The Future is Already Here

I spoke at IDEA's E-Biz Forum in Vancouver last week, where I presented the e-results from Facing the Forces of Change®: Lead the Way in the Supply Chain to a mixed audience (manufacturers and wholesalers). Allen Ray at Electrical Trends blogged his reviews on Day One and Day Two. You can also download the presentations from IDEA’s website.

The Connected Customers trends is quickly gaining traction in the electrical industry. Check out Mike Holt's Forum, an eye-opening site for the electrical industry that's hosted by electrical trainer Mike Holt. In addition to the usual discussions of professional electrical issues, I found many interesting threads discussing wholesalers. (Hat tip to Joe Salimando at EleBlog for pointing me to this site.)

Does your company sell to contractors? If so, here are three sample online discussions that will either intrigue you or frighten you:

A contractor complaining that there are too many electrical wholesalers in his area (22 replies)

Strategies for getting better pricing from a wholesaler (18 replies)

The pros and cons of buying from Home Depot or Lowes versus a wholesaler (120 replies!)

Once again, we see B2B customers building networked communities without any apparent involvement from their distribution suppliers.

Seek out and talk to any of your customers who have used online forums (such as the examples in Broadband Boom or Exhibit 4-6 of Lead the Way). What information were they searching for? Did they find what they wanted? How did their experiences compare with contacting a salesperson or customer service agent at your company? Their answers will either intrigue or frighten you.

Cyber-visionary William Gibson once said: "The future is already here — it's just not evenly distributed." If you sell to contractors in another line of trade, then you owe it to your company to visit Mike Holt's Forum and get a glimpse of the future.

Are you a profitable channel partner?

In Chapter Three of Facing the Forces of Change®: Lead the Way in the Supply Chain, I describe how channel compensation is becoming more fact-based and performance-oriented. Recent developments in two very different industries show how two large manufacturers are demanding greater accountability from distributors for business activities and financial results.

EXAMPLE #1: John Deere

Check out a Wall Street Journal cover story about John Deere (NYSE:DE) and its dealers called Why Deere Is Weeding Out Dealers Even as Farms Boom. The lead quote from Deere CEO Robert Lane sums up their new philosophy of channel management:

“For years we talked about Deere as a family. The fact is, we are not a family. What we are is a high-performance team....If someone is not pulling their weight, you're not on the high-performance team anymore."

Ooo, that's gotta hurt!

According to the article, the number of Deere dealer locations in the U.S. and Canada has dropped from 3,400 to 2,984 in the past ten years. The number of owners has shrunk at an even faster pace, as more owners take control of multiple locations.

EXAMPLE #2: Coca-Cola

Coca-Cola is planning to migrate distribution of Glaceau Vitaminwater (Classical music fan 50 Cent’s favorite drink!) from independent wholesaler-distributors to its own bottlers, as described in Coke Plan Riles Glaceau’s Old Network.

Coke bought Glaceau for $4.1 billion in June and now wants to sell the product through its primary distribution channel. Like many large consumer products companies, Coke faces powerful retailers who want national, integrated logistics.

But niche brands such as Glaceau are typically built by smaller, independent companies. In all likelihood, these distributors will find another niche brand to trumpet and the cycle will begin again.

On the other hand, I was reminded of the following comment from Steve Johnson, President and CEO of Tucker Rocky, in Modern Distribution Management: “We have never lost a brand we own … and we never will."

Where do you stand?

These are isolated but telling examples. Wholesale distribution executives should take a hard, objective look at their own company’s performance through the eyes of their supplier. On page 64 of Lead the Way, I describe how suppliers can use a activity-based costing methods to identify the true operating profit of working with each of its distributors.

Imagine a supplier asking the following two questions about your company:
(1) Does this distributor provide positive operating profits to us as a supplier?
(2) Does this distributor have the above-average growth potential?

If the answers to both questions are “yes” -- and you are being honest with yourself -- then you should encourage your suppliers to recognize your company’s contribution, especially if your company is not the largest wholesaler-distributor in the market.

If not, then ponder your future while re-reading the articles about Deere and Coke...

Reinventing Industrial Distribution

Industrial Distribution just released its 61st Annual Survey of Distributor Operations. I wrote the Overview again this year, which you can access for free. You’ll have to pay for the full report, but it’s a worthwhile investment if you want to really understand this sector of wholesale distribution.

In reviewing the survey data, I was once again struck by the ingenious ways in which many industrial distributors are evolving to stay relevant in a shifting marketplace. I cover the industrial market in Chapter 7 of Facing the Forces of Change®: Lead the Way in the Supply Chain, so it was interesting to see some themes from my NAW report appear in the more granular results from the 61st Survey.

• One out of four industrial distributors is currently private-labeling products manufactured outside of the U.S., including 18 percent of distributors with revenues below $10 million.


• Many—but not all—industrial distributors are charging fees for their services rather than merely giving away “value added” and hoping to recoup the costs with product margins. Notable fee-based services mentioned by survey respondents include accelerated delivery time, set-up/ installation, and fabrication.
  
• Smaller distributors are more aggressively using the Internet to level the playing field when competing for new sales opportunities with larger competitors.

There are many other important trends covered in this study. I found the report to be especially helpful in understanding detailed responses by major product category as well as distributor size.

Hmmm, 2007 minus 61 equals 1946. I guess the survey is now officially a Baby Boomer!

The Fallout from HD Supply

In June, I wondered if M&A activity in wholesale distribution was peaking. Well, I guess we don’t have to wonder anymore.

As you’ve surely read, Home Depot was forced to lower the price of its HD Supply unit by $1.8 billion and guarantee $1 billion of debt for the buyers – private equity firms Bain Capital, Clayton Dubilier & Rice, and Carlyle Group. HD Supply CEO Joe DeAngelo was “thrilled to be associated with this group of distinguished private equity firms.” (See HD Supply Deal Closes.)

Many big private-equity deals outside wholesale distribution are facing similar troubles because of so-called “turmoil in the credit markets.” Translation: lenders were taking on too much risk to buy companies that were over-valued. The Wall Street Journal’s Deal Journal summarized the status of many big deals last week.

But the renegotiation is not surprising given the sharp slowdown in revenues of building materials wholesaler-distributors. The chart below, which updates data from my NAW Economic Reports, shows double digit drops in revenues in 2007. The numbers look equally bad after adjusting for price deflation (not shown).

In chapter 5 of Facing the Forces of Change®: Lead the Way in the Supply Chain, I warned that industries do not consolidate forever, as evidenced by the sharp slowdown in acquisition activity after the peak in 2000. The current cycle began in 2004, as shown in Exhibit 5-1 of Lead the Way. The HD Supply deal signals the end of this cycle.

The next big shock will come if commodity prices return to historical levels, closing an inflation-led growth gap. For example, electrical wholesalers have been riding high on the price of copper for a few years and face an especially painful return to earth.

Bottom line: I suspect that valuations of wholesale distribution companies will return to more sensible levels over the next few years. Good news for companies looking to expand by acquisition, but bad news for sellers hoping to get out at the top.

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CORRECTION: In an earlier version of this post, I incorrectly reported that Joe DeAngelo had resigned from HD Supply. In fact, he has resigned his position as COO of The Home Depot but remains CEO of HD Supply. I apologize for the confusion.