The pandemic has produced no shortage of articles telling you that the world has changed, and we should all prepare for the “new normal.” While the “new normal” will undoubtedly change many aspects of business, waiting for it does not address the problems and demands of today. This is especially important for the relationship between manufacturers and distributors and the special requests that will come as a result of uncertain times over the next 24 months.
We put together a list of challenges associated with distributor special requests and best practices for addressing them. While every situation is different, these steps can help you navigate your own distributor/manufacturer relationships.
The economy will come back, and the drama will pass. Different markets will see different recovery rates. If you are serving the manufacturing industry, some are already in their recoveries and some will be forced to wait it out until early 2025. Why the large range? Simply put, it depends on what end-user markets their products serve and support. Those that sell to the hospitality, entertainment and recreation markets will have a long wait.
Action Step: Evaluate your distributors by the end-markets they serve to determine their time to any reasonable recovery. This will have an impact on how you will or will not support their requests. While all distributors serve a range of markets, the majority have a market focus or sweet spot. This only needs to be approximate for the decisions that will be made over the next 24 months.
The second key idea when thinking about the big picture is that the major growth driver over the next 24 months will not be the economy. This will follow the pattern we saw in the Great Recession where share shift became a much larger driver than core economic growth. Share gains between 2008 and 2011 were made up of acquisitions, incumbents exiting the market and customers changing suppliers. Often distributors changed their alignment with their strategic suppliers, as well. The whipsaw aftershocks of supply chain disruption have loosened and will continue to loosen what were stable trading relationships.
Action Step: Reevaluate your go-to-market strategy to ensure that you can react quickly to the opportunities created by the pandemic. Because things are moving much faster, speed is a weapon. At a minimum, build a list of distributor partners you may want to change or upgrade. Make sure that your list has a sober assessment of their survivability through the cycle. If the list is already built, your reaction time will be much quicker when an opportunity arises.
Those manufacturers that continue to be myopically sales-driven will probably have one or two significant write-offs over the next 24 months. Remember that everyone is dealing with increases in their receivables, and for distributors it may be significant. Many manufacturers with distributors on Vendor Managed Inventory (VMI) platforms accidentally loaded up their channel partners in March and April. It created cash flow issues for the distributors and effectively shut down ordering as they bled the inventory in a dramatically weakened market.
Manufacturers will need to make some accommodation and provide support to their distributors. The way to answer whether you do this is to decide if you are playing a short game or a long game. Both are legitimate depending on your strategy.
If you are playing a short game, hold the line on terms and let the strong survive and the weak perish. The only risk in this, and it is probably a small one, is that you may lose a distributor you wish to retain because one of your competitors has decided to use receivables as a competitive weapon to upgrade their channel partners. The swap goes something like this: The competitor offers extremely attractive terms but requires a changeout of shelf placement and promotion with some kind of deal-breaker fee.
If you are playing a long game you are trying to perfect your set of distributor partners at the point of a market recovery, not today. You supply some relief to the distributors with strong balance sheets that are driving your growth. You should create policies and make decisions on who and how you will help, and who you won’t.
Remember that every company that will end up in bankruptcy is persuasive in the months before the end asking for extended terms and relief. Those that provide it will have to deal with write-offs.
Action Step: Use an early credit-risk monitoring service, knowing their limitations, and build a list of your distributors and segment them by survivability risk. Make sure that your sales force is involved and understands the consequences of failing to share emerging concerns early enough to avoid a write-off.
In any recession assets are reduced in market value. When supply exceeds demand there is always a fair amount of frothy and knee-jerk discounting. Most of this happens in the early part of the downturn and then things settle again. This pattern will repeat in the economic aftermath of the pandemic.
If a firm has an unrealistic stretch goal and the sales reps are driven into a frenzy this discounting can easily exceed what may actually be required by the market. When a customer is getting quotes from multiple distributors, it is their responsibility to their employer to push for a lower price. In the distribution industry there is an old saying that the dumbest competitor in the market controls pricing.
Even if you have solid market-based analytics to determine pricing, you will still be subjected to brinksmanship as large orders are shopped around. An intelligent business must sometimes say no to an order.
Action Step: Examine your sales activity monthly. Make sure that you are losing an occasional order on price. Expect it and manage it, because the fear of losing an order in a weak market drives most discounting when salespeople are involved in setting prices. This emotional fear causes more discounting than what is required by the market. If you are not losing the occasional order, your margins are too low. It is a cosmic law.
Remember that the desperate folks who took business from you on the basis of price will likely fail to maintain the same service levels and fill rates. As a result, some of that business will come back.
As a starting point in any major disruption, be sure that every potential acquisition target is reminded of your interest. Don’t pay 2019 multiples and realize that probable purchase prices are likely to decline over the next year, independent of uninvested private equity capital sitting on the sidelines. Playing out an acquisition strategy in these times will be another blog, but there is a very specific issue around an unintended consequence now.
If you have open distribution this is not an issue. Open distribution simply means the more the merrier. If your go-to-market strategy relies on selective or single distribution then acquisitions create both a significant risk and also an opportunity. If you acquire a competitor or a firm that is complimentary, the probability is that they have their own distributor network that is coming along for the ride. You are challenged to merge and rationalize these two networks.
We have been supporting clients in this area for a long time and have observed the following:
- The acquiror distributors survive much better than the acquiree distributors.
- The rationalization process is normally driven by the senior sales executives in the acquiror firm. Their selection criteria are fuzzy or non-existent, so existing relationships and purchase volume carry the day.
- Whether we are consulting or arbitrating in a termination contract dispute, we have found that the senior sales executive has a very hard time defining the criteria for choosing one over the other. The typical approach is to tell the two distributors to fight it out and the best will survive. This fails to look at the value each distributor brings to the supplier. Some are very good at market serving while others are good at market making. Every manufacturer should value both, and this could be a selection criterion.
Action Step: Create a few simple distributor criteria that are aligned with your strategy. Then get every sales representative to present their ideal lineup of the best distributors for their area of responsibility, including their rationale. This helps define a true North when faced with the time pressure of integration.
Most importantly, treat distributor integration as a core element of any acquisition so it is done on the front end and not left to the last minute and dumped in the lap of the sales team. The right way is to be public with both sets of distributors about the timeline and process on integration. The worst thing to say is that nothing will change.
If you are faced with consolidating two distributor networks, it is a perfect time to seriously consider adding Amazon or another digital channel.
Where to Go Next
None of the situations above are bad in and of themselves. Instead, they present opportunities for manufacturers willing to take advantage of them. For example, if you have been discussing a channel realignment or go-to-market strategy change. Now may be a perfect opportunity as forces outside of your control continue to have their impacts.
Remember, in uncertain times, speed matters. The more you can prepare now for special requests, the better you will be at reacting with speed and decisiveness. The firms that will win will often be nothing more than the first movers, willing to take a risk.