Lessons from the Wholesale Distributors
A marketing vice president for a middle markets household appliance manufacturer recently told us he thought American manufacturers could easily go by way of the wholesale distributors (e.g. out of business) if they didn’t figure out a way to stay relevant to their key customers. The rise of wholesale distributors began after World War II, and the demise began in the 1980’s, when a series of trends impacted traditional manufacturer, distributor and retail channels. Specifically, retail formats began to change and consumers left many traditional “dealer channels” to shop at the big box stores. Moreover, with more successful aggregation of demand, price competition increased as the big box stores became more efficient with their bigger volumes than many dealer channels. This aggregation play occurred across multiple industry sectors from pharmaceutical to industrial products to hardware and household appliances.
Successful distributors quickly learned that to remain relevant they had to be world class at one or two key functions: in most cases, either a logistics/supply chain function and/or a marketing/customer service function. We see parallels between today’s U.S. manufacturers and yesterday’s wholesale distributors.
Traditionally, manufacturers played four key roles for their customers: 1) they converted raw materials to finished goods 2) they provided a logistics function, moving goods through distribution, stocking inventory, palletizing or shrink wrapping as necessary etc. 3) they provided their customers with a brand (in the case of consumer packaged goods companies) and 4) they provided product innovation, or engineering services. Today, offshore manufacturing combined with highly demanding customers has fundamentally changed the four primary roles of manufacturers. How have these roles changed?
To begin, manufacturers are, from a cost perspective, finding it difficult to efficiently convert raw materials to finished goods. Many of these functions have been outsourced, typically to China or India. Second, the box chains such as Wal-Mart and Home Depot more effectively ship and move their own containers in and around the world. Wal-Mart even has plans to buy its own shipping fleet! This leaves manufacturers with two key functions to perform- building strong brands which consumers demand (again this mainly applies to consumer goods companies) and developing innovative products that Chinese or Indian firms are unlikely to copy or produce cheaply.
What are some U.S. manufacturers doing to prevent the erosion of their businesses? Like the successful wholesale distributors before them, they are learning to focus on just a couple of key areas and get out of the other services they currently perform. For example, our household appliance manufacturer recognizes that applying its standard 35% margin to all products either, manufactured domestically or in China will not be sufficient to satisfy their big box chain customers. Instead, these types of manufacturers have implemented strategies to “direct source” certain products and offer cheap direct import programs (completely bypassing expensive distribution) as well as use their engineering services “strategically” to develop special innovative products for key box stores. Moreover, many of these manufacturers have invested in their brands hoping U.S. consumers will still demand branded consumer products when they enter their favorite stores.
But what should U.S. industrial products manufacturers do to avoid the fate of many of the wholesale distributors? They too, must assess and focus on key functions be it product innovation, world-class customer service and marketing support, engineering design and expertise, or stocking, slitting, or product packaging to meet local requirements. Industrial products manufacturers can demand price premiums for certain value-added services. Like the wholesale distributor success stories before them, industrial products manufacturers must be able to quantify the specific value they provide and get out of the business services that they can no longer provide cost effectively. Manufacturers that refuse to focus on specific added-value business services will unfortunately, go by way of the majority of the wholesale distributors before them.