get, and that sometimes meant lowering prices below their previous standard.
And customer price sensitivity continues. Tom East, president of distributor Refrigeration Sales, Valley View, OH, says potential customers continue to shop around, and ask for more quotes than they have in the past.
“The definition of ‘relationship’ in the business has changed over the past couple of years from people doing business strictly based on who they like. … That’s been a big change,” Gordon says.
“Customers want the best price,” says Charles Beasley, vice president of industrial distributor Perry Supply. Perry Supply supplies mainly mining and foundry customers. “That’s our main challenge. Customers are evaluating and looking more closely at the prices they are seeing.” In fact, some of his customers are considering options beyond the traditional independent distribution channel, including getting direct quotes from manufacturers. “We have to offer a value-add service that will compensate for the difference in the cost,” Beasley says. “We have been able to do that.”
In construction end-markets, commodity prices have challenged distributors.
“Commodity price volatility has really made every major construction job a major negotiation where before contractor customers would purchase wire or commodities from whomever they had had a relationship with. Now they’re opening it up to everyone in the region to bid jobs they previously never would have looked at. That will probably continue,” says Kevin Powell, president of Werner Electric of Minnesota. The “trust factor” has suffered.
On the other hand, customers have been more willing to listen to new ideas from new vendors, says Bob Dill, CEO of industrial distributor Hisco Inc. “It’s an opportunity or a threat, depending on how well you respond to it,” he says.
Dill says if distributors are “just moving boxes around” or offering something that is easy to replicate, “you’re very vulnerable” right now. The large distributors are growing larger, buying better and continuing to grow more aggressive, Dill says. “You have to have a legitimate way to drive value. Relationships are always important, but it has to be relationships-plus. It has to be more than being a good guy. It’s aggressive out there right now,” he says.
Despite the challenges, plenty of opportunities exist to offer the services that customers value now, say many of the distributors we spoke to for this report.
Powell says because customers have cut back on workers, they want distributors to perform functions they used to perform for themselves. He offered examples: storeroom management and technical advice that before would have come from in-house engineering.
“We are all being relied on more for services. There’s a definite responsibility shift. Where a customer used to look leerily at someone strange coming into a storeroom, now they look at it with excitement, as a cost shift.” Powell says as a result Werner has expanded the professional capabilities of its services delivery group.
Gallagher agrees, saying that his customers don’t have the same resources they used to. “They are looking for outside resources to help them,” he says. “They can’t manage what they have.”
“People are turning over every rock in the world to figure out how to make their supply chain more efficient,” says Mike Marks of Indian River Consulting Group. And that equals opportunity for distributors ready to capitalize on those needs.
Another strategy employed by distributors and their customers big and small has been decreasing the number of suppliers they employ, to ensure not only lower transaction costs but also consistency in quality.
“We need to make sure we’re putting our volume through our key vendors,” says John Masek, vice president of Bearing Service Inc. in Livonia, MI. For just one type of product, Bearing Service Inc. could buy from 10 different companies if it wanted to. “It’s incumbent on us to pick the one or two we want to support and push the majority of our volume through to get the rebate volumes we need, and make the distributor and manufacturer successful.”
Other distributors have said they are taking the same approach. This trend may have a negative impact on smaller manufacturers, Masek says, “unless they have a real niche in the market.”
The same trend is appearing on the customer side as well. Grainger has discussed in analyst presentations over the past year how its customers have decreased the number of suppliers they work with, in some cases dramatically. And distributors like Grainger continue to add to the number of products they can offer those customers.
HD Supply leaders recently spoke with MDM, saying the same. The distributor added 4,000 new products to its newest facilities maintenance catalog. “Every year we will add new products, and those products will fit existing customers’ needs,” CEO Joe DeAngelo says.
Of course there are challenges with this approach. Farrokh Khalili, CEO of Canadian Bearings Ltd., Mississauga, Ontario, says that his company, a bearings distributor, keeps this in mind when considering new product offerings.
“For each product group, you need an expertise distinct from bearings,” he says. “You also need a new network for relationships. On top of that you need market knowledge of those products. For example, for bearings you never have promotional sales, but in safety you do. Customer expectations and contacts are different.
“There are significant differences that make it difficult to just go and service your customers with these products. To expand your product offering is not a trivial matter.”
Lasting Impact on Channel
It’s really too soon to say whether the shifts we have seen at the customer and distributor levels in the first half of 2010 will be sustained. But distributors continue to change how they do business in response to the recession, and some of these changes are likely to stick.
In a recent MDM survey, distributors and manufacturers that sell through distribution said they are focused on not just cost containment but also training, online marketing, smart inventory management and implementing technologies that will help them keep on top of and meet changing customer needs more efficiently.
The severity and broad-based impact of this recession has changed how distributors, their customers and their suppliers look at the market, and will likely have a lasting impact on the role of independent distributors.
Those that capitalize on these shifts and adapt their model to the new demands in the market will come out ahead.