"Direct" is not always a threat

By Staff -- Industrial Distribution, 9/1/2000

I recently completed a whirlwind tour of six publicly traded industrial distribution companies. "Disintermediation" continues to be a recurring theme heard from their investors.

I am surprised that the concept continues to get as much play as it does, but some investors continue to raise concerns that distributors will be squeezed out as manufacturers sell directly to customers-a.k.a. "the Dell model."

Distributors should not feel insecure about their level of "directness" relative to Dell. In fact, you may be surprised to learn that even Dell is not always so direct.

Due to customer preference, many Dell PCs are sold through traditional value-added resellers that add another "touch" to the process. In fact, some industry observers estimate that 15 to 20 percent of Dell PCs are sold through the reseller channel. Others say the percentage could be even higher.

In addition, the non-PC stuff you buy from Dell (printers, modems, surge protectors, storage media, and the like) is never touched by Dell, at all. It comes directly from Ingram Micro-a wholesale distributor!

It may be possible for some manufacturers to circumvent traditional distribution channels when they can fulfill product themselves with equal or greater efficiency. However, as "cube value" drops, the cost of fulfilling product can rise significantly as a percentage of the sale. (Cube value is a product's cost per square inch/foot. A small product with a high cost has a high cube value, while a larger product with a low cost has a low cube value.)

Also, physical product movement is obviously not the whole ballgame. Manufacturers and customers rely on distribution channels for sales generation, technical support, credit, multi-vendor solutions, single point of contact, and other important services.

Be direct? It makes for good advertising copy, but in the real world, indirect is often the best way to go.

David J. Manthey, CFA, is a research analyst with R.W. Baird & Co., Milwaukee, Wis. He provides an analysis of publicly traded distribution companies each month for Industrial Distribution.

Manthey can be reached at (414) 765-3774 or e-mailed at dmanthey@ rwbaird.com.