Join us for the upcoming Profit and Productivity Summit for Distributors Nov. 11-13 in Chicago.
The Best Story in Distribution
One of my favorite sayings is, “Those who say it cannot be done should not interrupt those who are doing it.” Variously attributed to Confucius or George Bernard Shaw, it’s probably from neither and yet it’s insightful, pithy and highly applicable to distributor profitability.
When I joined White Cap in 2010, the construction supplies distributor’s sales were about $850 million, and we were running a negative EBITDA. Enter John Stegeman, who was hired to lead the company a couple of months before I showed up. Soon after taking the helm, John began proclaiming, “I think this can be a 10% EBITDA business.”
Because John was the president, not many people interrupted him to explain why such an EBITDA percentage “cannot be done,” but it was evident in the eyes of many leaders that they thought John was just dreaming.
One person who agreed with John was Mitchell Jacobson, who was (and is) the chairman of MSC Industrial and was on our board at the time. Mitchell used to say that “White Cap is the best story in distribution,” and when two powerhouse industry leaders like him and John take the same position, you should listen.
And they were right:
When I left White Cap in 2017, the company was consistently producing an EBITDA over 10% and had grown by a CAGR of 15% for seven years to reach well over $2 billion in sales. This growth was nearly all organic, meaning the company had driven profitability and sales up dramatically and consistently, year after year.
Since I left, a lot has changed: John is now the chairman, Alan Sollenberger, who was the CFO and COO during my time there, became the CEO, and the company has grown even faster while retaining most of the executive team that created its previous success.
John and Mitch were right: White Cap turned out to be one of the best stories in distribution – ever.
The “4 Ps of Marketing”: One of These is Not Like the Others
Legendary marketing professor E. Jerome McCarthy coined “The 4 Ps of Marketing” in 1960; this is now widely known as the “marketing mix.” It’s very easily applied to distributors:
- Product: That’s the stuff you sell, whether it’s a service or actually a product. You need to have the right products for your customers; that’s a requirement to be a distributor.
- Place: This means having products in the right locations when customers need them. This is very much an expertise of excellent distributors and requires outstanding inventory forecasting and management skills.
- Promotion: This is how you generate demand – marketing campaigns, account managers, ecommerce promotions, branch displays, catalogs, etc. Customers must know what you sell to consider you a potential supplier for a need.
- Price: Oh man … this is the one many distributor employees get wrong. Price is not something nice you do for customers. Price is how you get paid back for all the OTHER great things you do, such as having the right products in the right place when customers need them!
Price is Not Something You Do for Your Customers!
I’ve ridden along with many account managers and have listened in on countless calls with ISRs. Very often, I watch in horror as the person I’m monitoring gives away discounts the customer isn’t asking for. I remember sitting in the office of a distributor once listening in as a customer placed an order. The conversation went something like this:
Barb: “Thanks for calling Cut-No-Slack Supply. This is Barb; how can I help you?”
Customer: “Hi Barb. This is Bob from Crazy Legs Manufacturing. I have an order to place.”
Barb: “Go ahead Bob.”
Bob: “Okay, I’ll take 10 of item number XC148R.”
Barb: “Hmm…okay, those are normally $112.53 each, but I’ll give them to you for $91.68.”
Bob, obviously correcting the price he already wrote down on his PO: “Okay. And I need 6 of stock number RD400F.”
Barb: “Let’s see, those are $268.70 each…I can give those to you for $220 even.”
And on and on and on through all 12 SKUs. This customer was clearly just calling to place an order – he already had the PO filled out and never once asked for a discount. When the call was over, I asked Barb why she had discounted every line item and her answer was illuminating: “Bob’s a good customer, and I like to take care of him.”
And that’s one of the problems with margins in many distributors: Barb viewed pricing as something nice she could do for her customers instead of how she got paid back for everything else she did!
Solving the 4th P in the Marketing Mix
You can tackle this problem through tightening up your policies, reducing pricing flexibility in your systems, by educating your sales and service personnel or all of the above. At White Cap, we did all of these but the clear emphasis was on education.
John became the lead evangelist, encouraging people to “claim your value.” With the help of a good pricing team and the rest of the leadership team, we changed the way our sales and service people thought about price – as a measurement of the value we added to customers instead of something we gave away.
We also changed a lot of bad habits, like marking up “on the 5’s,” – cost plus 15%, 25%, 30%, became cost plus 17%, 27% or 32%, for example. We taught, “When it’s low, let it go,” meaning there was no point in reducing prices on small orders because they were convenience purchases for most customers.
But the most important task was reframing the definition of price in the minds of our customer-facing personnel.
Here are Other Levers Distributors Can Pull to Control Margins
Changing Customer Mix
Like many sales-driven distributors, most of our effort was focused on large customers. However, our smaller customers were often a thousand basis points more profitable, so we made a concerted effort to grow these accounts while making sure we didn’t take too much of a hit on transaction size which can drive up service costs. Your company can do this, too; are you trying?
Purchasing, Rebates and Co-op
I’ve written about this recently, so I’ll be brief here: Decentralized purchasing brings insidious hits on gross margin from poor cost negotiating to poor tracking that results in missed rebate and co-op opportunities. This is entirely within the control of a distribution company. At White Cap, we added a professional purchasing department, which radically transformed our costs.
Category Management
A sound and strategic category management function can not only rationalize your existing offering and drive profit gains through product line reviews, but can also help you add more profitable categories and create private label programs. White Cap became one of the nation’s largest distributors of safety products, which sold a much higher margins than most of our other lines. We also carefully and selectively added private label products where it made sense, and these improved margins, too.
Cost to Serve
While White Cap didn’t fully explore or implement cost-to-serve software, we did pay attention to service costs, including sales force and delivery productivity. Some distributors tend to view these as “sunk costs” rather than levers they can pull to improve overall profitability.
What’s in Your Control?
John drove our whole company to align around a new view of profitability: We deserved the profit we earned, we had control over it, and if we worked together we could achieve a double-digit EBITDA in an industry where many assumed that wasn’t possible. But he also listened carefully to a wide variety of perspectives and put in a place profit-improvement initiatives that paid off over several years.
White Cap’s profitability wasn’t event-driven or an aberration; John, Alan and others changed the company’s business model so it produced better profits.
Every company is different but what is consistent about high-profit distributors is the mindset: They believe they have control over their profitability and they analyze every operating metric – not just gross margins.
If you want to learn how to do that, you should join us at our upcoming conference, the Profit and Productivity Summit for Distributors, on Nov. 11-13, 2024, in Chicago. If you can’t make it, send someone. This is the fastest way to understand the technologies and best practices you need to transform your company’s profitability.
What could possibly be a better investment of your time and money than learning how to make your company more profitable?
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at iheller@distributionstrategy.com.