This article is part of an ongoing series looking at The Shifting Competitive Landscape in wholesale distribution. Read this and other articles in the series at www.mdm.com/shiftinglandscape.
As big-box retailers such as Staples, The Home Depot and Lowe’s have expanded their online presence and increased their focus on professional markets, some distributors are feeling the impact, not only on sales volume but on profitability as margins are squeezed and customer expectations shift. This article, featuring interviews with distributors, manufacturers and industry experts, takes a look at the effects of the retail channel on the competitive landscape in wholesale distribution.
Distributors in some sectors aren’t just competing with another independent down the street – they’re competing with big-box stores with billion-dollar brands and a different approach to the market. And for some distributors, that competition is growing.
“Big box’s arrival into the B-to-B world has fundamentally changed the way distribution goes to market,” says Dennis Riffer, president and CEO for distribution sales and marketing group Afflink.
Janitorial supplies distributor Dalco Enterprises, Minneapolis, MN, is feeling the effects of this shift as office supply retailers like Staples push harder into professional markets. “We are seeing increased pressure and activity from them in the markets we serve,” says President Ted Stark.
Stark says Staples has been adding maintenance supplies to its offering for years, but only within the past 12 to 18 months has Dalco really found itself losing business to the retail giant. But even when the distributor wins, it still feels the retailer’s influence. “We are finding ourselves bidding against them, so prices are decreasing, and consequently, gross margin is being squeezed,” Stark says.
Staples made a big move into B-to-B markets when it increased its focus on contract and delivery by acquiring global office supplies distributor Corporate Express NV in 2008. Distributors in construction supply have also seen the effects of big-box competition with the rise and spread of retailers like The Home Depot and Lowe’s in the 1980s and 90s in the U.S. and Canada.
In certain sectors, big-box competition has changed customer expectations and squeezed margins. Retailers’ online platforms have exacerbated this dynamic, broadening the scope of what and to whom they can sell.
Channel shifts are inevitable when customers see greater value available through retail stores, says Mike Marks of Indian River Consulting Group. “There’s no force in the universe that can stop a channel from becoming more efficient and more effective,” Marks says. “If you offer a better value to an end-user, they’re going to go.” But Marks says distributors can provide that higher value by thinking beyond price and reminding suppliers and end-users of the additional value they provide.
“To remain relevant, distributors must adapt to these changing pressures,” Riffer says.
The impact of retail’s B-to-B focus on wholesaler-distributors depends on the categories they sell and the markets they serve.
Home centers like Lowe’s and The Home Depot have carved out a large market share in power tools, at the expense of distributors, according to Joe Smith, who spent 20 years in the power tools business before becoming a general manager for manufacturer SIA Abrasives in Charlotte, NC.
“I think if you go back 20 years, industrial construction distribution was more the destination for power tools, and now Home Depot and Lowe’s are the destination. They’re pretty broad and deep in the power tool category,” he says.
Smith says retailers will gravitate to product categories that don’t require a lot of technical application competence, so categories like cutting tools and coated abrasives are somewhat immune to the channel shift occurring with other products.
Tom Blue, vice president of marketing and affiliate relations for Affiliated Distributors’ industrial division, says the distributors in his division that serve contractor and institutional MRO customers are challenged by competition from big boxes. But distributors serving the true industrial MRO and manufacturing segment, he says, are seeing little pressure because many of them are focused on products which require more specialized support than retailers provide.
“So much of the manufacturing world today is about documented cost savings and productivity improvements. That’s where the independent distributor is able to win out, because they understand that and have the expertise to address it,” Blue says.
“Some products are bought and some products are sold,” Marks says. Commodity products, where the knowledge of use lies with the end-user, are bought, so they’re easy targets for retailers who have made buying easy for consumers. Products that are associated with health, safety or environmental concerns require more expertise, Marks says, so they resist commoditization.
Kathleen Durbin, CEO of Sun Valley, CA-based General Industrial Tool & Supply, says the increased focus from retailers on B-to-B markets has affected the commodity products the distributor sells.
But the impact goes beyond just sales volume. “It can highlight price as the most important decision versus the total cost of procurement, which should be the most important metric,” she says.
At Dalco, reps spend a lot of time on consultative selling, visiting customers and working with them to solve problems. But Stark says he’s seen reps get burned after consulting with a customer on a product, often conducting demos and training staff, only to have the customer’s purchasing department go online and find a lower price for the product. The rep then loses the sale to a competing retailer. “That only has to happen one time and that sales rep will not sell that product anymore,” Stark says.
When this happens often enough, the distributor becomes less motivated to push that product or line. “We have to get paid for that. If the margins get so low that it’s not worth a distributor’s or sales rep’s time, they’re not going to do it,” Stark says.
Effects on Manufacturers
Stark doesn’t expect retailers to start providing those services because of increased costs. “If that’s a service that customers value, and the big-box folks won’t provide it, and there isn’t enough money in the product (for distributors) to do it, the only place left is for the manufacturer to do it themselves,” Stark says. “So we could see a shift in who does the sales and marketing for suppliers.”
Manufacturers face their share of challenges selling through retail. One of the biggest challenges, according to Smith, is the difficulty of landing and keeping accounts. At Home Depot, for example, he says he’s participated in so-called “shoot-outs,” a highly competitive process where competing vendors are called in to pitch and defend their products against competitors, as well as haggle on price. The result can be much lower margins, he says.
Smith says selling through the distribution channel provides certain advantages from the manufacturer’s perspective, like distributors’ willingness to carry a broader offering of their products, including slow-movers. When it comes to leverage with manufacturers, though, Smith says the benefits of selling through industrial distributors must be weighed against the high volumes generated by home centers. “Volume speaks volumes,” he says.
Phil Hanson, executive vice president of C.H. Hanson Co., a manufacturer of hand tools, says his company sells many products to big-box stores. But as home centers try to target more customers in the MRO space, they’ve asked the manufacturer to provide products for sale exclusively via home centers’ websites.
“That online business forces us as a manufacturer to spend a lot more time shipping either to the store or direct to the customer,” Hanson says. “That’s been a real challenge for us in trying to figure out the pricing strategies where it requires more work for us than to ship to the traditional DC.”
Unlimited Digital Shelf Space
Blue, of Affiliated Distributors, says buyers’ increasing reliance on technology and the greater visibility of products through online retailers is emerging as a bigger threat in the space than the brick-and-mortar locations of the retailers.
Hanson says retailers’ e-commerce capabilities allow them to attract customer segments outside the range of their normal bread-and-butter customer segments, like municipalities. “The shelf space required to satisfy that customer would be enormous. But when you have unlimited digital shelf space, you’re able to make that available for them online.”
Marks says the rise of SoLoMo (social, location and mobile) marketing makes retailers’ online presence more disruptive for distributors behind the curve. “SoLoMo is accelerating channel change and channel migration, because it’s giving end-users more choice, and it’s making our economy more efficient. And if something is more efficient, that means people are getting more value,” he says.
The good news for distributors is that improving their own technological capabilities is easier than it was in the past. “It used to be that I had to have huge scale, and I had to put in these great big ERP systems and have all this expensive communication,” Marks says. “But now, everything’s in the cloud.”
Marks says distributors with the vision to figure out how to add more value for the end-user “could be killing retailers just as easily,” since scale and capital are no longer a requirement to compete online.
HP Products Executive Vice President Jim Smith has invested in technology to help the Indianapolis, IN-based janitorial supplies, packaging and safety products distributor compete. “We have a whole team of people that do nothing but dedicate themselves to keeping our portal system as up-to-date as we possibly can make it. Because that buying model has changed significantly,” he says.
He says while many of his customers used to buy via catalog, about half of his business is now conducted electronically. He says ease of ordering is critical, so HP Products’ online system includes features like a favorites list of frequently purchased items to expedite the customer’s purchase.
How Distributors Can Compete
Marks says to compete, distributors have to realize that what customers are buying is in many cases not what distributors think they are selling. Some customers are buying a reliable source of supply. Some are buying the ability to bundle. Others are buying convenience, capital services, pre-sale advice or post-sale support.
As markets fragment, distributors need to start segmenting customers not by how much they buy, but by which services they’re buying. “They have to start providing differentiated value propositions,” Marks says.
Durbin says General Industrial Tool & Supply has been able to identify the types of service that customers are willing to pay for, such as vendor managed inventory programs and blanket purchase agreements for special inventory.
For distributors affected by these channel shifts, the value they already provide may cause some lost business to come back on its own. While retailers have targeted janitorial supplies, HP Products’ Jim Smith says big boxes haven’t done a good job of serving the space.
He says that because retailers often sell cleaning supplies in bundles of other products, customers often end up with products that don’t solve their problems, and may even create new ones.
Product maintenance issues, such as malfunctioning soap or towel dispensers, can also be problematic for customers who don’t have access to a distributor’s expertise and support.
“You’ll have that segment of customers out there that will try to go out and find a product for less money somewhere else, and it ends up creating more headaches than they can imagine,” Jim Smith says. “So you don’t lose that customer for very long.”
When customers do come back, it’s up to the distributor to justify the greater cost to them. But Jim Smith says when customers are returning due to problems, it’s generally not hard to help them see the return on the additional investment.
Stark says distributors will need to focus on their unique value propositions over and above the product they’re selling to compete. But if profit margins continue to shrink, he says, “we could see a trend where distributors start making more of their money off of services as opposed to re-selling product.”
To compete with the big box, Joe Smith says the best industrial distributors have learned to add value in some way, through specialization, integrated supply or a commitment to cost reduction through consultative selling.
“These are models that are difficult for Home Depot to crack,” he says.