The Value of Independent Distribution

Since 2001 National Industrial Distributors have largely replaced small, single-location Independent Distributors. After taking a short break due to the economic downturn of 2008, the consolidation of Industrial Distributors through acquisition has continued to accelerate.

In the last ten years, large, publicly-traded Industrial Distributors, like MSC Industrial Supply, DXP Enterprises, and private companies like DGI (DoAll) and BlackHawk Industrial have acquired dozens of Independent Distributors. To monetize these acquisitions, the strategy for these companies is similar; consolidate vendors to leverage buying power then pressure these vendors to support their operations. Usually, this support comes through enhanced Rebates, Training Programs, and Discounts. This support, ideally, creates a mutually beneficial relationship – a relationship that a small Independent Distributor is unlikely to match.

Small, Independent Distributors have other attributes. Understanding the qualities that set them apart allows Independent Distributors to align their strategy better and overcome their challenges when competing with larger companies.??

Independent Distributors bring value to customers and manufacturers by offering 5 Key Attributes that the larger companies are unlikely to match.??

Decision Makers are closer to Customers and their Issues?

Independent Distributors are likely to have frequent contact with customers; this results in both the Distributor and the Manufacturer improving products and services to meet customer needs. For manufacturers, this is most acutely demonstrated by the strong resistance for large Distributors to hold stock for individual customers regardless of how such an activity could improve margins or sales. A?Carr?Lane?Mfg.?(CLM) Distributor saw its sales decrease by nearly 30% after being acquired by a national firm. That firm significantly reduced the amount of inventory they could carry. While unhappy, their sales declined at a single site; the national Distributor believes that such restrictions were necessary to ensure success at all locations. Further common examples include special pricing/discount needs for specific customers and extended payment terms.??

Specialization?

Focusing on a single industry or product vertical brings improved Distributor employee knowledge. Large national Distributors rarely have a sales team that includes specialized knowledge, especially when that knowledge is about a non-consumable product. This improved knowledge provides customers with enhanced service and value through enhanced application knowledge, reduced costs, and reduced time spent searching for solutions. The benefit of such specialization is seen every day at CLM. Our most successful Distributors are not those with a dozen locations in several states but focused, targeted Independents who know their market through years, or decades, of focus.??

Reduced Competing Lines?

National Distributors frequently create programs or incentives for their salespeople to emphasize a specific line within a product vertical. Despite this emphasis, national Distributors are likely to have virtually every line available. Reducing the number of lines sold allows for improved Distributor salesperson knowledge and results in a more significant investment of manufacturer sales resources due to the reduced potential for line conflict.??

Speed of Decision-making?

Suppose a National Distributor has an opportunity to win some new business but must get approval for something like low margins or increased inventory. In that case, they are likely to need to seek the consent of a corporate manager. Independent Distributors frequently have a much shorter path to such decisions. For customers, the speed of the decisions can often be as important as the decision itself. Consider a customer who has a quote and the price is a bit higher than they expected. The first Distributor that agrees to lower the price is likely to win the order even if a national Distributor has larger initial margins than the Independent.??

Employee Tenure?

Reduced employee turnover builds knowledge in products and organizations, especially between Distributor and Manufacturer sales personnel, resulting in improved personal relationships and trust. Training programs offered to National Distributors can educate many salespeople. Still, if Manufacturers must conduct training frequently, due to high turnover, how much of that training makes it to the customer? Longer tenure also builds significant knowledge between the Distributor and the customer – a substantial advantage at larger accounts.??

These attributes bring real value to manufacturers that nationals are unlikely to match. Why then do manufacturers continue to work with Nationals? And offer them preferential discounts and treatment?

Independent Distributors rarely drop a product line from their offering and therefore never punish a manufacturer for preferring National Distributors over Independents.??

Consider the manufacturer's perspective; they are virtually required to co-operate with the National Distributor. Not doing so would not only potentially interrupt the supply of their goods to existing customers, but they might want to become the preferred vendor in their vertical to grow their sales.

For the Independent, more confounding is when manufacturers also sell through large digital commerce sites like zoro.com and amazon.com, to mention two; manufacturers may not even control the prices charged for their goods on these sites.??

The only reasonable option for Independent Distributors is to only represent manufacturers who have a clear distribution strategy that values them and their contribution. Independent Distributors must become more willing to stop working with manufacturers that rely on them to develop products and markets but reward and incentivize national Distributors to take the order.??

Independent Distributors should consider the following attributes when determining if they wish to represent a manufacturer.?

Increased Discount by Sales Volume?

Sales volume directly correlates to the geographic area covered by the Distributor sales team. When manufacturers provide the largest discount to those, who sell the most products, they disregard geographic coverage, undervaluing Independent Distributors.??

Too Many Distributors?

Making a product available virtually everywhere benefits the manufacturer by allowing customers to purchase the product through their preferred channel. It also incentives Distributors to lower the margins to "poach" a large value sale for which they did little work, thus reducing margins; margins that, generally, favor the national Distributor.??

Co-Operative Marketing Programs that exclude Digital Marketing Assistance?

National Distributors have a digital footprint and associated staff that most Independents are unlikely to match. Most manufacturers also have dedicated staff to create digital marketing collateral and strategies. Manufacturers should recognize that Independents need their assistance in the digital space, and not sharing these resources down to Distributors impedes Independent Distributor Digital Marketing efforts.??

The Bottom Line

Independent Distributors must recognize that selling products from manufacturers who do not recognize their value and help them address their challenges may not be ideal partners even if that manufacturer is a significant source of sales volume. Independent Distributors who continue to carry lines that appear to prefer?National Distributors may find themselves increasingly squeezed from programs and promotions until they bring little value to customers?and manufacturers.?