Year end is a time of reflection. For 2012, I’ve attempted to both inform and warn distributors about significant changes in B2B customer buying habits including use of e-commerce, use of handheld devices and growing acceptance of nontraditional distributors in the PHCP space.
This year’s blogs can be reviewed here . The gist of my writing concerns bundling services with products where the majority of services and products are commodities. When this bundling occurs, we typically find where 40% of the accounts deliver 140% of the operating profits of the wholesale firm. Looking at this another way, if the wholesaler employs 300, at any one time 180 folks are doing work for accounts that don’t add one nickel to the operating income.
Traditional wholesaling bundles services, labor, products and typically cost plus prices to deliver an average 2.5% return on sales. This bundled model worked well back in the day when information was difficult to get, delivery services were limited and the customer/seller interface had to be synchronized to be effective. Today, however, advanced logistics, better information flow due to the internet, e-commerce where selling and ordering can be asynchronous and detailed costing models that accurately estimate labor by transaction type all mean the bundled model is in trouble. Why?
To answer the question, I’ll use a fairly new entrant in the wholesale marketplace: Amazon. Amazon Supply is a recent entrant in the $120 billion MRO market in North America. Our review of its transaction costs using publicly available information and vs. Grainger finds that Amazon can process a standard stock transaction for some 60% to 70% less than Grainger. How? Amazon has no traditional branches, outside sales, inside sales and branch managers. In essence, its operating cost is low, typically much lower than most traditional distributors, and it passes along a fair portion of its cost advantage to the customer.
Amazon has been successful in hard goods retail markets in unseating traditional brick- and-mortar companies and it’s likely it will be successful in distribution markets — especially with commodity products that are easily stored and shipped. A recent study by the Boston Consulting group, on various commodities sold by distribution, finds that, more often than not, Amazon can beat traditional wholesaler prices by 25% on average. This pricing advantage is common among transactional distributors and has been cataloged by a number of studies.
Amazon is only one of a growing number of wholesalers we’ve termed as transactional. The transactional distributor is increasingly found in product vertical markets, and we recently found where an entity in the Upper Midwest scored a significant coup against a traditional PHCP bundled service distributor. We believe that there is significant room for transactional distributors or usage of transaction-based strategies in most traditional distribution circles.
Topics such as driving efficiency of solicitation efforts, streamlining and limiting services and products and taking cost savings to the customer will become more commonplace. Wholesalers who believe they can perpetuate a bundled, full-service model without accurate cost of service calculations and tough decisions on which services and products customers can do without aren’t dealing with reality where competitive operating structures are mandatory.