Dawning of a new era

The largest study ever done of the industrial distribution marketplace shows that the Internet and technology are rapidly changing the role of the traditional distributor

By -- Industrial Distribution, 7/1/2000

In each of the past 54 years, Industrial Distribution magazine has conducted its Annual Survey of Distributor Operations in which we identify some of the major trends impacting distributors. This year's survey is the largest we have ever done, with more than 900 owners and executives of distributorships across the country responding.

The study clearly details the myriad changes taking place in distribution. While national chains continue to grow, most distributorships (68 percent) are still small, family-owned businesses. Consolidation has slowed down considerably and the Internet is changing the way distributors bring products to market. Integrated supply is not growing as fast as it had been and customers are continuing to decrease their distribution base. At the same time, the traditional industrial sectors distributors sold to have been replaced by newer, even more demanding customers. Those are just some of the preliminary findings of this year's study. The entire, complete report will be available next month. Here are some highlights broken out by specific categories.

The Internet

The use of the Internet continues to soar. This year, 68 percent of all distributors say they have Web sites. Not surprisingly, more than 90 percent of the distributors with sales of more than $20 million have Web sites. Even more intriguing, however, is that 45 percent of distributors with sales of $5 million or less have sites compared to less than 40 percent a year ago.

About 60 percent of the respondents who have Web sites tell us they actually sell products from it. About half of the distributors say they outsource maintenance of their sites.

The Internet is becoming a vital tool for distributors. More than a third of the respondents say they have bought industrial supplies over the Web and, even more importantly, distributors report that a larger percentage of their new orders are coming via the Web.

While the spread of dotcom B2B business providers is prevalent, about 14 percent of distributors have signed on with such companies to sell over the Web. This is the first year we have asked this question and 14 percent should be considered high, according to several industry observers who predict that number will be going up sharply this year.

Despite this Internet growth, most distributors indicate they do not have a formal e-commerce strategy in place. A majority of distributors (more than half) who have Web sites don't update them often, and simply established their sites because of competitive pressure. Now that they have sites, many say they don't know what to do with them. They're willing, however, to put money into developing and expanding their sites for e-commerce applications. Not having a clear policy in place is fraught with danger, according to Steve Epner of BSW Consulting, an expert in e-commerce strategy for the distribution community.

"Distributors in general have to be careful not to jump into the Internet without knowing its ramifications," Epner said. He mentioned the problems of Toys 'R Us in which they sold toys over the 'Net last Christmas and then couldn't fulfill the orders. Epner warns: "Be careful what you wish for. You might get it."

He says that unless distributors bring electronic ordering into their existing systems, it could actually cost them money. "There are a lot of extras that go into electronic ordering," he says, noting that unless orders are electronically integrated, they must be processed manually. "In effect, unless you integrate your electronic ordering, it can ultimately cost you money."

Regardless, distributors expect their e-commerce business to grow substantially in the next two years.

It seems ironic that Internet use has grown so sharply because a survey ID conducted seven years ago showed that only about 68 percent of distributors were even using computers. Today, nearly 90 percent of the respondents to our survey have access to online services. Most access the Web on a daily basis.

ISO certification

Only a few years ago, it seemed that ISO 9000 registration was a must for distributors. Our survey shows, however, that only 18 percent of the respondents are ISO 9000 certified. Only another 18 percent say they want to become certified in two years. Sixty-three percent of the respondents say they have no intention of becoming certified.

Of those distributors who have become certified, most say they did so to stay competitive or because customers demanded it.

Most ISO certified distributors, however, say that becoming certified has had a positive impact on their businesses. Only four percent say it has had a negative impact. Clearly, for those who have become certified it has worked to their advantage, while many others say it is not worth the time or effort.

Employment

It was only a few years ago at a major industry convention that a keynote speaker predicted that the Internet would eliminate the need for many outside salespeople. That doesn't seem to be the case, according to our study. About 48 percent of the respondents say they have more sales representatives today than they did two years ago. In fact, 65 percent of distributors with more than $20 million in sales have increased their sales force and by almost the same margin expect to hire more sales reps this year.

Many distributors who reported increased sales in 1999 say a major reason was the decision to hire more salespeople. "We hired experienced salespeople who know our product lines," one distributor said. "That led to increased sales and an expansion into new geographical areas."

Despite the increased use of salespeople, distributors still are lacking a formal training program. For example, most distributors (61 percent) report having "informal on the job training" for new employees. About 29 percent say they have formal training programs for inside salespeople and, remarkably, only eight percent indicate they have a formal training program for outside salespeople.

It seems clear that if distributors are going to grow their businesses-and create more professional employees-training is a critical area that needs addressing. Whether it's product training, sales training, or management training, distributors have been slow to respond to that need.

Mergers and acquisitions

For years, distribution has been engaged in a high rate of mergers and consolidations. In fact, it was listed as one of the major trends that occurred in the industry during the 90s. That may be cooling off, however. This year, only four percent of respondents say they have been either acquired or merged in the past six years. However, 30 percent say they would welcome an acquisition offer. That is especially true of distributors with less than $5 million in sales. Two out of five of these smaller distributors say they would be willing to sell their businesses.

The study also shows that 28 percent of the respondents want to acquire another distributorship. Not surprisingly, it is the large distributors who are on the prowl for additional companies. More than half (51 percent) of distributorships with sales of more than $20 million indicate they are looking to acquire distributorships to expand their geographical reach.

Those figures are in line with a similar survey we did a year ago.

Integrated supply

Unless you've lived in a cave for the past few years, you've heard about integrated supply. Integrated supply, many experts have said, is not a fad. It's a new way of selling products to a changing and more demanding customer base that is looking to reduce its number of distributors.

But our survey shows that integrated supply is not seeing the huge growth once expected. Only about one-third of the distributors who responded to our survey say they have integrated supply contracts with customers. In 1997, 39 percent of distributors had such contracts, followed by 37 percent in 1998 and 27 percent in 1999.

Larger distributors-those with $20 million or more in sales-are especially involved in integrated supply. About 60 percent of these large distributors have such contracts in place. Those distributors said they have anywhere from four to 10 integrated supply agreements in operation.

Smaller distributors did say, however, that they are second tier distributors, selling products and services through the integrators servicing these accounts.

The new customer base

One of the knocks on distributors many years ago was that they were nothing more than smokestack chasers. They serviced the big industries, such as automotive and aerospace. In fact, a survey done by ID some 10 years ago showed that those two industries comprised the bulk of sales for industrial distributors.

Today that's changed.

The largest of the industrial sectors distributors sell to is "general industry" followed by machine/job shops. About 57 percent of the respondents sell to construction, while 56 percent sell to utilities and government. Other industrial sectors include food, 52 percent; institutions, 49 percent; automotive, 49 percent; the chemical industry, 43 percent; and aerospace, 32 percent.

A look back at 1999

Industrial distributors enjoyed a good year in 1999. Nearly 60 percent of this year's respondents say their sales increased, while another 21 percent say sales remained about the same. About 19 percent say their sales decreased. Business was exceptionally good for larger distributors, as some 67 percent of those with more than $20 million in sales report having increased sales.

There were a number of reasons why distributors say sales rose. Several distributors say the increase came from adding new, complementary product lines, better-trained personnel and deeper penetration of products into their existing customer base.

"We lowered our costs because of better inventory management," one distributor said. "Our employees, particularly those in outside sales, had better product knowledge and an even stronger knowledge of customer needs. We increased sales without adding substantial costs."

While most distributors tell us they expect similar results this year, many say there are problems ahead because of increased competition and the danger of manufacturers selling direct, especially through the Internet. But once again, finding qualified people is a top concern.

"We advertised for a salesperson for months without getting anyone qualified to take on our line," a cutting tool distributor told us. "We're still trying to fill that position."

Summing it up

This year's survey shows that distributors are optimistic about the future. There are concerns, however, about the Internet and how (or whether) it will change the role of the distributor in the future.

"We're looking at the Internet as a tool," one distributor told us. "It's opening up new markets for us. But at the same time, I'm worried that manufacturers, because of the Internet, will sell direct. The only way we can ensure future growth is if we provide services for our customers that can't be matched by anyone else. That's the future for our company and for distribution in general."

If you would like to purchase a complete copy of the survey, please call Alice Yu Miller at (617) 558-4504. The report will be available next month.