Purchase a copy of the annual survey here.

In recent years, distributors have identified e-commerce/e-business as an important part of their strategic growth plans. That may not be the case anymore, according to INDUSTRIAL DISTRIBUTION's 61st Annual Survey of Distributor Operations.

Just one-third of the more than 513 respondents to this year's survey said e-business is “very important “or “important” to their growth plans for 2007. Meanwhile, 45 percent of the more than 500 respondents said e-business was “not at all important” or only “slightly important” for their business.

Some of these results aren't surprising, since many distributor executives told us in June as part of our Big 50 report that the Internet was merely a tool for customers to research and find products.

“[The Internet] is an informational tool to let people know who we are and where we're focused,” said Dan O'Leary of Edgen Murray Corp., No. 16 on the Big 50 list.

In fact, more than half of the distributors polled for our Annual Survey said customer sales via the Internet are between one percent and 10 percent of their total revenue. We expected those numbers to be higher based on data from previous studies. That's not to say distributors aren't using their computers to communicate with suppliers. Nearly seven out of 10 distributors say they order products via the Web.

“In theory, the Internet should have increased sales. The reality is that it never happened,” said Steve Epner of Brown Smith Wallace Consulting Group, an expert on technology issues in the distribution marketplace.

Epner says the Internet is a long-term marketing opportunity for distributors, not a short-term selling one. He also says that despite the technological trends taking place, “people still buy from people,” and although prospective customers might find products online, they still want to talk to someone with knowledge about the product.

The Internet, then, is important to distributors as they put catalogs online and increase their Web presence to attract customers. That means Web sites and home pages must be updated. In fact, distributors said improving or redesigning their Web sites is one of their top goals for 2007. Nearly 40 percent of respondents said they'll redesign or update their Web sites this year. And many of these distributors said they'll outsource the design efforts to a third-party firm rather than have the work done in house. One distributor told us he worked with his local school department to re-vamp his site; a high school class redesigned his home page as a school project.

Thirteen percent of respondents said it's a priority to optimize their Web sites for search engines such as Google. Search Engine Optimization, or SEO, has become increasingly important for many businesses and distribution is taking note.

Of course, there are other changes occurring in the distribution marketplace. In particular, our survey shows that international business is becoming more important to distributors' growth. Distributors are selling products to, as well as sourcing them from, China, and are also reaching customers in South America, Eastern Europe and Germany, in particular. This continues a trend begun in the last few years.

Our survey identified some other key challenges shaping distribution as well:

• More distributors are selling private-labeled products than ever before.
• Many distributors are adding engineering capabilities as they seek to provide additional value-added benefits.
• Distributors are conducting plant audits as a value-added, fee-based service.
• Distributors are adding products to complement their existing lines.
• Mergers and acquisitions are accelerating, and our respondents expect that to continue, particularly among manufacturers.
• Nearly six out of 10 distributors with more than $20 million in sales are involved in integrated supply.
• Job satisfaction is high among distributors, who say they would recommend a career in industrial distribution to young people entering the workforce.

Let's take a look at some of the specifics. Our survey shows that 79 percent of respondents are buying products manufactured in China, 41 percent are selling to plants there and 16 percent are looking to establish branches there. Canada, of course, continues to be our biggest trading partner. Forty-eight percent of respondents say they import products from Canada, 82 percent sell to Canadian customers and 48 percent have or are planning to open branches in Canada.

Distributors are also selling products to customers in South America, Asia, Southeast Asia, Mexico, the United Kingdom, Europe and Japan. They're also setting up branches overseas, primarily due to demands from customers that have established manufacturing facilities in those regions.

Still, most distributors said they sell primarily to U.S.-based accounts.

“We have plenty of business to handle in the U.S.,” one distributor said, and another pointed out that his company is a “regional distributor and not equipped to or interested in going outside the U.S.”

Still another said that being a small distributor makes it too difficult and costly to expand internationally, and that “there's still plenty of business for us in the U.S. for at least another 10 years.”

Some of these statements appear slightly contradictory, since respondents said one of their growth strategies for 2007 is to increase sales to existing customers and/or take market share from competitors. Finding new customers has become a challenge, distributors said.

“We need to refocus our efforts on existing accounts before we do anything else,” one distributor told us. “We also need to train our employees to a higher degree of technical expertise and better customer service levels.”

Private labeling was identified as a key trend in the latest “Facing the Forces of Change” study published by the National Assn. of Wholesaler-Distributors. Our survey supports that conclusion.

More than one distributor in four now sells private-labeled products from China or another part of the world. Private labeling is especially popular with larger distributors (those with more than $20 million in sales). More than a third of those distributors sell private-labeled products.

For example, Interline Brands, No. 14 on our 2007 Big 50 list, says that more than 20 percent of its sales come from private-labeled products. In fact, private-labeled products now comprise up to 20 percent of sales for most of the distributors who already are engaged in this practice, according to our study.

Why customers buy from you Answers varied when asked, “What is the major reason customers buy from your company?” Thirty-six percent of respondents said it was because of product availability, 20 percent said technical support, 9 percent said customer service/relationship or delivery time, and just 5 percent identified price.

Those results are borne out by similar studies from our sister publication, Purchasing magazine, which found that product availability is one of the key reasons purchasing departments buy from specific distributors. Price finished way down the list on Purchasing's survey as well.

To meet customer demands for more products and to maintain proper stock levels, 58 percent of distributors told us they plan to add product lines next year and 38 percent said they'll keep the same number of lines. Only two percent said they will decrease the number of lines they stock.

So how else will distributors grow their businesses in 2007?

• 42 percent plan to hire new employees—technically proficient people, in particular.
• 23 percent plan to open new branches.
• 48 percent plan to increase advertising/marketing efforts.
• 19 percent plan to conduct business overseas.

To meet that expected growth, distributors will invest in customer relationship management software, sales force automation, ERP systems, warehouse management systems and financial management software.

Distributors continue to struggle with charging customers for value-added services. Sixty-four percent of respondents said they do not charge for such services, though 34 percent do. The services distributors offer include engineering support, shipments requiring faster lead times, set up/installation, employee training and technical product support.

Two-thirds of distributors report that they do or will soon provide engineering support to customers.

“By providing these types of services, we're able to lock them in for a longer period of time,” one distributor told us.

Significantly, nearly 60 percent of respondents said that less than 10 percent of their sales come from services. Another 10 percent said services comprise between 11 percent and 20 percent of their sales. In interviews conducted with distributors—and backed by this study—distributors say they are developing new value-added services, including plant audits. Nineteen percent said they now conduct such audits. In particular, safety distributors tell us they're doing them to help customers stay in compliance with OSHA regulations. Others say they're conducting maintenance classes for plant personnel and maintaining equipment within plants.

In last year's Annual Survey, 27 percent of distributors said they were approached with an acquisition offer. Six percent were actually acquired or merged. The size of the distributorship didn't seem to matter, as the numbers were fairly even across small and large companies. This year, one-third of distributors said they would welcome an acquisition offer—particularly smaller distributors. Forty-five percent of these smaller distributors, which had less than $10 million in sales, said they would like to be acquired.

Larger distributors are on the prowl for acquisitions. More than half of distributors with sales in excess of $20 million said they are looking to acquire companies.

Is integrated supply as strong as it was predicted to be? It depends on whom you ask. One of the largest distributors in the country, who has long been involved in integrated supply, says it accounts for more than 25 percent of his company's sales and he expects that to grow another five percentage points next year.

In our survey, 39 percent of respondents said they have integrated supply agreements. Most of those are distributors with more than $20 million in sales.

Distributors' greatest concerns are price competition (43 percent), the economy (41 percent), distributor competition (34 percent), increased operating costs (29 percent), and keeping qualified employees (27 percent).

Several distributors said they're seeing an increase in direct sales from manufacturers to customers, a problem that has topped distributors' list of concerns in past years. Other distributors mentioned the loss of customers who are moving offshore.

“This past year we've seen many remaining manufacturers in the U.S. financially weakened in trying to stay competitive with [companies] who have moved offshore,” said another distributor.

Others cited national contracts, which they said result in fewer customers for the small- to mid-size distributor; severe price cutting by competitors; large systems integrators taking an increased share of business; and national distributors moving into new geographic regions and putting the “squeeze” on regional distributors.

Despite the challenges distributors face—shrinking margins, increased competition, pricing structures and customers moving overseas—most distributors say not only are they satisfied with their career choice but that they'd recommend it to others.

Two-thirds of respondents said they'd recommend a career in industrial distribution to someone entering the workforce.

When asked why they like the industry, here's what some respondents said:

“Stability of the industry, opportunity for better-than-average income for performers” … “There is great satisfaction in improving processes and helping to keep manufacturing profitable in the U.S.” … “Variety of work challenges, opportunity for independence and growth.”

Will distributors be as satisfied in the future as technology continues to grow at a mind-boggling pace? The next few years promise to be even more challenging. The average age of an industrial distribution professional is 46—about the same age as the customers to whom they're selling.

Buying patterns will change and technology will continue to evolve as a new, younger workforce emerges. In the past, distribution has been reactive, rather than pro-active, to such challenges.

Will this change, and will distribution be able to adapt to this new marketplace? Time will tell.

How distribution meets those needs will determine its future.

Purchase a copy of the annual survey here.