Manufacturers: What’s Happened to Your Market Access?
Most industrial manufacturers go to market through traditional distributors to serve the MRO market. Some customers are sold directly, often large end-users or OEMs. Recently, many have also become involved with an web-direct channel.
We know market access starts with coverage, but do all your potential customers see you how you want to be seen?
Over the past several years, B2B customers have been changing how and where they source products. A short list of factors driving this change includes:
- Buyer demographics that are trending younger
- Decreased value placed on personal relationships
- Increased price transparency due to technology
The growing transparency in pricing has also uncovered many cross subsidies that, when exposed, break. This results in reliable integrated supply chains that commoditize product differences and increase competitive intensity with new competitors entering the market.
These forces have placed pressure on every channel partner in the industrial product value chain. As an analogy, consider that the manufacturer makes the hot dog, and the channel provides the bun and condiments. All the customer wants is lunch and their mantra is, “If you are just going to sell me a product, do it for less.” They aren’t concerned with how you deliver the hot dog; they just want it fresh, hot and fairly priced.
It doesn’t end there. Distributors are just as affected as the manufacturers they represent.
To deal with rising competitive pressures, falling margins and rising costs, many distributors are turning to private label.
The large distributors are leveraging their takeaway power with suppliers. And we’re seeing a rash of merger and acquisition activity. The large players in the market have shifted their growth focus to acquisitions to supplant their GDP-based organic growth rate. The acquirors stop investing to sell more products and instead divert resources to acquisitions. Those being acquired also have stopped investing to grow, pulling cash out to put in their personal estates before a sale.
Through all of this, most have 25% of their gross-margin dollars invested in customer-facing selling expenses. At the same time, they try to get into the service business to make their customers sticky, which as we know is a tricky proposition.
Adding a bit more complexity, Amazon Business has achieved multiple billions in B2B revenue in a few short years. It appears that they are just getting started, but they have their own growing pains to handle such as fake five-star reviews and the proliferation of third-party resellers. Given industry fragmentation, most distributors haven’t noticed as Amazon simply reduced the industry growth rates by a small percentage. The industrial distribution market’s revenue alone in 2018 was $465.4 billion and grew at 13.6% from 2017, according to 2019 MDM Economic Benchmarks for Wholesale Distribution.
Lessons in disruption from Walmart
This has left many manufacturers behind the power curve, and many remain hostage to their own history. Success is not about doing the same things better, rather it is about doing new things. There are lessons from recent history for those who are playing the game to win for their shareholders. Back in the 90s, Walmart told suppliers that they wouldn’t accept paying manufacturers’ rep commissions on their purchases. They wanted those dollars as they had automated all replenishment activity. At the time, many thought it would be the end of the independent rep business model. (The manufacturer rep model is entering a robust growth phase after some major disruption, but that is a different blog topic.) The net result was that it created a two-tier commission structure, a base rate for servicing existing purchasers (zero at Walmart) and a higher rate for creating a new customer. The channel terms used to describe these are market-serving and market-making.
Why talk about Walmart in a B2B blog? Manufacturers had a tried-and-true tool that worked for years, but it doesn’t work anymore. Manufacturers provide discounts on the front end or back end for distributors to buy faster. The idea is that the manufacturer could buy mindshare with the distributors through price discounts and it would result in revenue growth, and hopefully share growth, as well. Distributors would do their best to sell this linkage to their suppliers and many would make large end-of-year purchases to get the rebates offered. Sophisticated distributors have ERP tools that let them maximize rebate income with strategic share shift.
Distributors provide coverage and, most importantly, they uncover critical selling events (CSEs) when a competitor fails to meet a customer requirement. There are over 200,000 sales reps working for industrial distributors in the U.S., and no manufacturer can provide the same market coverage with their own sales force. Distributor sales reps take these CSEs to their trusted supplier partner, so the channel needs to be nurtured and managed. (What they don’t do is actively sell to displace a happy customer’s current incumbent suppliers. It was and continues to be a fantasy. It doesn’t make business sense in distributor’s go-to-market models.)
The problem: Extra discounts no longer move the growth needle for manufacturers.
So can some of the discounts be pulled back?
The answer is, “It depends.” There is always the implied threat of competitive displacement and retaliation, but for many the answer is “Yes, they can.” To understand the actual risk and make an informed decision, manufacturers must understand the economic benefit to the distributor. For many, it is much harder to retaliate than to threaten. Imagine what happens when a customer calls to order a product from a supplier that the distributor is trying to hurt.
Do they take the order to keep the customer happy, or do they run a small risk to substitute another brand? Does the inside or field sales rep care what the corporate product manager wants them to do? It’s critical to also recognize that there is a labor cost in lowered sales productivity. The point is that the risk can be assessed and used to make the best decision possible.
The bigger question is not about taking discounts back, but rather where to invest available funds to generate growth. This answer is attainable, but it takes letting go of outdated beliefs and requires information gathering. There are three components of market access that include:
- Analyze the market to identify where the real growth opportunities lie. This often involves some behavioral segmentation based on customer buying behavior and value proposition design.
- Identify the firm’s selling costs including: selling, rebates, distributor gross margins, advertising, promotions, trade shows, etc. As consultants, when we do this for clients they are always surprised at the scale of their investment. Once the list is complete, identify areas where the investment is wasted activity and build a plan to reduce or eliminate them.
- Reallocate the recovered costs in the second step to areas of growth opportunity.
As a note, the distributor gross margin is compensation provided by the manufacturer for performing services to the manufacturer’s customer. This is easy to describe, but hard to do as it requires a fair amount of analysis in areas that are new to many industrial manufacturers. The net result, however, is higher growth with no increase in costs.
The common outputs for many that are going through this analytical process include:
- Compensating distributors for services provided rather than takeaway power
- Getting out of the intensive transaction pricing activity and many of the routine special pricing authorizations
- Redeploying the manufacturer’s sales force to market making, while still placing much of the business through aligned distributors to save the transaction costs
- Taking a large position in Amazon and other Internet resellers, but placing the volume through aligned distributors at a price point that protects the existing channel partners
- Getting the manufacturer’s supply chain staff to work with their counterparts at the distributor to reduce the total working capital in the channel
These ideas are just a start. The bottom line is that it is time to do something different. But it will take data to determine the right steps to take. Just like we put off cleaning out the garage because it isn’t quite enjoyable, this effort is dependent on serious and professional analytics. The answers are relatively easy once the analytical work is complete. Skipping this step, or doing an amateur job of it, significantly increases the risks of change.
Welcome to the new age of channel design. Perhaps those that figure it out first will gain share from those that don’t.