In April 2001, Industrial Distribution conducted a survey of small distributors — those with annual sales of $15 million or less. We asked this group to respond to questions investigating the nature of business for small distributors today. We asked these distributors to tell us the three biggest concerns or issues they face. The top responses were: competition from large national distributors and catalog houses, pricing pressures and finding and keeping employees.

Many of these business owners responded that small distributors must carve out a niche and become increasingly more specialized. Small distributors also need to be able to provide more and more services and increased technical expertise.

"Small distributors must become the authority on the market segment they serve," says Michael Thuringer of Bierschbach Equipment & Supply in Sioux Falls, S.D.

This has meant adding to the body of technical expertise and engineered solutions offered by distributors. According to Patrick J. Frater of Northwest Power Products of Eagan, Minn., "We need to be the inventors and bringers of new ideas."

Many distributors reported facing increased pricing pressures and increased competition from large national distributors, catalog houses, e-commerce and integrated supply. Some distributors reported that there is an increase in manufacturers selling commodity items through their own direct sales force or via the Internet and removing distribution from the supply chain. Overall, they have responded by enhancing their relationships with end-customers and providing higher levels of service.

"Small distributors must continue to offer superb service," says Andy Morris of H. M. Craig Metal in Stanley, N.C. "We do not sell anything that cannot be bought cheaper if you search hard enough. Our true product is service."

The customer need for this expertise and service is great. The training and application knowledge offered by salespeople is in great demand. Some distributors have used this not only as a way to compete with pricing pressures but to generate revenue by charging for these value-added services.

Gordon Male of Air Power Equipment Co. in Minneapolis, Minn., says distributors must continue to provide value added service but notes that, "[distributors] need to unbundle our services." He suggests distributors take on repair and consultative roles.

Evidence that small distributors have entrenched more deeply into their niche may be found in the size of small distributors. In our 2000 survey, only about 20 percent of respondents had annual sales of $1 to 3 million, yet that number has increased significantly in 2001. At the same time, distributors with sales of $12 to 15 million decreased. Several distributors reported decreasing in sales volume while becoming more profitable.

Average sales dropped from $6.3 to $4.7 million during this period, while the average size of the workforce remained at 16 people. On average there were eight salespeople divided nearly evenly between inside and outside sales.

A large change in the last year was in the number of distributors with Web sites. In 2000, only 39 percent of small distributors had a Web site, while in 2001, nearly two-thirds are online. Of those that are not online, most have plans to create a company Web site.

Of the respondents, 16 percent are conducting e-commerce through their own Web sites and 12 percent are selling through other Web sites (i.e. online exchanges or collaboratives.) A majority of the respondents saw the Internet as a dual-edged sword for small distributors, citing it as both a benefit and a threat.

Many small distributors are also participating in integrated supply. Nearly one in five respondents are participating in integrated supply, with an average of 19 percent of sales coming from integrated supply contracts.

Even though finding and retaining employees is one of the top three concerns, 80 percent of small distributors are satisfied with their current workforce. Small distributors invest about 40 hours in employee training each year and nearly 40 percent of distributors have added new programs or benefits to retain employees.

Small distributors still have a strong role in the supply chain. Distributors are answering the issues they face by finding and keeping the best staff and concentrating on adding value and technical services so they can compete on expertise and service rather than price. Distributors say there is a demand for these services. This is shown they say, by the number of businesses that have left national or regional contracts and gone back to small distributors.

"Smart end-users are seeing us as a resource to increase productivity and profits and decrease costs," says Donn Cropper of Angle Co. in Elmwood Park, Ill. "Integrators and catalog houses don't do this."