Equal footing with flat pricing
Independents negotiate price discounts and carry deeper lines to combat chains
By Staff -- Industrial Distribution, 4/1/1998
With price competition continuing to mount, independent power transmission distributors are seeking flat-pricing deals with suppliers to give them more level footing with national chains.In recent years some independent distributors have cringed -- and switched product lines -- as manufacturers provided large national-selling companies discounts of 20 to 30 percent. Faced with expectations of sluggish margins, many firms are negotiating better deals for themselves.
"This is the cycle,'' says Tom Volk, president of Ohio Belting & Transmission in Toledo, Ohio. "The big chains come in with purchasing power and beat us, the price disadvantage is too great, and the independents stop selling [the product line]. Then the large manufacturer realizes there is no market development and commitment. They sit down and say how can we get market development back? They realize flat pricing is better.
"An independent distributor can't get national contracts with GM, but if a company like mine has equal costing, we will go out and beat national people in terms of products, marketing development and costing,'' Volk says.
A recent survey of power transmission/motor control distributors and manufacturers highlights the sharp pressure on prices. Only 52 percent of distributors predict profits will grow in 1998, while 13 percent expect a decrease.
Power Transmission Distributors Assn. members say price competition is the major factor dampening their profit hopes. Many customers are buying items based strictly on lowest price and do not consider overall costs when product reliability, quality, productivity and value-added service are factored in. Meanwhile, distributors say their operating costs continue to increase, led by wages and insurance factors.
"There's mindless price competition,'' says Alan Haveson, president of Eastern Bearing, Inc. in Elizabeth N.J. "There's some guy sitting in a top office telling people they have to buy for less, no matter what.''
One way Ohio Belting & Transmission has negotiated better supplier pricing is by carrying more of a manufacturer's product line. Herb Baxter, an area sales manager for Boston Gear, a division of IMO Industries Inc., recalls that until recently Ohio Belting would carry an engine that had a Boston Gear reducer and someone else's AC drive.
"They've given us a commitment to not be so selective,'' he says. "They put together a system trying to use all of our assets, from gears to AC motors with all the equipment that goes into it.'' Volk's company is also working harder to introduce one of Boston Gear's new products, an enhanced AC inverter line.
"If I had to describe it, I'd consider it as a one-source supplier,'' Baxter continues. "Here a customer can get 90 percent of his power transmission needs met...I think this is giving us a definite advantage in the marketplace.'' In return, Baxter says Boston Gear put together a "more competitive package," which he and Volk described as proprietary.
Volk, who is a former PTDA president, says flat-pricing agreements benefit customers by encouraging more inventory at the local level. Despite what some suppliers believe, he says, traditional quantity pricing discourages distributors from carrying high inventory because of the variable cost.
"It's clear how it works," he says. "The products I have flat pricing on, I have the highest level of inventory and highest off-shelf customer service. It gives the manufacturer a more consistent flow."
Expect more sales but weak margins
For the fourth straight year power transmission distributors anticipate strong sales increases, but only half believe they will boost profits.
According to the Power Transmission Distributors Assn.'s annual member survey, 90 percent of distributors and 98 percent of manufacturer members forecast sales increases. Fifty-six percent of distributors and 83 percent of suppliers believe sales increases will be at least five percent over 1997. Seventy-eight U.S. and Canadian distributors responded to the survey.
Only 52 percent of distributorships predict better margins this year. Among those, about eight of 10 companies expect growth will be limited to five percent or less. Meanwhile, half of the manufacturers expect better profits.
"Profits are getting squeezed in a lot of companies,'' says Andy Nations, president of Bearings & Drives, Inc. in Macon, Ga. "We have to come up with new products or strategies to offset that, like selling more applied technology products.''
Despite tepid profit expectations, more than half the distributor respondents plan to add new employees this year. Three-quarters of that group indicate they will expand their payroll by five percent or less, while 60 percent of manufacturers plan to add to their staff.
Meanwhile, 56 percent of distributors said they would expand inventory, while only 15 percent plan reductions. In other survey responses:
* Half of the distributors report they began carrying a greater number of supplier lines in 1997, while 52 percent of manufacturers say the number of distributors carrying their products rose last year.
* Only 27 percent of distributors say they were a sole supplier for at least one customer, down from 37 percent in last year's survey.
* The number of distributors belonging to a marketing alliance or buying group also dropped from 40 to 23 percent.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
