Distributors that invest wisely in talent, technology or other areas of their business will gain a competitive advantage – and market share – when economic conditions improve. This article explains why strategic investment is critical and provides tips on where and how to devote resources.
Remodeling a business model requires strategic planning, unwavering commitment and, most importantly, financial investment. A distributor can’t reinforce the company’s foundation or add new floors without devoting time and money to the process, but those that take the steps needed to compete in today’s competitive landscape will be rewarded with additional market share and improvement to their bottom lines.
When should distributors invest? Distributors must prepare for the looming economic recovery – expected to arrive in the second half of 2016 – by investing in their businesses now. While cost-cutting seems to make more sense in today’s challenging economy, distributors should commit to growing their business so they’ll be ready when the climate improves and sales bounce back.
Where should distributors invest? That depends on a company’s most glaring shortcomings. Even a successful distribution giant like Grainger, Chicago, IL, which has endured two straight quarters of sales declines, is finding areas to cut costs in order to build the company’s infrastructure, e-commerce, supply chain and IT systems, according to CEO Jim Ryan.
“Those capital investments are really tough to make when you’re looking for ways to get costs back out of your business when revenue is down,” Ryan says. “Many companies, we found, will take a timeout on those more capital-intensive investments in down economies. But this is not only an opportunity to be different; it’s an opportunity to move forward faster.”
Reasons to remodel
Myriad factors underscore the need for distributors to remodel. Disruptions occur every day. The digital divide is growing. Positions throughout a company’s organizational chart remain unfilled as HR directors lament high turnover and a lack of qualified candidates. Yet distributors – especially small to mid-sized ones – have historically remained resistant to change.
The main reason is financial. For a $10 million distributor that has annual profit of $200,000, a new e-commerce platform might seem like a luxury rather than a necessary tool to compete in today’s digital world.
“If you’re asking them to spend $100,000 on a new e-commerce system, and that is going to take out what their profit is for that year, that’s obviously a really hard conversation,” says Ranga Bodla, wholesale distribution industry lead for NetSuite.
Another reason is that many distributors are family-owned and multigenerational. Lifestyle businesses, in which the owner is also the chief executive, operate on a different playing field, according to Mike Marks, partner, Indian River Consulting Group.
“For them, it’s more important to avoid a bad year than it is to take a risk, invest money and have a good year,” Marks says. “That’s hard-wired in their DNA. As soon as things get soft, they hunker down and wait for it to go away.”
But professionally managed distribution businesses, such as ESOPs, private equity-owned entities or public companies, take a different tack. They covet revenue growth, geographic expansion and added market share – and the percentage of businesses pursuing measurable growth is encouraging.
A joint MDM-Baird survey showed that more than three-quarters (77 percent) of distributors plan to invest in their business in 2016. Of the 6 percent that said they won’t invest in 2016 and the 17 percent that said they might, the fragile U.S. economy was the top reason for hesitating or balking altogether.
But, as Bodla points out, “the market, as always, is going to turn. If you wait until the market stabilizes, you’re going to be too late. Now is the perfect opportunity to get ahead of the pack and put in place that competitive advantage before your competitors do.”
The need to differentiate
Investing in a distribution business, especially during a down economy, helps differentiate it from enterprises focused only on short-term results.
“We try to practice an investment mindset instead of what I think a lot of larger, publicly held companies, in particular, tend to do,” says Victor Jury Jr., CEO of Summit Electric Supply, Albuquerque, NM. “They view things like payroll or technology from a financial perspective, seeing them as expenses rather than investments. Any business is only as good as the people that it employs and the technology it uses to serve its customers.”
That approach doesn’t change when the economy softens or sales dip, Jury says. If anything, it
provides a key opportunity for Summit to find new ways to excel. “When the industry is less active, we have our very talented people pursue improving our business and doing things that we can build on for the future,” he says. “That’s been our philosophy for the last 38 years.”
Distributors with that ideal are more likely to evade the disruptions that arise constantly, according to Mike Sprague, director, eBusiness Development, Thomas Enterprise Solutions.
“Players like Amazon have changed the landscape forever,” Sprague says. “These guys are coming into the B2B space with a bunch of tools, a bunch of talent, a bunch of tried-and-true commerce methodologies and they’re changing the old paradigms of locations, logistics, and they’re changing it forever. Customers who use Amazon by night come to work by day with that expectation.”
Differentiating means honing in on a company’s competitive advantage, according to Will Parsley, manager of new product development, Carswell Distributing Co., Winston-Salem, NC.
He says a company shouldn’t focus on committing to a specific amount – such as a certain percentage of profit each quarter or year – but should instead constantly ask what needs to be done to remain competitive and enhance the value proposition to customers.
“If we want to emerge from an economic cycle or even sit in the depths of an economic cycle and succeed, we’re going to have to have a compelling value proposition,” Parsley says. “We have to invest or we die.”
Invest in technology
From e-commerce to IT to data and analytics, distributors have fallen behind other industries when it comes to investing in technology, especially as customers expect a more compelling experience, like something they’d find on a B2C website.
“Looking at the different kinds of investments you can make, technology is the No. 1 investment to improve productivity and your competitiveness as a business,” says Andy Vabulas, CEO, I.B.I.S. Inc. “I don’t understand the hesitancy to invest in technology, but I understand that the question, ‘Do I buy a new boat or lake house or do I buy a new ERP system?’ comes into play more than I’d want to believe.”
Others, like IRCG’s Marks, agree that technology is where distributors lag, yet it often takes a backseat to other business considerations. “Given that most industrial channels are way behind the digital process, the smart play is investing in making it easier for customers to deal with (the distributor) electronically. It’s about selling. It’s about being sticky.”
Carswell Distributing upgraded its 20-year-old business systems, which Parsley likened to trading in a flip phone for an iPhone, skipping the Blackberry phase altogether. “We made some clear strategic initiatives for the things we needed to do to evolve our business,” he says. “We looked at the technology that we had and said we can’t do it with this, so we have to invest to get to where we know our business can be.”
Large distributors with massive amounts of capital to spare on new technologies aren’t the only ones making that commitment. Smaller companies such as Carswell or health care packaging distributorAction Health, Bensenville, IL, repeatedly dedicate resources to upgrading their technology.
“Now is always going to be the best time to get yourself away from that traditional model of maintaining and supporting your own hardware and getting into an operating expense that’s more manageable, easier to forecast and gives you the ongoing business capabilities you need,” says Action Health CFO Phil Negri.
And while a basic website or e-commerce platform are now considered table stakes in the industry, many distributors are realizing the need to enhance their capabilities quickly – or risk obsolescence.
“We need to be the absolute best in our space,” Negri says. “If we’re running technology that’s even a year or two old, someone’s going to be passing us up. We always need to be current, we always need to be pushing the envelope in new optimizations to make us more efficient, better at what we do. If we’re not, someone else is.”
Right now, money is cheap to borrow, but companies also should view today’s slow economy as the ideal time to optimize their systems because the downtime gives employees ample opportunity to learn at a leisurely pace, all with the idea that they’ll be up to speed when things pick up.
“You have the time to put your best people on it and take a fresh look at your business so that when the business comes back, you’re hitting it and you can take advantage of (the recovery),” says Vabulas of I.B.I.S. “The worst time to take advantage of technology change-out is when you’re blowing and going
and you don’t have time to pay attention and you just do enough to get it done instead of rethinking your business and taking advantage of all the new best practices and technologies available today.”
Technology isn’t the only area where distributors should consider investing. Respondents in the MDM-Baird survey indicated they will spend money in 2016 on sales (18 percent), training (14 percent) and other investment areas.
For Grainger, investing in inventory during a down economy is mission critical. Keeping order fulfillment rates high will help drive new inquiries and new business, Ryan says. “Customers are facing the same economic headwinds as we are, and they’re looking for ways to get cost out of their business. So if they can rely on our inventory and we can help them manage their inventory, those are two great ways to help customers get costs out of their business and ways for us to invest,” he says.
Another area to invest is marketing. Alan Beaulieu, an economist with ITR Economics, has been reminding distributors at various association conferences during the past year to invest in their businesses – most notably in human resources and marketing. “If you don’t have a chief marketing officer, rent one,” he said at the National Association of Wholesaler-Distributors Executive Summit in Washington, DC, last month.
Plenty of companies heed that advice. Summit, for example, places a strong emphasis on marketing, viewing it as an area where the company can brand itself, promote its competitive advantage and even find ways to more easily acquire talent while further developing customer and supplier relationships, according to Jury.
“We’ve invested in marketing since our founding and have been blessed to have the same person leading our marketing group for almost 30 years,” Jury says. “At the end of the day, marketing is about telling a story. Whether you’re telling it to a potential recruit, a customer or a supplier, it’s important for that story to be well-told and for it to be communicated in a way that is compelling so it gives your audience an opportunity to respond.”
Pitfalls to avoid
Challenges exist when investing in a company, especially amid stagnate sales, a shaky economy and tenuous cash flow. Distributors must be mindful of the biggest mistake they can make, which is deciding to spend money once – on technology, talent, a marketing campaign or something else – and then not committing to it.
“You can’t position it like you used to do as a one-time investment with bricks-and-mortar and say, ‘I built a building, I don’t have to worry about it for 15 years at least,’” says Dave Bandi, director, AEC/BIM Solutions, Thomas Enterprise Solutions. “These are investments that need to be aligned with an overall strategy, and they will become part of a significant ongoing plan. And it needs to be around a complete change of business. Some companies get it, some don’t.”
Grainger has spent heavily on its e-commerce capabilities during every economic cycle – up or down – in the past two decades, and in 2016 e-commerce will compose half of its revenue, or about $5 billion.
“That would not have been possible if we were episodic in our e-commerce investments,” Ryan says. “Having the discipline to continue to invest in e-commerce, continue to invest in our supply chain and continue to invest in our systems infrastructure – which can be a little painful – has helped us create a competitive advantage.”
The message to distributors is clear. Though the economy is down, it is short-term, and this is the point when you have the time to invest in one or more projects to make your business competitive long-term and capable of handling the disruptions that are sure to surface.
A company that invests in its technology and talent, in its inventory and its sales force, will bolster relationships with employees and supply chain partners, become more profitable and position itself for future success.
“This is not something that is a one-time project,” says Sprague of Thomas Enterprise Solutions. “This is a journey that you’re going to go on. And it’s going to make you viable not only this year but into the future and will protect your business from B2C players like Amazon as well as the nipping at your heels from small, startup companies.”