In many business-to-business markets, value-added distributors are used to get products to the end-user. Well-known companies such as Grainger, Fastenal, and Ferguson Supply are examples of distributors that offer a broad range of products to a wide variety of industries. Such companies are typically non- or low-valued added distributors. They stock inventory from a variety of suppliers, market it to the end customer and typically provide product delivery.
There are other types of distributors/dealers that resell products but provide a broader range of support services. Examples are construction equipment, machine tool, and heavy truck dealers, to name a few. While they provide the traditional marketing and product inventory services much like non-value added distributors, they also do a lot more. Typically, the products they sell require significant and ongoing parts and support services, which are provided by the dealer. The post-purchase relationship between dealer and customer can be significant in terms of spending.
Both types of distributor will face a more challenging future. Why? First, consider some numbers. From 2010 to 2011 the number of wholesale distribution firms declined by 3,329 (from 381,632 to 378,303) (US Census). Larger distributors are buying smaller ones. Some are going out of business. In the agricultural implement market, dealers with 15 or more stores grew from twelve in 2009 to twenty in 2013. Over this same period, the average number of stores per big dealer grew from 18.3 to 22.8.
There are many factors creating the move to consolidate. Manufacturers are encouraging consolidation as it reduces their support costs. Additionally, many manufacturers are pressing harder on performance expectations that, while present for many years, have not been emphasized as strongly as they are now. Things such as: the market share of the distributor/dealer; dealer profitability; safety performance; and customer loyalty are becoming more important and are being made measurable by the manufacturer. These moves are done to create a distribution channel that is stronger, more durable, and, ultimately, more profitable for both the manufacturer and the distributor/dealer.
If you are a distributor/dealer, what are some of the questions you need to be asking at now about both the present and the future?
- Will our culture support becoming a larger entity? Managers of smaller entities sometimes do not wish to grow. If you do not wish to grow and you are faced with manufacturers that are pushing for growth, it may be a good time to consider selling.
- If you want to grow, how good is your infrastructure? In particular, do you have the necessary financial management and information technology systems in place? If not, are you prepared to make the investment in time and money necessary to build for the future?
- Do you have the management talent in place? It is one thing to operate a small distributor with a few locations. It is quite another when the number of locations grow. Sometimes, managers do not feel comfortable or simply do not want to manage a larger organization.
- As products become ever-more complex, the need for product support changes. While some times the product support needs may decline (e.g., consider today’s automobiles compared with those of years-gone-by) but those that remain require technical support that has a much higher skill level. This means more training and hiring people with different skillsets than was true in the past.
It is fair to say that the business of value-added distributors will change and change significantly over the coming years. Now is the time to consider what you need to do to get ready for the change. The most fundamental question to ask is whether or not you want to do it at all. Your business will be changing!