We are pleased to provide the results of our 72nd annual Survey of Distributor Operations. Through this report, our aim is to give readers in the distribution sector the latest market intelligence on key changes and developing trends affecting companies serving and supplying the industry.
In today’s rapidly evolving business climate, it isn’t always easy for those closest to their operations to spot many of the subtle, but critical, developments emerging across the supply chain. In many cases, strategies that powered successful distribution companies for a half-century or more may no longer adequately serve the needs of even their most loyal customers, who also are being challenged by their own customers to offer greater product choice, immediate and individualized price quotes, more rapid delivery options, and 24/7 customer service.
Even though business-savvy distributors survived the Great Recession and adjusted sales strategies to counter non-traditional online competition, new threats continually surface.
Deep customer relationships and individualized service have helped top distributors keep Amazon at bay. But Amazon’s success was not built on running away from tough competition. Are today’s distributors learning from Amazon’s strategies and taking steps to put more effort into building their e-commerce platforms?
What other steps are they taking as they approach 2020? What’s are the latest trends in mergers and acquisitions, an area that has been on the rise in distribution for several years? Do survey respondents see themselves as potential M&A buyers or sellers as we prepare to enter the new decade?
The industrial economy has continued to improve over the last few years as U.S. manufacturing has rebounded and a rallying stock market has pumped in new investment money across the board. Has that led more family-owned distributors to sell off their operations?
The 2019 Survey of Distributor Operations also gives readers insight into what other distributors across the U.S. are thinking about the state of the business. Beyond that, our survey shares information on the use of technology; the state of supplier relations; how distributors view their place in the supply chain; how they are faring in employment; and much more.
In this report, the survey results include:
- Demographics—A breakout to establish a profile of respondents based on company size, years in business, sales volume, and product line.
- Challenges, Trends, & Economy—An outline of the initiatives distributors are undertaking to address key business and market concerns. This also covers the continued interest and involvement in mergers and acquisitions and how distributors view the impact of the economy.
- The Balance Sheet—This section offers insights into revenues and profitability. It addresses areas of investment, concern, and other factors affecting revenue.
- Best Practices—Responses that shed light on distributor relationships with suppliers and customers, as well as their global business plans and what challenges are involved.
- Tech Usage & Investments—How areas like e-commerce and other big-impact technology solutions affect the industry now and set the stage for the future.
- Value of the Distributor—Why our survey respondents believe customers do business with them, and which service offerings play a significant role in the industry.
- Employment—Concerns over today’s hiring and layoff trends, recruitment efforts, and compensation are identified.
This report summarizes the key survey findings.
The results of this study are based on an email survey sent to Industrial Distribution subscribers in April 2019, with a collection time of three weeks. Recipients of the survey were offered an incentive to complete the questionnaire. The majority of Industrial Distribution’s subscriber base is comprised of readers who identify as executive, upper management, sales, or sales management. Results are based on our pool of survey respondents from within this subscriber base.
The Demographics section of our survey shows significant growth in the number of operations located outside of the U.S., with noticeable declines in the Northeast, South, and Midwest, increases in the Southeast and West, and negligible movement in or out of the Southwest region.
Perhaps surprisingly, more than 17 percent of respondents reported headquarter locations outside of the U.S., a dramatic increase from nearly 10 percent reported last year, which had been the highest such figure in at least a decade.
That noted, the U.S. Midwest still held the top spot at 31 percent of respondents, down from 34 percent the previous year. The Northeast came in at 18 percent, down from 22 percent; and the South at 6 percent, off from more than 9 percent reported last year. Headquarter locations in the Southeast increased to nearly 14 percent, up from just over 12 percent previously, while the West jumped to 9 percent from 6 percent of respondents. The Southwest was flat at 6 percent.
According to our reader survey, while the industrial distribution market is fragmented, comprised mostly of family owned, small-to-midsize firms, there is a noticeable drop in family-owned distributorships to 56 percent, down 7 points, and a corresponding jump in corporate/non-family-owned operations to 44 percent, up 7 points. The resulting shift may have been affected by the continuing trend of mergers and acquisitions across the entire distribution sector.
As for company size, based on 2018 sales, again this year 60 percent of the respondents are at companies that have less than $50 million in annual revenue. Also again, the largest segments are at opposite ends of the spectrum, as 28 percent (down from 32 percent in 2017) are at companies with less than $10 million in sales, while 18 percent (down from 19 percent) are at distributors that take in more than $500 million.
The largest shift in sales was in the $20-50 million category, in which reside 17 percent of respondents, up from the previous survey's 13 percent. This shift is most likely a result of improving U.S. and industrial economic conditions.
While the number of respondents reporting an expansion in product lines during the year fell 8 points to 62 percent, following a significant rise in the previous year’s survey, the overall number including both pre-existing and expanded product lines were up slightly to 97 percent. Contraction of product lines slowed to under 3 percent from more than 4 percent the previous year.
Some other demographic stats:
- 41 percent of respondents report that their company has been in business for at least 50 years, down from 49 percent in the 2018 survey
- The biggest jump occurred in companies that have been in business less than 10 years, with responses jumping 9 points to 17 percent
- Our respondents’ most popular product lines are hand tools (42 percent); MRO supplies (38 percent); safety (38 percent); lubricants (35 percent); electrical (34 percent); material handling (34 percent); cutting tools (33 percent); power tools (33 percent); personal equipment (32 percent); adhesives & sealants (30 percent); pipes & tubing (30 percent); hose, reels & cords (28 percent); motors, controls & drives (27 percent); and chemicals (27 percent)
- Our respondents’ most popular selling markets are manufacturing/processing (77 percent); construction (58 percent); machine shops (48 percent); government (45 percent); OEM (44 percent); utilities (41 percent); and energy (40 percent)
- 49 percent of respondents are conducting business outside the U.S., down slightly from 50 percent the previous yeaar, but 11 percent of respondents said their company planned to do so within three years, up from 6 percent previously
Challenges, Trends, & the Economy
In our 2018 survey, 31 percent selected economic conditions as a primary concern, which was an 8 percentage points decrease from a year earlier, and a significant decrease from 2016 and 2017. However, our 2019 survey shows that the economy is returning as a primary concern for distributors—44 percent indicate economic conditions this year as their primary concern.
Price competition—one of the top concerns ever since our survey started 72 years ago—remains at the top spot for third straight year at 53 percent, followed by finding more qualified people at 44 percent, distributor competition at 33 percent (down 13 percentage points from the previous year), and increased operating costs at 32 percent.
Additionally, concerns over e-commerce saw a 5 percentage point decrease from 31 percent to 26 percent in the past year, perhaps suggesting that distributors are getting more comfortable and confident in the e-commerce space.
Other notable findings from this section:
- 33 percent of respondents indicate internet sales as one of their top four primary growth strategies, a significant increase from last year’s 28 percent
- 75 percent of respondents expect an increase in internet sales
- More than 25 percent of respondents were at least approached in the past year about being acquired
- About 30 percent of respondents would be agreeable to a buyout—down 2 points from last year
- Nearly 42 percent of respondents are actively looking to purchase another distributor, up more than 10 percentage points from last year
Technology Usage & Investments
Last year, our survey indicated that industrial distributors—who have been notoriously slow when it comes to embracing and adopting technology—experienced a sizable bump in most areas of tech. While amount of respondents whose company utilizes CRM software decreased a bit to 59 percent, those that offer ERP jumped about 9 percentage points to 47 percent. Online web ordering and warehouse management systems remained roughly the same at 64 percent and 34 percent, respectively.
Here are some other key findings in this section:
- Of the technologies we listed that respondents currently don’t have in use, the ones they are most likely to adopt over the next two years are online web ordering (29 percent); CRM (29 percent); and SFA (28 percent), which is an 8 percentage point increase from last year
- More than 69 percent of respondents say e-commerce is a priority for them—up more than 2 percentage points year-over-year
- Asked what they primarily use their website for, respondents’ top selections were housing technical/product information (49 percent); e-commerce (48 percent); generate orders (40 percent, a more than 10 point increase from last year); and find new customers (37 percent)
- About 80 percent of respondents redesigned their website within the last several years
- 54 percent of respondents update their website content at least monthly, a moderate increase from 48 percent last year
- 40 percent of respondents have a mobile app for their website, an 8 percentage point increase from last year
The Balance Sheet
More than 62 percent of respondents in our 2019 survey indicated that their sales increased compared to a year earlier. While this figure was much lower—43 percent—in our 2016 survey, it is still a significant decrease from last year’s figure of 73 percent, likely due to economic challenges.
Other key findings in this section:
- 78 percent of respondents expect sales to increase in the year ahead
- Asked to select which tactic they consider very important for growth and business development, 63 percent of respondent said advertising/marketing, a 6 percentage point increase from last year, and 42 percent said improve/redesign website, which is almost a 10 percentage point decrease from last year’s 51 percent (this is interesting because between 2016 and 2017, this answer increased by 11 points, and now it’s decreased by 10)
- In terms of the timeframe to receive payments and receivables, 16-30 days barely replaced last year’s front runner of 31-40 days as the most common among our respondents; 41-50 went from 32 percent to 20 percent (this indicates faster times)
Our Best Practices section focuses on distributor-supplier relations. Asked how their relationship with suppliers has changed in the past year, 34 percent of respondents say they’ve gotten better. Only 13 percent say relations have gotten worse, while most—53 percent—say they’ve stayed the same. These results are very similar to what we saw in our 2018 survey.
Most negative anonymous respondents’ comments regarding how supplier relations have changed focused on an increase in response and delivery times, or that suppliers are providing worse service and support.
Specific comments include the following:
- “People don't care.”
- “Their on-time delivery has gotten much worse. Service has suffered.”
- “Lead times are longer, customer service is dropping off.”
- “Rotating door of representatives.”
- “Some do not offer the support they used to. New people that do not have the experience.”
- “They don't come around as often.”
Positive comments showed an increase in prioritizing business relationships, communication, and collaboration
Some of the relevant comments include:
- “Specific suppliers are realizing that we all are in business to succeed and the best way to do that is to have GREAT relationships.”
- “Better communication and partnering.”
- “Deeper relationships on a national and local level.”
- “More focus on vendor relations.”
- “We each realize that we both need to work together to make the relationship to work properly!”
The other question that we at ID have the most interest in from this section is what criteria respondents consider the most important when evaluating suppliers. Despite the popular ‘race-to-the-bottom’ rhetoric, our respondents say that price isn’t the top factor. It’s not even second or third. Given six options and asked to pick up to three, respondents have picked quality as the No. 1 supplier criteria for at least the past decade, and it repeated at the top this year with 84 percent of votes. On-time delivery was second with 63 percent, followed by service/support at 53 percent, and finally price at 52 percent, a 9 point decrease from last year.
Other key findings from this section:
- 34 percent of respondents say the level of support they receive from suppliers has gotten better in the past year, an 11 point increase from last year, while 13 percent say it’s gotten worse
- Perhaps due to the improved industrial economy, 91 percent of respondents say their suppliers have increased prices over the past year
- Of that previous 91 percent, more than 34 percent of respondents say suppliers have offered co-op advertising/marketing as a means to help reduce costs, closely followed by new product innovations (just under 34 percent), reduced shipping fees/drop shipping (29 percent) and technical assistance (27 percent) as other top methods
- Only 28 percent of respondents say they install/maintain vending machines at customer locations, and more than 79 percent of those that don’t, say they do not intend to offer vending machines
Value of the Distributor
Our Value of the Distributor section features internally focused questions asking respondents to evaluate themselves on an operational-basis. Distributors know they typically can’t compete with direct-to-consumer manufacturers and retailers on price, which is why price usually falls only middle-of-the-pack among the options our respondents pick as reasons customers do business with them.
And despite the role of digitization growing more every year, distributors seemingly always will value relationships and services above all else. More than 81 percent of our respondents say relationships are the top reason they earn business, a 6 point decrease from last year’s survey, but still the most popular selection. Product availability was second at 76 percent, followed by technical support (66 percent) and delivery time (62 percent). Price (53 percent) was fifth out of nine options.
Other key findings from this section:
- 52 percent of our respondents say they are providing unbundled services to their customers for a fee—up 5 points from a year earlier
- More than 67 percent of respondents charge for shipping—by far the most common fee-based service
- Other top fee-based services: set-up/installation (31 percent); design/engineering consulting (29 percent); fabrication/kitting (28 percent); and employee training (24 percent)
- 40 percent of our respondents say between 1 and 10 percent of their revenue come from value-added services—down 10 points from our 2018 survey; 23 percent see 11 to 20 percent of revenue derived from services, up from 15 percent a year ago
- 49 percent of respondents are involved with vendor-managed inventory programs
- Most our respondents—54 percent—are not involved with a buying group or co-op—down 6 points from our 2018 survey; 22 percent are in a buying group; 6 percent are in a co-op; and 17 percent are members of both
Industrial distribution still tends to be a baby boomer driven industry, which makes recruiting new talent a bigger challenge each year. Millennials became the largest generation in the U.S. labor force in 2016. Distributors have been forced to modify their hiring techniques to match millennials’ desires, and many companies are struggling to adapt. Compounding this challenge is a resurgent U.S. economy and lower unemployment rates—reducing the available applicant pool nationwide.
Asked if they are typically able to find suitable job applicants for their company, more than 60 percent say yes, about a 5 percentage point increase from last year. From 2016 to 2017, we saw a 5 percentage point decrease.
Other key findings in this section:
- More than 56 percent of respondents say they have added staff in the past year—while almost 26 percent anticipate the need to add staff in the next year
- Nearly 11 percent reduced staff
- For respondents that added staff, the most popular job categories were sales (59 percent, down 12 points); warehouse (48 percent, down 6 points); customer support (nearly 46 percent, up 14 points); administration (32 percent); and operations (27 percent, down about 8 points)
- For the small percentage of respondents who reduced staff, the top job categories for reductions were clerical (38 percent) and warehouse (34 percent)
- 59 percent of respondents rate the importance of hiring technically trained employees as very important; 38 percent rate it as somewhat important, while only 3 percent rate it as non-important, down 3 points from last year
- 45 percent of respondents say their number of sales reps has increased in the past year, while only 8 percent say they’ve reduced sales reps, down more than 5 points from last year
- When asked which means of employee retention respondents use, higher pay/pay for performance was the top pick at 67 percent, down 10 points from our 2018 survey; improved benefits package (43 percent) shows an 11 point decrease from last year, while training (59 percent) remains the same
- More than 78 percent of our respondents offer health insurance coverage to employees, a 9 point decrease
- Out of 13 options, the other top benefits respondents offer include bonus/compensation programs (70 percent) and 401K/pension (66 percent), both of which showed a slight decrease from 2018. Other top selections include sales performance reviews (45 percent, a decrease of 9 points); training programs (46 percent, an increase of 8 points); profit sharing (38 percent, an increase of about 7 points); and tuition reimbursement (38 percent)
We ended our survey with an open-ended question asking respondents if there are any other issues they see as relevant to their businesses. Most of the responses centered on new technologies and employment concerns:
- “My business has been manual for years. Now the need to automate certain processes is high.”
- “Once we fully establish our online presence, things will get better.”
- “Technology deployment and ecommerce issues.”
- “It’s important to hire technically capable employees.”
- “Employee motivation leads to higher staff performance.”
- “Retaining employees that we have trained is an ongoing issue.”
- “Lack of adequate financing to conduct all business.”
- “The need for branch offices in certain areas.”
- “Compliance issues.”
- “We need more support and total cooperation on supply.”
Note: All percentages cited in this article have been rounded to the nearest whole number.
A version of this article appears in the June 2019 issue of Industrial Distribution.