Distribution Trends: 2007 Year in Review

Believe it or not, it’s time for my final post for 2007. In the spirit of the season, I take a quick look back at this year’s posts to highlight the major themes of Distribution Trends.

As you may know, I started writing this blog to help people get the most out of Facing the Forces of Change®: Lead the Way in the Supply Chain, a research study sponsored by the NAW Institute for Distribution Excellence. Many posts have been organized around the four major trends identified in the report, although other themes – economic trends and consolidation activity – generated very high levels of readership, too.

Here is a brief rundown of the year’s posts.

Trend 1: Private Label Products – The impact of private labels on channel relationships turned out to be an especially controversial topic. As I discussed in Brand Killers, private labels will continue to grow in categories where the manufacturer's brand does not add enough value to the customer. The debate in the electrical industry was particularly open because Graybar took a public stance against private labels. (See Private Label Static from Electrical Products.) I still think that private label products can be a way to strengthen manufacturer-distributor relationships by enabling the creation of jointly developed products.

Many private label products come from Asia, a fact that hit home over the summer with the recall of Chinese toys. Personally, I believe that The Risks of Chinese Sourcing have been overblown for political reasons, although private labels offer both Opportunity and Risk to a wholesaler-distributor. Perhaps we will even see a counter-trend toward Near-Shoring Private Labels from Canada and Mexico.

Trend 2: Demand-Driven Channels – The trend toward more data sharing between channel partners challenges many preconceptions about the wholesale distribution industry. I highlighted examples on the blog in channels as diverse as construction equipment and beer distribution. (I do not recommend combining the products from those industries!) Nevertheless, I believe that wholesaler-distributors should only share point-of-sale data with supplier organizations that have rigorous internal security policies for data management. (See Trust and Channel Data Sharing.)

Trend 3: New Profit Models – As I point out in Chapter Three of Lead the Way, many wholesaler-distributors are now successfully selling fee-based services and positioning themselves as suppliers of products with related services instead of only reliably providing goods. I highlighted examples from electronics distribution and industrial distribution. The new profit models trend also refers to the fact channel compensation is becoming more data-based and performance-oriented, as examples from John Deere and Coca-Cola demonstrated. I was also impressed with pay-for-performance forecasting in the beer industry.

Trend 4: Connected Customers – This trend was perfect for a blog because it refers to the growing interconnectedness of manufacturers, customers, and distributors. I advised wholesaler-distributors to Be Found Online, pay attention to Online Customer Communities, and recognize the power of Leads Searching for You. The Future is Already Here was one of the top posts this year on Distribution Trends.

Other Trends – Loyal readers know that I’ve strayed beyond the confines of the four major trends to look at other major issues.

My most popular posts (based on number of web hits) were analyses of economic trends, especially 2008 Economic Growth and You and 2007 Growth and the 2008 Economic Outlook.

As always, consolidation was a hot topic, especially as we all watched the twists and turns of HD Supply this year in Is M&A Peaking? (June), The Fallout from HD Supply (September), and HD Supply Begins to Unroll-Up (December).

Two posts on strategic planning also had very high readership. In Why Strategy Matters, I reminded wholesale distribution executives to pay attention to long-term economic trends when building a long-term vision for your company. In Building Future Leaders, I described how one CEO uses Facing the Forces of Change®: Lead the Way in the Supply Chain as a leadership development tool for managers.

What’s ahead for 2008?

I'm grateful for the positive response to this blog and very much appreciate the many positive emails and comments that I have received since launching 8 months ago.

As I told you in my 2008 Wholesale Distribution Economic Outlook, many wholesaler-distributors will face the toughest economy in nearly five years. Therefore, I plan to cover broader macro-economic developments throughout 2008 while continuing to interpret the news for wholesale distribution executives and their suppliers. Please feel free to email me if you have suggestions for topics or articles.

I'll wrap-up the year with some homegrown supply chain humor, straight from the pages of The Wall Street Jovial:

Santa's Supply Chain Keeps Pace, Despite Changes

I will be back during the week of January 8. Until then, I wish you a healthly and happy new year!

All the best,
Adam

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.

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!

Broadband Boom

Chapter Four in Facing the Forces of Change®: Lead the Way in the Supply Chain argues that wholesaler-distributors must fully embrace the Internet in their business operations now that it is a normal part of everyday life in the United States. The newest data make it harder than ever to believe “my customers are different.”

The latest survey by the Pew Internet & American Life Project found 47% of adults – 103 million people – have high-speed internet connections at home as of early March 2007, up five percentage points from a year earlier. You can download the full report for free: Home Broadband Adoption 2007.

The chart on the right shows the time trend from the Pew data over the past 8 years.

I like to go online during my presentations and show the reality of today’s Internet to distribution and manufacturing executives. Online Customer Communities are especially eye-opening. Here is a sample of active forums mentioned in Exhibit 4-6 of Lead the Way in the Supply Chain:

• Contractor Talk -- All trade contractors (electrical, plumbing, etc.)


• Tractor by Net -- Farm and construction equipment users


• Lawnsite -- Lawn care and landscaping professionals


• WeldTalk -- Users of Hobart welding products
  
• JLC Online -- Lumber and drywall contractors


• Maintenance Forums -- Industrial facilities maintenance professionals

If you are new reader to the Distribution Trends blog, check out the posts under the topic Connected Customers. How can any wholesale distribution executive seriously ignore the impact of information transparency on their business?

Our Brave New Ad World

Two weeks ago, I discussed Microsoft's $6B acquisition in the context of how customers are searching online for new distributors.

Learn more by reading Will the New Online Advertising Models Click?, a very good analysis of online ad models from Knowledge @ Wharton.

A key point: the online ad model is based on accountability -- Did an ad deliver the intended reaction? Online ads can be measured using criteria such as the number of people who "click through" an ad or the number of leads generated from a particular search query are readily available.

Unfortunately, it's virtually impossible for traditional media (trade magazines; newspapers; yellow pages; NASCAR sponsorship) to correlate spending to new leads or incremental sales dollars. Thus, business trade magazines are getting thinner and thinner as B2B moves online.

If you are still skeptical, look at the following searches inspired by my visit to the ISA meeting two weeks ago:

Cutting Tools (google) or Cutting Tools (froogle)
(I discuss Froogle in Chapter Four of Facing the Forces of Change®: Lead the Way in the Supply Chain.)

Pay attention to the ads -- "sponsored links" -- on the right hand side because these keyword ads probably feature your competitors!

At the same time, heed the words of one Wharton professor who said: "I wouldn't walk away from TV. Instead, I would allocate some budget to non-traditional ads, buzz marketing and the Internet. This is the time for a lot of experimentation." (Hey, just like Exhibit 4-4, page 77, of Lead the Way!)

Your next step: Try something new. Buy some Google keywords for your business, see what happens, and let me know.

Leads Searching for You

Last week, Microsoft announced the $6 billion acquisition of aQuantitative, an online ad specialist. Microsoft’s move is very consistent with the findings from Chapter Four of the new Facing the Forces of Change®: Lead the Way in the Supply Chain report (see pages 76-78, in particular). Customers will increasingly use the Internet as a primary way to gather information and find new suppliers even if they never buy anything online.

For more insights, I recommend you download the 2007 Distributor Buying Trends Survey Results. The survey was sponsored by GlobalSpec, a vertical search engine and online database. (Note: You will have to register to get the pdf document. I am not personally familiar with GlobalSpec, but their privacy policy indicates that registration info will be used only for their own marketing and not sold to a third-party.)

The survey included engineers, technical buyers, scientific professionals and others in the engineering, industrial and technical communities. Two-thirds of buyers sourced from 7 or more distributors, so the sample is a good one for understanding the typical (industrial) wholesale distribution customer. There was also a good diversity of products and services specified by the respondents, including chemicals, electrical components, material handling, fluid power components, and many others.

Here are two results that caught my attention:

• Almost 8 out of 10 buyers go online first when searching for a new distributor, either to search engine or an online industrial directory.
• The top two reasons that buyers contact new distribution sources were: (1) Current distributors do not offer product needed (45%), and (2) To make price comparisons and negotiate better pricing (37%).

These results point to today’s tough reality: The Internet makes comparing options very easy, so buyers may wander even if service levels are fine. Bill Gates is putting $6 billion behind this idea to catch up with Google. You must make sure that your company can be found online because search is now the #1 way for new customers to find you.

Online Customer Communities

The Internet is now a key decision-making tool in our society because it allows us to draw on a broad social network of people for advice or to share experiences. My kids (ages 7 and 10) would hardly think about buying anything without looking it up online. (Yes, "to google" is a verb in my house!)

People don’t forget that the Internet exists when they go to work, which is why Connected Customers (Trend 4 in Facing the Forces of Change®: Lead the Way in the Supply Chain) describes how business customers will increasingly use the Internet to gather information from other customers rather than manufacturers or wholesaler-distributors.

Is your company taking this new development seriously?

ONLINE COMMUNITIES

I found internet forums (a.k.a. communities) to be one of the most fascinating aspects of my research for the latest Facing the Forces of Change® report. Customers can communicate with each other by reading and responding to messages posted for everyone to see. Exhibit 4-6 (page 82) lists 21 active forums with participants who would be customers of wholesaler-distributors.

You will probably be amazed at the quantity and detail in these online conversations. Spend a few minutes browsing the many forums at ContractorTalk.com. You’ll see customers giving product reviews, sharing business tips, and discussing buying strategies. One recent conversation gave a fascinating peek into how contractors view the tradeoff between the services of a lumber wholesaler versus Home Depot. (See
Nothing beats outstanding service, but saving thousands is tempting.)

The discussion forums on TractorbyNet.com provide another active forum with plenty of advice to and from customers. Are you skeptical that customer will get independent pricing information online (as I suggest on pages 79-80 of Lead the Way)? You will reconsider after reading the posts in the Buying/Pricing/Comparison forum.

DEALING WITH 'NET REALITY

I’m just scratching the surface, so I suggest that you take some time to find out what your customers are doing online.

The fifth Question for Management Discussion from chapter four (page 90) suggests that you research customers who have used online forums.

• How many of your customers are visiting an online forum in your industry? (Don’t say “none” unless you’ve bothered to find out.)
• What information were they searching for? Did they find what they wanted?

The big question: Does participation in an online forum lower the perceived value of a wholesaler-distributor?

You can try searching for online communities at the Open Directory of Internet Social Communities – or just ask a few of your net-savvy customers.

Be Found Online

The Internet now accounts for approximately 5% of total U.S. advertising spending, making it a crucial tool for new customer acquisition. (See page 76 of Facing the Forces of Change®: Lead the Way in the Supply Chain for more details and survey results from wholesaler-distributors.)

And the boom keeps going. According to the Interactive Advertising Bureau, total Internet advertising revenues were $16.8 billion in 2006, a 34 percent increase over 2005. See Internet Advertising Revenues Estimated at $16.8 Billion for Full Year 2006.

(Note that I was only able to cite data from the third quarter of 2006 in Chapter Four when the report went to press. Hooray for blogs!)

In Chapter Four's Action Ideas section (page 85 of Lead the Way), I state: "Customers will increasingly use the Internet as a primary way to gather information and find new suppliers even if the actual purchase is not made online. Therefore, your company’s Web site must function as an effective sales lead generation tool, not just as an online e-commerce platform."

What about your company?

• Can a prospective customer find you through a search engine? Would they find a competitor instead?
• If a prospect does find you online, how easily can they figure out what to do next? Can they send an email to a real person?

If you don't know the answers to these questions (or don't care enough yet), make all of your top managers try Question for Management Discussion #3 on page 90 from their homes one weekend. I bet your Monday morning discussion will be very enlightening!