The wholesale distribution business in the United States is changing at warp speed. The recession hit wholesalers hard; only the most robust, best-capitalized distributors made it through the downturn in good fighting shape, and now that they have emerged, they’re facing a flurry of new competitors and new technologies.
The biggest, strongest and smartest distributors — let’s call them the lucky few — are making the investments needed to keep pace with the changes. Many other distributors are looking for more affordable ways to stay relevant. And some are cashing in their chips and finding something else to do.
“Distributors’ customers’ demands are changing,” says Brent Grover, managing partner with Evergreen Consulting LLC in Cleveland. “They want to be able to call you or access your website and find out three things immediately: ‘Do you have the product I need?’, ‘What’s the price?’ and ‘When can I get it?’ And they don’t want to wait around for somebody to fumble through their system and figure out what the price is supposed to be.”
Sophisticated online sellers with roots in retail, such as Amazon and Staples, have starting moving into some wholesale markets, and those sellers’ technological expertise has upped the ante for traditional distributors.
“Keeping up with those companies and their advanced systems requires a big investment in information technology,” Grover says. “The traditional ERP [enterprise resource planning] systems that distributors have been using don’t necessarily have the capability to provide all of these options to the customer. So distributors have to change their business processes and their support systems to make that happen. And it requires an investment in IT that some distributors may not be able or willing to make.
“But I think most of them will decide that they like adaptation a whole lot more than they like becoming irrelevant.”
The new technological requirements are forcing distributors to come up with answers to difficult questions and make tough decisions.
“It takes capital and management acumen to make these types of changes happen,” Grover says. “In the wholesale distribution business, the companies that are not big and well-capitalized have three choices in front of them: get bigger so they have the ability to afford these IT investments, get very specialized so customers will deal with them for reasons that don’t have to do with technology but because the customer needs their specialized knowledge, or get out — in other words, sell your business.
“All of this pressure, coupled with the low interest rates we’ve been seeing and the fact that banks have money to lend, has led to a lot of merger and acquisition activity in wholesale distribution.”
Guy Blissett, a wholesale industry expert with the IBM Institute for Business Value and a fellow with the National Association of Wholesaler-Distributors’ Institute for Distribution Excellence, underscores Grover’s points about the technological and economic shakeout taking place in the wholesale distribution business.
“We’ve seen the economic crisis drive many distributors out of business and damage others to the point where they’re struggling to grow now that the economy is starting to turn around,” Blissett says. “Unfortunately, some of those distributors now are not in a position to make the investments that they’ve been deferring.
“The key challenge that wholesaler-distributors face is simply continuing to drive their relevance in the supply chain. The traditional source of their value proposition — the ability to stock all the products their customers want and get those products into their hands quickly and efficiently — is still critically important, but it’s no longer enough. There’s so much transparency now with product pricing, product availability and individual company capabilities that distributors are having to think very differently about what will differentiate them over the next five to 10 years.”
The game changers
Amazon and Staples are the two most visible new players in the wholesale distribution market, and their technological sophistication is changing the rules of the game.
“AmazonSupply.com, in particular, has definitely had an effect on people’s psyche,” Grover says. “It’s not that they’re stealing everybody’s business, at least not so far. Our view of AmazonSupply.com is that it’s really for unplanned purchases of maintenance, repair and operating supplies for the noncontractor segment.
“Is AmazonSupply.com going to decimate anybody’s business? Probably not. Was it reasonable that the stocks of distributors, such as Grainger and Fastenal and MSC Industrial, took a hit when the news about the launch of AmazonSupply came out in April? No, it really didn’t make a lot of sense.”
Sensible or not, those distributors’ stocks did take a dive when the online giant came on the scene.
“When AmazonSupply.com was announced, the splash was that here was a business-to-consumer-style website appearing in the distribution world — and we all know about the bells and whistles Amazon has,” Grover says.
“Here they were repositioning themselves as a distributor, coming on-stream with prices that weren’t really low, but they were decent prices, and they were offering free two-day shipping for orders of $50 and up, which, I mean, that’s crazy, and a 365-day return privilege — a new feature. And they were offering a toll-free number to call during business hours for support, so you could actually talk to somebody at Amazon. That was a new thing. They’ve emerged with 14 different product lines and a half-million items in stock.”
Analysts who follow the stocks of publicly traded distributors overreacted to the news, Grover says.
“They reacted like, ‘Boy, this is terrible news for these distributors and AmazonSupply.com is going to come in and crush everybody,’” he says. “My personal view is I think that while AmazonSupply.com is the real deal and they’re going to be here for the long run, they’re not going to destroy anybody’s world, at least not right away.”
While Amazon is not expected to immediately cut a swathe across the old-line distributors’ business, the deep-pocketed gatecrasher has raised the technological stakes in the industry, and the other distributors will have to step up their games to compete effectively.
“The issue for distributors is that if they have an online portal, it’s probably something fairly rudimentary, a typical business-to-business-type Web experience,” Grover says. “The bar has definitely been raised by AmazonSupply.com bringing a business-to-consumer electronic commerce experience and putting it out there. For all of the other distributors, if they don’t have a good e-commerce portal, it’s going to make whatever they have look pretty bad. So they have to step it up.”
Blissett agrees that distributors will have to make serious investments to improve their e-commerce sites if they hope to compete with the new competitors moving in.
“Distributors have to ask themselves, ‘How do I sell my products to my existing customers, as well as new customers, using mobility, using the Web, using other channels of distribution?’” Blissett says.
“In some ways, customers’ demands are the same as they’ve always been — they’re just more acute now. So pricing continues to be key. Customers demand low prices. The difference now, I think, is that with more products being able to be purchased over the Web, price transparency has become a much more real tool that customers can use against distributors — if pricing is what they’re primarily focusing on.”
New ways to compete
There are several strategies that wholesale distributors are hatching to differentiate themselves in the new competitive landscape. An interesting new tactic is the use of vending machines to distribute supplies.
“This is a trend that’s just starting to emerge,” Grover says. “Distributors are placing vending machines in their customers’ industrial plants or in hospitals for nursing staff supplies. The employees use an ID card to get the needed supplies out of the vending machine.
“For example, in an industrial plant, let’s say a worker needs some safety goggles or some gloves. Instead of going all the way to the tool crib or having to fill out a requisition form, they can just go to the vending machine near their workstation and put their ID card in, and they can pick what they need out of the machine.
“It tracks who got the item and when they got it, and it also electronically signals the distributor when it’s time to replenish the machine.”
Blissett points to the use of data analytics as an exciting untapped opportunity for distributors to serve their customers in a new way in the future.
“Some distributors are looking at their role in the supply chain and the tremendous amount of information and data that flows through their organization and they’re realizing that can be a potential source of differentiation going forward,” Blissett says.
“They’re looking for ways to capture that data, do some analytics on it and turn it into something meaningful for their customers and suppliers. They’re starting to wake up to this potential and invest in it.”
Some distributors are envisioning that within the next five years they could reposition themselves as an information provider for their line of trade similar to companies such as IHS Global Insight and IRI Nielsen, Blissett says.
“They would be able to aggregate information from suppliers, information about customer interactions, as well as macroeconomic data and other information that they have access to,” he says.
“Their ability to pull all of that together, do some analytics on it and make some sophisticated forecasts and projections about where the overall economy is going and where individual facets of the economy and particular commodity prices are going — they could provide a lot valuable information by doing this.”
Economic modeling is just one area among many in which distributors could apply data analytics to create useful information for customers and suppliers.
“It’s essential, now more than ever, for distributors to understand their cost structure and all of the different activity-based costing elements of their supply chain and to be able to drive down the cost as much as possible, and then be able to go to their customers and have a fact-based conversation about that,” Blissett says.
“That allows a distributor to go in to a customer armed with a great deal of information and insight about their own cost structure and how things work, and they can use that to surface some inefficiencies in their customer’s supply chain that the customer might not even have been thinking about.”
Whether it’s in the supply chain, pricing, labor management, fleet optimization or customer segmentation, the opportunities for distributors to drive revenue to the bottom line via the application of analytics are many.
“We’re seeing many distributors make investments in this area,” Blissett says.
“As they get their basic data and their core IT infrastructure in place and they have either a packaged or a homegrown ERP system that’s robust and comprehensive and they can start to do some analytics on top of that, we’re seeing some exciting examples where distributors are challenging long-held perceptions about how to most efficiently move products through the supply chain and how to do things differently and capture a significant value along the way.
“Analytics is a potentially huge source of differentiation for wholesale distributors. Going forward, that type of role for these companies is pretty exciting.” <<
How to reach: National Association of Wholesaler-Distributors, www.naw.org; IBM Institute for Business Value, www.ibm.com/services/us/gbs/thoughtleadership; Evergreen Consulting LLC, www.evergreenconsultingllc.com