ISA Small Distributors Study Reveals Market Discrepancies

On April 25, the ISA Convention kicked off with a Small MROP forum, where a 2015 market study revealed some interesting data about how small distributors and manufacturers of all sizes view the current and future role of small industrial distributors.

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The Industrial Supply Association's 2015 Annual Convention was held April 25-27 at the downtown Cleveland Convention Center, where the first day's forum sessions were kicked off with a MROP Business Session that delivered a wealth of market insight, targeted for small industrial distributors.

The session, 'Looking Ahead at Distribution: The Future Impact of Size and Value Content 2015,' was based upon a 2015 study by W.R. McCleave and Associates for ISA. Bill McCleave, president of the consulting firm, hosted the session, which compared data from surveys taken by distributors and suppliers of all sizes regarding market trends, and compared them to surveys taken just by small distributors.

The forum was held at the ISA convention for many years, but this was its first after a three-year hiatus.

Following his presentation, McCleave directed a four person panel, asking them study-related questions to see what they found most interesting about it, as well as take questions from the audience.

The panel was comprised of:

  • Sandy Johns, Channel Manager at Brady Corporation (Milwaukee)
  • Peter Madsen, President, Madsen and Howell (Perth Amboy, NJ)
  • Phil Hanson, President, C.H. Hanson (Naperville, IL)
  • Jon Eames, President, N.H. Bragg (Bangor, ME)

The four companies the panel represented have a combined 517 years in business.

Demographics

The firm's 20-question study included 144 respondents, 40 percent of whom were distributors, while 44 percent were manufacturers. Of the distributors field, 32 percent were small, local, general-line distributors. Asked to name their two product categories contributing their largest revenue, distributors said their No. 1 product was cutting tools by a wide margin, followed by abrasives, while the top two No. 2 products were general line industrial supplies and abrasives.

Takeaways

The study revealed a handful of interesting data points, and here are the ones I found most prominent:

  • Service sales: A majority of distributor respondents (of all sizes) said that less than 5 percent of their total sales over the next five years will be made up of services they sell to customers. With small distributors relying more and more on value-added services, 5 percent was a surprisingly small figure.
  • Support: Out of eight support services, distributors rated their quality of support they receive as highest from large manufacturer corporate technical support, large manufacturer direct field people, and buying groups, while distribution software companies and manufacturer representatives were the bottom two. Buying groups had the greatest number of 'Great' support responses out of five rating choices, large manufacturer corporate had the greatest number of 'Good' ratings, while small manufacturer direct field people had the greatest number of 'OK' ratings. Distribution software companies and manufacturer representatives both had the largest number of 'Very Poor' ratings.
  • How small is small? How big is big? Asked to all respondents, 23 percent said the annual sales cutoff for what can be considered a small distributor is at up to $10 million. 20 percent said the cutoff is up to $5 million, while 18 percent said up $2 million. On the other end, 37 percent said $100 million is the minimum to be considered a large distributor, while 30 percent said it is $25 million.
  • Market Potential: With all respondents (distributors + manufacturers) rating seven categories of distributors regarding their future market potential, 'Small local general line distributors' came in last by 0.67 on a 0-5 scale, followed by 'Regional general line distributors.'
  • Role of service: Asked, 'In the next five years, how do you see the total revenue from selling services changing for distributors?' about 52 percent all respondents said it will slightly increase, while about 62 percent of just distributors said it will slightly increase.
  • Who is relied on for what? Asked, 'What size distributors will manufacturers rely most on for the following in the next five years (choose all that apply out of seven), small distributors edged out medium as the top choice for Loyalty, and was a close second to medium for Technical Expertise, and competed well with medium in Local Market Development. Asked the same to distributors only, respondents will less optimistic. Distributors said small compete well in loyalty and technical expertise, but wasn't close in any other category.
  • Believing in themselves: The study asked, 'Do you believe small distributors will have some potential advantages in the marketplace over the next five years?' 71 percent of all respondents said yes, while 77 percent of all respondents but distributors said yes. Only 63 percent of all distributors said yes, while 78 percent of small local distributors only said yes. This shows that large distributors don't have high hopes for small distributors, who are far more optimistic.
  • Advantages/disadvantages: All respondents said small distributors' top five advantages (out of 16) in the market over the next five years are: Local problem solving, Product application expertise, Longstanding customer relationships, Custom Services, and Intimate market knowledge. Meanwhile, their top five disadvantages (out of 13) are: Integrated supply/national contracts (by a wide margin), Cost of technology, Access to financial capital, Difficulty in we marketing, and Competitive pricing for customers.
  • Supplier attributes: Asked, 'Which three manufacturer attributes (out of 10) will attract small distributors the most in the next five years?, all respondents said 1) Product lines requiring local technical support and value-added content, 2) More exclusive territories, and 3) Tightly focused product lines. Meanwhile, only small local distributors those top two were the same, but had Broad range commodity product lines as their No. 3. All respondents had Broad range product lines as No. 8. This shows a bit of disconnect between what manufacturers and large distributors think that small distributors value in their suppliers.
  • Value-added priorities: One of the most telling data points is what McCleave presented last, with the question, 'Which of the following value-added capabilities will your company offer in the future? With 13 options, all respondents top five choices in order were: 1) Product training, 2) Expert product applications, 3) Consolidated invoicing, 4) Engineering services, and 5) Integrated supply services. Just small local distributors' top five went: 1) Consolidated invoicing, 2) Product training, 3) Integrated supply services, 4) Bin stocking, and 5) Assembly. This shows small distributors put a higher value-added priority on invoicing and bin stocking, and a lesser priority on engineered services (11) and expert product applications (6).

The small distributor forum panel, consisting of (from left) Peter Madsen of Madsen and Howell, Jon Eames of N.H. Bragg, Sandy Johns of Brady Corp., and Phil Hansen of C.H. Hanson.Panel commentary: After presenting the study, McCleave presented a list of questions to the four-person panel regarding the study's findings. All four agreed that there is a need for the small distributor to specialize in order to survive. Here's what the panel had to say about a few topics:

1. Do small distributors really have a service advantage?

  • Hanson: They do, provided they have the right value proposition, and only if the customer is asking for it. Then yes, because they have a more personal relationship with their customer, giving them better access.
  • Johns: Yes, as long as they're focused. Small distributors have more tenure in the field.
  • Eames: Less and less. Medium and large distributors are buying technical capabilities that add those services. There's still a place for those small guys, but the playing field is leveling out.
  • Madsen: Only if the customers want it. The customers have to see it as advantageous to them. You have to provide what they want. Sometimes the best service isn't good enough.

2. Buying groups ranked high in quality of support. Why, and can others get to that level?

  • Eames: They have a lot of value in sharing best practices. It allows electronic invoice on the same platform – one transaction per day instead of 120 different payments. They offer scale in affordable e-content and training programs. It's tough to beat.
  • Madsen: You almost have to be in a buying group. If you don't have an identity card, you're not getting that discount those in buying groups have. It's additional revenue. They get access, we get discounts, hopefully it's a marriage that works out.

3. What should distributors do – if anything – to prepare for the impact of 3D printing?

  • Eames: I don't see it as a real threat.
  • Hanson: It's absolutely going to change everything. I think its going to have as big of impact on distribution and manufacturing as the Internet itself. Cutting tools used to be a huge requirement for prototypes, etc. It's not that anymore. It's an area of huge opportunity. We don't know much about it, but we know it is the future. If I can find a distributor who has some expertise in it and is interested in partnering with it, that's appealing. I think we're three years away from bringing it into our facility.
  • Madsen: Both. It's a threat, but still three years away on the horizon. But it is the future. It is excellent for prototypes. They'll figure out how to make real products. It's coming.
  • Johns: It will be a fascinating thing to watch. How much impact it will have and how quickly, we'll have to see.
  • McCleave: A lot of people said 'this is a toy, it has no place in our business,' about the computer. It rocked the community. The Internet has rocked the manufacturing/distribution community. If distributors don't participate, one day they'll look up and say, 'what happened?' It's certainly worth considering.

4. One piece of advice to small distributors:

  • Hanson: Know who you are, know why your customers need you. Hardware  independents are thriving because they've figured out what they can do better than the big guys.
  • Johns: Work closer with manufacturers to understand what the value proposition is. Have more openness to share where your business is and where it's not. Small guys are reluctant to share – maybe they've been burned in the past.
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