Despite this, HD Supply is unlikely to disappear completely as a competitor, even if the division is sold. It is a good example of the effect a big player has when it diversifies its game plan.
Home Depot has been working its way up the customer segment food chain for more than 10 years. It made its formal entry into industrial and commercial markets with a 1,000-page, 15,000-item catalog called the Pro Book in 1996. The Pro Store came next, in 1997.
The retailer, looking to grow outside its core operations, continued to buy catalog houses and later expanded its acquisition strategy to brick-and-mortar wholesalers. It bought Apex Supply, Atlanta, GA, in early 2000, a plumbing supplies and HVAC distributor. From there its acquisitions grew: National Waterworks, a $1.5 billion distributor; White Cap Construction, a $500 million building materials distributor; and its biggest yet, diversified distributor Hughes Supply, with $5.4 billion in revenues.
It has now branded its wholesale division HD Supply. HD Supply hit $12 billion in sales in 2006, 12 percent of Home Depot’s overall sales.
The growing presence of competitors like Home Depot playing in mid-sized and smaller distributors’ back yards has changed how manufacturers view and interact with their distribution networks.
At Home Depot, for example, with nearly $90 billion in annual revenues, suppliers have to play by HD rules to get the market share the retailer is offering, some say. “They have built such a big engine, manufacturers have to do what they want,” Jones says.
Smaller distributors, to a degree, have ridden on HD’s and other large players’ coattails. Manufacturers are more willing now than they were 20 years ago to play by a distributor’s rules. For example, one big-box requires bar coding on the outside of a box. Smaller distributors have started to ask the same.
Another example, provided by Jones: If a big-box buys a grinder for $72 and sells it for $79, an independent distributor is going to want the same thing. “They will need to do that,” Jones says.
Big-boxes have changed the rules, and in some cases for the better. Manufacturers have to create programs and better respond to smaller distributors to maintain their network to protect the business they need from certain product niches they can’t reach through a big-box.
At a big-box or national distributor, manufacturers “have a lot of their eggs in one basket,” Jones says. But those channels are a required risk because of dollar volume.
“You have to be careful as a manufacturer that you have a good balance of trade,” Perry says. “I think manufacturers get in trouble when a huge percentage of their business becomes too dependent on one high-volume distributor or channel.”
The traditional roles of manufacturers and distributors are changing.
Manufacturers have started to broaden their product lines. Thanks to increasing globalization, the speed and low costs associated with producing overseas have made that option attractive.
“The necessity of growth and their desire to become a one-stop shop strains the distributor’s relationships with both the expanding and current suppliers,” Jones said in his STAFDA president’s speech two years ago.
The move to produce more overseas has turned many manufacturers into “brand-brokers,” Jones says. In other words, suppliers are focusing more on product development and marketing, and less on actual production, particularly if they can outsource it more cost-effectively.
Some distributors have developed their own brands, using manufacturers overseas, sometimes to the chagrin of their traditional suppliers.
“Does it make sense that a distributor with strong sourcing capabilities invest in these suppliers when they can probably do what these ‘brands’ are doing and remove cost for their customers?” Polli asks.
The strategy clearly is a balancing act. Distributors who have been successful with private label brands offer products and services their traditional suppliers won’t, such as customizing a run or product for a specific customer.
Private label changes the distributor’s role, which could strain its relationship with traditional suppliers, notes Adam Fein of Pembroke Consulting. “This is a fundamental change,”” he says. “You’re no longer a sales and marketing agent. You’re your own agent on behalf of the customer.”
Private label and more potential suppliers for distributors have prompted some manufacturers to drive their brands straight to the end-user to create loyalty. In this way, they sometimes bypass their distribution networks with their marketing.
“The swing in power has forced the manufacturers to react over the past 15 years with new programs advertised as advantageous to the distributor, but perhaps designed to wrestle back some control,” Jones said. Vendor Managed Inventory is one; a renewed focus in marketing to the end-user and collection of point-of-sale information another, he said.
There is opportunity for manufacturers to work with distributors to improve brand recognition and loyalty, says Jeff Campbell, vice president of sales at Irwin and Lenox Industrial Tools. “Distributors should market themselves aggressively as a destination for the brands that matter to their customers and proactively tap into manufacturers’ marketing initiatives.”
As manufacturers try to reach a broader set of end-users without alienating existing channels, the new landscape can be like walking on a tightrope. But balance is key to profitability today, for manufacturers and distributors alike. Independent distributors of all sizes arguably have gained power and a more level playing field through these new market dynamics.
“When you’re selling through a network of distribution -from the smallest to the largest -they all think they’re important,” Perry says. “And they are. The smallest out there are very important if you have enough of them and you are providing programs and value enhancements that enable them to effectively compete. That’s the balance of trade I was talking about.”
Those distributors with a clear difference in the value they provide to customers and suppliers have a competitive edge. While that statement might have been equally true 10 years ago, the definition of value in today’s channels is a moving target that demands flexibility. “Distributors don’t want the same old, same old, where they can only compete by dropping their price and create minimal margins,” Perry says. “They want to be able to go out and do what they do best and sell the value they provide to their customers.”
Part 2 of this article will appear in the next MDM.
While the basic concepts for effective channel management haven’t changed, new competitive pressures have changed the focus to channel profitability. Here’s an analysis of the key shifts taking place in independent distribution channels. Part 2 of this article will outline manufacturer-distributor emerging best practices in channel management.
Relationships between manufacturers and distributors have been a topic of conversation at conventions for decades. The tension has always been there,” says Marshall Jones, a past president of the Specialty Tool and Fastener Distributors Association. “But the sources of that tension have changed.
Distributors and manufacturers are navigating uncharted territory and areas that until now maintained some stability. The new frontier includes private-label branding, converging channels, pricing conflicts, product support, and the push of big-box retailers into new territories.
Channel dynamics have arguably never been more complex or fluid. At no other time has the customer had so much choice and so much power. As a result, the end user, thanks to better access to information and better visibility throughout the supply chain, is playing a bigger part in how manufacturers and distributors go to market, and how they interact. Tension, inevitably, has sometimes been the result.
And that’s just where the complexity starts. As many manufacturing segments have shrunk, construction markets have boomed. Regardless of product mix and how they might define themselves, many distributors and manufacturers have had to adjust, sometimes dramatically, to the new look of their customer base and how they support and grow it.
The bottom line: The new crux of how distributors and manufacturers relate is how they can best maximize profitability for each market segment.
Amid the shifts are many flashpoints:
- Distributors have started to sell their own private labels, while more manufacturers are producing overseas. Some manufacturers are starting to look more like brand-brokers, as they shift their focus from manufacturing to marketing and product development.
- Pricing is at center stage as competition -between big and small, local and national, big-box and independents & ndash; intensifies in individual markets and at specific customers. Traditional volume discount models can’t address today’s market dynamics, many argue.
- Also at center stage: how manufacturers deploy resources to support these increasingly diversified channels. New product introduction, shorter market adoption rates and end-user education have become key focal points for differentiation, growth and profitability.
As with most industry shifts, distributors and manufacturers are finding opportunity emerge from the brewing conflicts. Many manufacturers are exploring how to best strike a careful balance by actively managing their increasingly diverse routes to market: independent distribution channels with their higher profitability and better reach into key niche markets; and the high-volume big-box and national accounts channels.
Interestingly, because of the strong feelings surrounding channel conflict, manufacturers have the added challenge of managing perceptions distributors have about their level of support. Case in point: One manufacturer found many of its distributors felt its field support was overwhelmingly devoted to managing big-box accounts. The opposite was true as field reps found independent distributors much more flexible and receptive to targeted and customized programs.
Similarly, distributors have an opportunity to leverage the market dynamics manufacturers face today to reinforce their value.
Competition hasintensified as product channels have started to overlap. “More companies are putting greater focus on customer segments and what they value most as opposed to strictly selling products,” says Greg Polli, vice president for product management at MSC Industrial Direct Inc.
Many distributors have added on safety products or other tangential products to complement their traditional product lines. Some sectors have reached into neighboring niches -some power transmission/motion control distributors have developed strong fluid power business segments, for example.
Manufacturers are now able to satisfy the needs of multiple product channels in one stop as distributors broaden their scope, notes Dan Perry, founder of consulting firm D.R. Perry and Associates LLC and former president/CEO of Milwaukee Electric Tool Corp.
On the other hand, some distributors have gone super-niche, specializing in response to segment needs. They have been successful by focusing on fewer customers, fewer products, fewer suppliers, and higher levels of service and support. And while national accounts, integrated supply and big-box retail have complicated markets for many smaller distributors, these trends have also served to help these types of distributors define their value in the marketplace.
A Power Shift
Polli, at MSC for 19 years, has some insight on channel shifts. “Distributors have gained more power, but customers were driving this,” he says. In the 1970s and 80s, “it was sacrilegious to carry more than one brand. Manufacturers picked distributors they wanted and sold exclusively through them. The distributor did not carry competing brands.”
Polli says MSC, a $1.32 billion industrial distributor of MRO products bucked that trend. “From our perspective, it was good to have many brands available for the customer to choose from,” he says.
Jones, president of Marco Supply, Roanoke, VA, a 15-branch building materials distributor in the Southeast, says that before the 90s, the manufacturers wrote most of the agreements, set the policies and decided what the distributor should stock. The distributor was essentially catering to the manufacturer, who carved up the market to fit its marketing goals.
“It sounds good, but what about the customer?” Polli asks. Customers started demanding to buy product through certain channels or from particular distributors. Technology also played a part in this by allowing customers more visibility into pricing, product options and alternate sources.
Other factors adding to the shift in power included integrated supply -the ability for an end-user to buy virtually all its required product from one place, regardless of brand -and the emergence of big-box stores.
Enter the Big-Box
As Michael Marks of Indian River Consulting Group points out, as far back as 100 years ago, each new and larger competitor in the marketplace was seen as a threat, just as players like Home Depot are seen today. When retailers like Sears or JCPenney entered a market, they challenged local merchants on pricing. The big retailers also challenged the way local merchants were doing business.
Similarly, the more recent emergence of big-box stores drove some of the change in how manufacturers do business by providing more options in one place for customers.
They are tapping into the growth from commercial and residential construction in the past four years to get to the professional segment. The most notable big-box inching onto industrial and construction distributors’ property is Home Depot. HD Supply has been buying distributors in segments outside building materials, including industrial, as well as buying end-users themselves.
The giant’s wholesale division is in transition – HD recently announced it is considering “strategic options” for HD Supply.