ID reveals the results of its 59th Annual Survey
ID's Annual Survey shows that distributors are overcoming many obstacles to increase their importance in the supply channel
By Jack Keough, Editor -- Industrial Distribution, 8/1/2005
Additional Information:New! 59th Annual Survey home pageCharts from 59th Annual Survey of Distributor OperationsClick here to purchase 59th Annual Survey |
INDUSTRIAL DISTRIBUTION's 59th Annual Survey of Distributor Operations shows that the Internet has become nothing more than a tool for distributors, and is not the threat that was once envisioned. At the same time, the Internet is not the panacea that some distributors had looked to for substantially increasing sales to their growing geographical territories.
Those are just some of the conclusions drawn from this year's Annual Survey , which consisted of responses from nearly 800 distributor executives across the country.
The study indicates that the distributor's role is even more important today than it's been in the past. Distributors tell us they've become an integral part of their customers' operations, and are specifying brands and serving in a consultative role for those end users.
However, distributors' efforts are continuing to be hampered by customers who are moving their manufacturing facilities overseas, particularly to China.
And health care costs are soaring, causing many distributors to increase the deductibles paid by employees or, in some cases, to reduce coverage.
They are struggling to focus more on selling fee-based services such as training and kitting, and are readily adding complementary lines to their existing arsenal of products to satisfy customer needs.
With all these problems, you'd think distributors would be pessimistic. But our survey shows that that's far from the truth. In fact, most distributors (88 percent) predict sales will increase this year.
Even more interestingly, integrated supply seems to be losing its luster. Buyers, distributors say, are looking for even more innovative ways to do business with distributors. In fact, distributors tell us that integrated supply sales will not grow at the level many experts have predicted.
What's more, merger and acquisition activity is on the rise once again. Distributors say they are looking for acquisitions to grow their businesses, and some 30 percent say they would sell their business for the right price. M&A activity may not return to the levels of the late 1980s, but the study shows that this could be the biggest acquisition year in recent history.
We've already seen a few major purchases recently, including WinWholesale's acquisition of Noland Corp., and Ferguson's purchase of Full Service Supply from the Kennametal Corp.
Many of ID's Big 50 distributors—a report of the largest industrial distributors based on sales volume—said they are actively looking for acquisition candidates in the year ahead as a key way to grow market share.
The InternetOur survey also shows that about half of distributors receive less than 10 percent of their sales via the Internet. Forty percent said they had no sales over the 'Net, and only 6 percent said they made 20 percent of their sales over the Internet. This is far below the numbers that had been predicted by distributors just a few years ago.
In fact, during interviews conducted for our Big 50 report (June 2005), distributors told us that the Internet has become more of an information tool than a buying portal.
Says Steve Endries, president of Endries International: 'The biggest benefit is using the Internet as a communication tool, both on the customer side of the business and also on the supplier portal side. You have customers that don't want to go down the Internet path, for whatever reason. Our call center today is larger than it's ever been, and more business goes through there.'
In addition, distributors are not using the Internet to participate in reverse auctions. Just 36 percent of respondents said they had participated in such events, and a whopping 79 percent of those respondents said their experience was unfavorable.
In other technology news, distributors are not rushing to become compliant with Radio Frequency Identification (RFID). Two years ago, Wal-Mart started the charge to RFID by telling suppliers that, in order to do business with the giant retailer, they had to become compliant with the new technology.
However, distributors have not implemented RFID in large numbers. Just 21 percent of the respondents to our survey said they'd implemented RFID. Even more interesting, 93 percent said customers were not requiring them to become RFID compliant.
Distributors: a vital linkDistributors say they are becoming closer to their customers as they help them make brand decisions. Nearly 60 percent of respondents either strongly agreed or agreed with the statement that 'my influence over brand decisions is increasing.' Only 15 percent disagreed. (The remaining 25 percent neither agreed nor disagreed.) This follows another study done several years ago in which buyers told us that they will nearly always go along with a distributor's recommendation concerning brand selection.
Though distributors may be closer with their customers, they may have trouble reaching them these days. Sixty-seven percent of respondents said that national contracts have impacted their ability to sell products to customers on a regional or local basis.
And many distributors continue to report on the ever-pressing problem of manufacturers moving their operations overseas, particularly to China. Nearly half of our respondents said they had lost business because of customers leaving for China. Nearly 70 percent of the distributors said they had lost anywhere from 1 percent to 10 percent in sales as the result of manufacturers moving off-shore. A majority of distributors expect that number to increase in the years ahead.
China may not be the last stop for some manufacturers. A major semiconductor company last month said it would be building a plant in Vietnam, while other companies are reportedly looking to Africa for future development.
To stop manufacturers from moving overseas, distributors tell us that the U.S. government should provide incentives to promote investment in manufacturing (63 percent); reduce health care costs (54 percent); and impose tariffs on imports from China (37 percent).
Service reigns supremeIn the last decade, distributors have moved from being product providers to service providers. Today, distributors say they are providing technical support (82 percent); faster delivery (69 percent); employee training (68 percent); and cost reduction assistance (67 percent) to customers. In addition, more distributors are unbundling services and getting paid fees for them—particularly when it comes to fabrication, set up and installation of equipment, and employee training.
In fact, 58 percent of our respondents said they are receiving anywhere from 1 percent to 20 percent of their total sales from services they are performing—a number that is expected to rise in the years ahead.
Distributors also are selling their products to an increasingly wide variety of business sectors. Topping the list is machine/job shops (64 percent); followed by the automotive industry (55 percent); construction (53 percent); and the food industry (52 percent).
Lower on the list were the chemical and aerospace industries, both of which had been near the top of the list just a few years ago. One area that has seen growth is the electronics sector, which had not been on our list in the past.
Distributors also told us that they intend to grow their businesses in the traditional ways in 2005—by increasing sales to existing customers, adding to their customer base, and taking market share from competitors. They say they also intend to provide more training for their salespeople, broaden their product lines and advertise. Others report they will offer engineering capabilities.
One problem that continues to plague distributors is finding technically astute salespeople. Two-thirds of the respondents said that finding enough salespeople with the appropriate technical training is a critical problem in the industry. Other concerns are price competition (44 percent); distributor competition (33 percent); increased operating costs (33 percent); and economic conditions (31 percent).
Health care woesThere doesn't seem to be a prescription for dealing with health care costs, which continue to soar.
Three-quarters of our respondents said health costs rose in 2004. Nearly half of the distributors said the increases ranged from 11 percent to 20 percent.
Responding to those increased costs, 43 percent of respondents said they increased their employees' share of contribution; 29 percent increased deductibles; 25 percent found a new insurance provider; 20 percent reduced coverage; and 3 percent eliminated coverage altogether.
'We absorbed [the increased costs] this year because we have hit up the employees in each of the previous three years and we wanted to give them a break,' one distributor reported. 'We did undertake some plan re-design initiatives that did lower the impact of the initial 12 percent increase.'
Mergers and acquisitionsLast year, 22 percent of the responding distributors said they were approached with an acquisition offer, but that the deal didn't go through. Surprisingly, 23 percent of the larger distributors—those with more than $20 million in sales—said they'd been approached.
In years past, our survey showed that most of the companies approached were those with less than $5 million in sales.
Respondents to this year's survey said they would welcome an acquisition offer. One-third of all respondents said they would look kindly toward an acquisition, a higher number than in previous years. More than half of distributors with more than $20 million in revenues say they are actively seeking to acquire a competitor.
Distributors also say that mergers and acquisitions have given them more power to dictate terms to their manufacturers, meaning they have been able to negotiate items such as price, freight allowances, extended payment terms and cash discounts.
|
Comments on the survey or its findings? E-mail Jack at jkeough@reedbusiness.com.
View All Blogs
