In the wake of COVID-19, there has been plenty of speculation about the role of distribution associations and how they must adapt to disruption, rapid digitization and the evolution of marketplaces, all of which were accelerated by the pandemic. Edward Gerber, President and CEO of Industrial Supply Association, had a thing or two to say about that when he joined us on the Wholesale Change Webcast and Podcast.
ISA has a mission to help their members navigate change. That’s why we invited Gerber to discuss the state of the industry in 2021 and how associations can act as guideposts for companies during uncertain times.
“The demise of any organization is predictable if they don’t evolve – whether that’s a distributor, an association, or a doctor’s office,” he said.
“As terrible as COVID has been for the world and humanity, it has allowed our association to accelerate and scale up what we had started prior to the pandemic in adding value for members throughout the entire year instead of only through an annual event.
“With virtual, we are driving engagement at scale, going deeper and wider within each company while expanding our global reach. Today we are in better shape than we were prior to COVID.”
Distribution Strategy Group: How is disruption affecting the distribution industry?
Edward Gerber: It’s a perfect storm. If you start from the end-customer’s point of view, there was major disruption taking place even prior to COVID, but COVID has accelerated it.
End-users are becoming extremely sophisticated in seeing the value of aggregating – buying more from fewer suppliers. Typically, the larger customers have thought more about aggregating their spend, but now it’s happening all the way down with medium and small customers. B2C is also coming into B2B with companies like Amazon offering an “easy button” for aggregating spend, introducing a disruption that drives value for end-users.
From the distributors’ point of view, they’re wondering how they can participate in this opportunity by looking at their product portfolio: Are they going to have a soup-to-nuts portfolio or specialists? More and more, distributors are moving toward service-centric offerings over product-centric. This is another form of disruption.
From the manufacturers’ point of view, they are also wondering how to participate in all this as their distributor partners become more service-centric. They’re wondering how to make sure their brand is specified at the end-user level.
Pile on work from home, managing productivity, and the challenges of keeping up team morale while sales people are working to connect with end-users in a meaningful way. New skill sets are needed, but there is a talent gap – how does the industry present itself as attractive to the next generation? It’s a big melting pot of disruption taking place and a challenge for all companies.
DSG: Regarding consolidation of suppliers at the end-user level, is that about reducing the cost of procurement, better pricing, or is there something else driving the desire to consolidate their number of distributors?
Gerber: Picture a scenario where a customer reduces a thousand of their suppliers down to one supplier; this lets them streamline their supply chain, leverage costs, reduce fragmented spend, reduce FTEs that manage the process, better manage their inventory, and even outsource obsolescence to their supplier of choice.
There is so much value-added benefit for a customer to buy more from fewer distributors that drops through their P&L to their bottom line. It also allows them to focus on core competencies. Plus, it’s no longer a pioneering effort. There are a lot of successful examples at the end-user level and those end-users are connecting with each other so it’s only accelerating.
DSG: We see disruptors like Amazon Business or Walmart.com selling industrial products, but it seems a lot harder for them to break into the industrial market than it is for them to sell office supplies and janitorial products. There is much more value-add potential in the industrial channel. Amazon’s services are not industrial as much as they are financial, yet there still seem to be sharks circling the edges. What are suppliers and customers saying? Do they view them as credible competitors or just nibbling at the edges?
Gerber: We discuss this topic a lot at our virtual roundtables with very large and mid-sized end users to determine if it’s really based on size and scale. Bother large and mid-sized end users say they value a true partnership in their business relationships where they can use their own ERP or purchasing platforms to aggregate and automate their purchasing function through their supplier base.
When asked about the Amazons of the world, customers say they’ll always keep their eyes on the horizon for better and more efficient processes, but they also emphasize the value of true partnerships. Their current suppliers are often helping them drive costs out of production onsite on the shop floor. It makes a huge difference.
Manufacturers selling through Amazon Business report that it is a very small percentage of their total business. Most of it is to understand and see how it works.
DSG: It seems that the tight traditional distributor manufacturer relationship is eroding somewhat with more and more suppliers selling direct and being willing to risk some channel conflict to sell direct or through other channels. Do you see that and if so, what’s driving that?
Gerber: We survey on this question continually in the industrial sector, asking manufacturers how much of their total sales go through distribution and what percentage goes direct. We look at how many distributors make up their active distributor profile. Over the last two or three years, we haven’t seen a decline at all. We see the percentage of manufacturers selling through distributors in the industrial space as 90+%.
To be honest, it’s not about the manufacturer or the distributor; it’s about the customer. And if the customer is saying that they want to aggregate by spending more with fewer suppliers, and a manufacturer is engaging in conversations about selling direct, that is a 180 degree turn from what the customer is looking for. A better conversation would be about how manufacturers can engage in more meaningful ways with the distributor and how to manage the channel.
DSG: Our surveys are broader and less specific to the industrial sector, but we’ve actually run two that showed a smaller percentage of manufacturers going through traditional distribution. we designed the question to capture what’s going to happen over a five year period and in both sets of data, we saw a 1,500 basis point drop of what’s going through traditional distribution. We saw a lot of it is going through marketplace and digital distributors, some of it is going through retail, and just a little bit was going direct.
Gerber: The manufacturing community is still selling through distributors, however the volume they’re selling through distributors is shifting. We’re speaking about a different version of the same topic. Even if 98% of a multibillion dollar manufacturer’s business is still going through distribution channels, the growth of their total distribution portfolio may be moving towards nationals, integrators and those with ecommerce capability.
DSG: If we accept the 1,500 basis point shift, that probably means that there is consolidation that’s going to happen, which is consistent in terms of customers wanting to aggregate.
Gerber: In the MRO space, it’s typical for end-customers to have thousands of suppliers, even if only a hundred suppliers make up the majority of the volume, resulting in a long tail. Customers are looking for a way to cut off the tail. This pushes distributors to consider carrying all the brands in a certain category in order to be considered a full supplier when previously they may have carried only one preferred brand.
Nobody cares if distributors have the products on their website as rich content if they can’t ship, deliver and service them. In MRO, the EBITs hover in the 2-3% range leaving little money to expand, so distributors are facing redeploying funds in different ways. They are asking themselves, is it better to merge? To consolidate? For distributors with a strategic mindset and funds, it’s a great opportunity.
DSG: It’s important for distributors to know whether they are a consolidator or apt to be consolidated. For consolidators, there are many companies that are going to be available this decade since there are capital requirements that some companies don’t have – consolidators should be looking for companies that have a good sales force and customer base to roll into their platforms.
Gerber: It’s also about complementary product offerings and geographic locations. A lot of these customers have multiple locations. Picture a $50 million distributor in Boulder, Colorado, with a major customer who makes up a big chunk of their business. If that customer wants to aggregate their spend with that distributor, they will begin asking them to supply other things that the distributor doesn’t currently have to multiple of the customer’s locations.
These are the logistic challenges requiring distributors to commit to product offerings and locations on a daily basis. COVID has brought on revenue pressures and gross margin pressures accelerating this kind of consolidation activity.
DSG: It doesn’t seem like there is a behemoth marketplace alternative like Amazon or Walmart pursuing the industrial space at all in terms of the value-added services like bin replenishment, vending, technical support, repairs, configurations or programming. The closest thing seems to be Grainger, right?
Gerber: Companies like Amazon Business are not order generators, they’re order fulfillment. They’re really good at logistics. At our end-user virtual roundtable, it’s so clear that the value-add for customers is what happens before the sale.
DSG: They can only take the product to the threshold of the business, even if their logistics are fantastic. Is it even possible for a non-traditional distributor to come in and scoop up industrial business the way Amazon is doing on the commercial side?
Gerber: With enough money, anything is possible, but practically, there has be to be a return. It’s a safer option for a business to think about what the competition could look like and build the strategy to make sure it never gets impacted by that. So, distributors should imagine if Amazon did decide to employ a bunch of people around the country and sign service contracts to do bin fulfillment. The barrier to entry would be very high. But this creates a real opportunity for distributors to solidify their value prop and grow their business through this time versus looking at it defensively.
DSG: Given the impact technology has, what role can associations take in helping members understand the various tools and platforms available? There are a lot of options out there – does the association have a role in providing advice or partnerships or resources to help members find the right solutions to their digital and ecommerce needs?
Gerber: From an Industrial Supply Association point of view, we believe we have a role to lead the channel forward. Considering the disruptions we just talked about and how most companies are very operationalized with training, there is a lot we can do around thought leadership. What’s coming around the corner? How should you move your organization forward? Our vision is to help the channel by leading it forward. If we can do that well, we will ultimately strengthen the industrial channel by strengthening each member company.
Our mission is to make sure we deliver content, education, strategy and tools that help the member company navigate change. And there is a ton of change going on right now. Our association focuses on major value drivers that we can bring together to provide thought leadership back to distributors, manufacturers and reps. Our virtual conference in April, ISA ’21, offers a lot of different elements related to digital and technologies to help with that.
DSG: Speaking of the long tail, are you seeing that distributor members are relying less on in stock inventory and more on drop-shipping? How are they differentiating?
Gerber: Imagine our $50 million distributor in Boulder, Colorado, who provides safety and cutting tools, and then suddenly they decide to offer welding supplies – how do they do that? They can create supplier relationships and drop-ship direct to get started quickly or go to wholesalers that have other products that round out their offering. There are also distributors stocking up their ABC high brands with a depth of inventory and looking at drop-shipping other items – there is a mix of all that.
The more distributors are drop-shipping products instead of stocking them, the more they must think about their value prop for their end-customers. Drop-shipping can be a good option if the value is there and it’s part of the journey for a distributor to meet the changes their end-users are driving.
DSG: Marketplaces like Berkshire Supply and others that are upstream rather than downstream serve small industrial distributors by building a website where they can add a bunch of their products to look like they’ve got this incredible assortment. When we talk to distributors, we don’t feel like this model is making a lot of headway in the marketplace. Do you have an opinion about the business model of aggregating supply rather than aggregating demand?
Gerber: The business model exists because the demand is there. Distributors are looking to round out their product offering, and going wholesale is a really powerful lever to pull on. The website is an added value for small distributors trying to figure out how to get into the game of an online world in a way to scale up quickly without a lot of cost and resources.
DSG: How can distributor members feature digital services like account self maintenance to processing returns to technical guidance and information in the digital era? Do you have distributors who have found success with online services by enhancing their traditional physical services with more online services? Is that a differentiator?
Gerber: Everybody wants an online store presence, but most are not seeing traction from online customers. But an online presence allows distributors to build rich content that connects with punch outs for their existing customers allowing them to become more operationally efficient.
Distributors are investing more in digital operational efficiency to allow that friction to go away for their current customers, using digital platforms to replace processes they would typically do manually like JIT replenishment or historical orders.
DSG: We agree that the whole purpose of a B2B website is not to try and sell the shopping cart – that’s a retail approach and it’s not how business buyers buy. There are many benefits that go uncaptured.
Do you see generational turnover among customers driving the same move towards digital in the industrial channel that we see in other markets like commercial?
Gerber: There is a real challenge for the MRO space in getting ready for the next generation. Demographics are changing; the next generation are digital natives who are much more sophisticated with technology and oriented around Diversity and Inclusion.
The No. 1 problem beyond strategy and digital is bridging the talent gap. Companies are struggling to attract the right talent, so we’ve created our first ever Diversity and Inclusion advisory task force of really sharp minds within the industry and outside the industry to try and figure out how to help members attract diverse incoming talent. It’s a major opportunity and a challenge.
DSG: I’m glad you brought up diversity. If distributors don’t have a diverse workforce, they can’t possibly have the best team. But it’s a horrible problem in distribution – there aren’t very many diverse teams. Tell us more about the mission of the Diversity and Inclusion task force.
Gerber: We started with a women’s advocacy group which has become one of our most successful groups. Our next step has been about bridging the talent gap to bring in a more diverse culture by working to bring everybody into the mix. It can’t just be an initiative or a strategy or it’s going to go away.
It’s not just about the customer value prop anymore, it’s an employee value prop centered around diversity and inclusion, purpose and culture. A lot of other companies are unfortunately checking the social movement box right now, but we see this as the holy grail to making the industry more appealing.
Our association is a reflection of our members – if diversity and inclusion doesn’t exist within the culture of our members, it’s hard for the industry to have the diversity and inclusion mindset. We’re trying to create the mindset that having diversity and inclusion is not only right thing to do as a person, but it’s really good for business.
Diversity isn’t just black and white or men or women or religion, it’s background and different ways of thinking. It’s about getting people around the table who look at problems differently to get to better outcomes rather than assembling an echo chamber that thinks the same way. It has to be a culture. We’re asking: How do we change the current culture and perspective of the industrial industry to attract talent in the next generation?
Even with all the unknowns of 2021, if association leaders can add year-round value to members with resources and thought leadership about digital transformation and bridging the talent gap, they’ll be well poised to sustain for years to come. Learn more from Gerber and the good work he and his team are doing at ISA and their mission to lead the distribution channel forward by reaching out: [email protected] or visit isapartners.org.