Big Strategies for Big Distributors

If you don't know where you're going, any path will take you there.

• By Brent R. Grover
• Aug 01, 2013

Do your employees, suppliers, customers, and competitors know what your strategy is?

1. What we do -- and don't do -- is crystal clear to those who know our company.

2. Our strategy is a closely guarded secret. No one outside of our inner circle knows.

3. We don't really have a strategy. We're just trying to grow and make money.

My friend Jonathan Byrnes of MIT says that a company's strategy is defined "as much by what it doesn't do as by what it does." I would add that many distributors are notorious for lack of focus. Evergreen Consulting's experience facilitating strategic plans for distributors shows that management is highly reactive to what customers ask for. The distributor responds to whatever business "comes over the transom." There isn't much discipline about which customer segments, products and services, and geographic markets the business will invest in, those it will harvest, and others it will ignore.

Publicly held wholesale distribution companies provide a window into the inner workings of distributor strategy in several trade lines -- Wesco in electrical, MSC in industrial products, and Applied Industrial Technologies in bearings and power transmission, for example. As the largest distributors continue to expand into new lines, their product focus has blurred. Grainger (once a specialist in electric motors) and Fastenal (originally fasteners) started out with narrower lines but have blossomed into many other products and services. Others have become more of a processor than a distributor (Olympic Steel) or are also in non-distribution businesses (Genuine Parts owns Motion Industries; Kaman and Barnes Group own distributors and other businesses).

This article is about distributor strategy, so at the outset I am going to concentrate on two public companies that are "pure" distributors and one diversified company that is making a strong move into distribution with a clear strategy. I'm describing strategic distributor moves being executed by three publicly held companies: Fastenal, Grainger, and Amazon Supply.

Fastenal
Fastenal is a hard charger in wholesale distribution that has exploded out of its niche to become a major player:

• Fastenal operates more than 2,650 stores (wholesale + retail = "wholetail"?). The company opened 73 new stores during the first nine months of 2012.
• Under its "FAST Solutions" banner, Fastenal has placed more than 17,000 industrial vending machines in customer locations. The firm installed 9,650 machines in the first three quarters of 2012. Plans call for 30,000 more placements in 2013.
• The machines dispense products such as cutting tools, fasteners, and safety supplies.
• Coin-operated vending machines were used to sell chewing gum as far back as the 1880s and were introduced in distribution in the early 1990s. Technology that enables machines to signal the distributor for replenishment has made the machines economically feasible.
• Nearly 18 percent of Fastenal's total sales in the first quarter used the vending machines. Competitors may no longer refer to industrial vending machines pejoratively as "candy machines."

Fastenal is executing these distinct strategies simultaneously. One is building out its enormous network of “whole-tail” stores. The other is installing thousands of sophisticated vending machines at customer locations.

Grainger
W.W. Grainger is an old-timer in the distribution business, but the company certainly doesn't show any signs of its age:

• Last year, more than 25 percent of Grainger's sales came in through the Internet. The company predicts that total to exceed 50 percent within a few years.
• The company recently introduced a mobile app to provide full access to the Grainger website from customers' smartphones and other devices. The capabilities include a voice search function and an integrated workflow system.
• Grainger's private label brands, including Tough Guy, Westward, and Dayton, comprise 20 percent of company sales.
• The company's famous catalog has grown in recent years to offer more than 500,000 products. The catalog included only about 80,000 products as recently as 2005.

Grainger is executing multiple strategies. One is leveraging its extraordinary logistics capabilities with tens of thousands of new products, including private label brands. A second is innovative electronic commerce. Another is rapid overseas expansion with acquisitions in Europe, Asia, and Latin America.

Amazon Supply
For distributors, Amazon Supply (amazonsupply.com) is the new kid on the block:

• Amazon launched its entry in 14 major product categories with 500,000 stock items, including many of the top brands in the various industries. The service offering is backed up by two-day delivery, free freight on orders over $50, and a 365-day return privilege. Corporate charge accounts and phone support are available.
• Amazon Supply brings Amazon's patented "One-Click Ordering" and the incredibly successful "Amazon Prime" customer loyalty program to wholesale distribution electronic commerce.
• Which competitors is Amazon Supply targeting? The benefits for unplanned purchases of MRO items are apparent. The threat to sellers of supplies to contractors is less obvious. The exposure may be greatest to Grainger, which does much business with small customers and handles small orders for all kinds of customers. The big box retailers such as Lowe's and The Home Depot may also be affected. In any event, Amazon Supply's flexible strategy is ready to meet the unpredictable needs of new types of customers in the future.
• Amazon is well known for its ability to test, perfect, and implement breakthrough strategies.

Amazon Supply is bringing its extraordinary "B2C" electronic commerce capabilities into the wholesale distribution channel. The powerful attack is being waged on multiple fronts with a barrage of offerings.

These three large companies are in different stages of development in their presence in the wholesale distribution channel. While there are many things going on beneath the surface, note that even these leviathans are concentrating their efforts on a fairly small number of strategic initiatives. They are executing relentlessly.

Get Big, Get Specialized, or Get Out
Moving on to the second part of this article, which of the following options most closely describes your plans for your company?

1. We're mostly trying to grow so we can stay big enough to have a seat at the table.

2. Size isn't our main goal. We are a specialized distributor that "flies under the radar."

3. We are trying to build up our profits so we can sell the business for a good price.

Business owners tend to do a lot of soul-searching as the end of the year approaches. Did I achieve my goals for the past year? What do I want to do with the company in the coming year? The big question for effective business leaders might be, "Is the business a better company today than it was at the beginning of the year? What can I do to make this company better next year than it is today?"

Now that your business plan for 2013 is well under way and, one hopes, is on track with your company's strategic plan, I have a suggestion for you: Close your laptop and forget about the spreadsheets, flow diagrams, and graphs. Pour yourself a glass of your favorite beverage or step outside by for a brisk walk by yourself. Take a deep breath and ask yourself three questions:

1. Is your distribution company big enough to compete effectively? Do you have the needed buying power to attract the right suppliers and get the best prices? Can your business continue to attract great managers and sales people? Do you have the critical mass to meet the growing demands of your customers, employees, and suppliers?

2. If you are simply not big enough to have "scale," is your business adequately specialized to compete effectively in the niches you have carved out for yourself? Are your small specialty areas growing fast enough to sustain your company? Can you maintain your distinctive advantages so you can avoid having to go head to head against bigger players?

3. What will you do if your company isn't big enough, or specialized enough, to continue to thrive? Are you doing everything you can to build up the value of your business in anticipation of a sale, or are you going to preside over a gradual liquidation of the company?

1. Get big. How much sales revenue is needed to be big enough to compete? The answer demands on your line of trade and upon your geographic market. Many smaller distributors have devised ways to have the "look and feel" and critical mass of a much larger company:

• Most independent distributors are members of buying groups to leverage their purchasing power. Some of these groups are highly effective.
• Some buying groups offer importing programs, centralized warehousing, and private brands for their members. Again, some of these groups are very successful.
• Groups of competing distributors are using technology to share inventories.
• Some enlightened non-competing distributors are sharing warehouse locations to enable local presence in more markets.
• Distributor groups have found ways to share customers through integrated supply programs, as well as national account contracts serviced by multiple distributors.

Simply striving for growth is too difficult for most distributors. Rapid growth requires a great deal of capital, management capacity, patience, and tolerance for risk. Distributors have other options to provide the advantages of scale.

2. Get specialized. Historically, the driving force for distributors has been customer intimacy. The hallmarks of customer intimacy are either a close understanding of the customer’s business needs or a highly specialized knowledge of how products are used. Either way, the customer-intimate distributor is in a position to solve customer problems quickly. The distributor often can help regular customers anticipate and avoid problems.

• By combining both their knowledge of their customers' operations and product expertise, a strong distributor can get the first opportunity to provide solutions and win more business.
• At best, great distributors help their customers earn more profits through growing sales, reducing costs, and lowering asset levels.
• These protected niches tend to be exposed more readily by technology (the Internet, for example) and by financially motivated customers who place less value on long-term problem solving and more emphasis on immediate cost reduction.

Distributors realize it's getting harder to harder to just "move boxes." Larger customers are looking to concentrate their purchasing power by buying multiple product lines from the same distributor.

3. Get out. Evergreen Consulting has advised many distributors on buying and selling companies. We urge "acquisitive distributors" to be cautious about buying damaged companies, and we implore would-be sellers to make sure their business is as attractive to as many buyers as possible:

• Buyers look for a dependable stream of future earnings and will pay accordingly.
• Buyers try to avoid integration risks and will dig for them in due diligence. They will reduce the amount they are willing to pay, or they'll walk away if they foresee too many problems.
• Some sellers tend to value their company based mostly on how much they will need to support themselves after they retire. They must concentrate instead on the value perceived by the prospective buyers.
• Sellers usually need help to find the right buyer and to structure and close the deal. Also, the company's regular accounting and legal advisors may not have the experience needed to assist the seller on a large transaction.

Preparing a business for sale at a good price is a long-term process often spreading over three years or more. For most distributors, quite a few gaps require major repairs before the company is ready to be shown to a prospective buyer.

These three options for distributors, get big, get specialized, get out, aren't necessarily mutually exclusive. Some companies work on growth and specialization at the same time. Many distributors are quietly planning for the upcoming sale of their company. As an outside advisor, I have the greatest confidence in companies who are trying to do one of those things well rather than all three halfheartedly. I worry about those who are doing nothing.