Scott Benfield, president, Benfield Consulting
Supply chain firms will undergo substantial change as a business category according to Competing in 2020: Winners and Losers in the Digital Economy. The sponsored research, published in Harvard Business Review in April of this year, finds that wholesaler-distributors are more likely to face change from digitalization than manufacturers.
North American durable goods wholesalers and distributors, a three-trillion dollar industry, are supply chain firms undergoing substantial change. Leading online distributor W.W. Grainger Inc. has moved more than half of its business online while sizably reducing its number of bricks-and-mortar branches. Grainger has also developed separate online identities—which I call “segment platforms,” including Zoro.com and MonotaRO.com—and these are generating substantial organic growth in sales.
Full-Service Online or Not?
Befuddling the online efforts of wholesalers and distributors is the probability that, despite building out the e-commerce platform with the best of software and content, organic growth is elusive. It is important to note that we are not referring to organic growth as the transferring of traditional offline customers to online commerce. Organic online growth is an increase in sales due to online activity; it includes new sales from both existing and new customers.
The failure of a wholesaler/distributor to grow online is termed a “digital washout”. The event has financial implications as millions are often invested but fail to attract incremental business. Our research and review in the sector find that digital washouts are common.
Solutions to a digital washout usually fall back on tweaking a company’s e-commerce software, adding content, or switching out management. None of these efforts is likely to solve the problem. Instead, what needs to change are executives’ assumptions regarding the probability of online success with their existing bricks-and-mortar business model.
Recently, even industry leader and e-commerce pioneer Grainger has struggled with its main e-commerce site, Grainger.com, as it cut prices this year to better compete against Amazon Business. Its stock price dropped nearly 20% the first quarter. In a recent earnings call (QI, 2017), CEO D.G. Macpherson alluded to reduced contract pricing and moves to “add digital marketing to acquire customers under the Grainger brand which we’ve not been able to do.”
However, Grainger’s separate online businesses, including Zoro Inc., at Zoro.com, and MonotaRO Co. Ltd., at Japanese-language MonotaRO.com, showed a 23% growth during the same period and the “operating margin expanded by 100 basis points.” The question coming out of Grainger’s current reporting is why are separate businesses growing and increasing profit contribution while Grainger’s core namesake business has challenges with growth?
Our work and research at Benfield Consulting indicates that typically the full-service entity has trouble online in securing incremental growth. While technologically competitive firms can move existing relationships online, they have trouble generating new growth from existing customers and customer acquisition. Historically, distribution firms, especially those following the Pareto principle of getting 80% of their business from 20% of their customers, are highly accretive—they grow a lot through mergers and acquisitions.
They have consolidated segments (for example, plumbing distributors have acquired water-well distributors) across dozens of product verticals. Today, they are large firms, usually from hundreds of millions to billions of dollars in sales, with numerous bricks-and-mortar locations. Their online catalogs cover from hundreds of thousands to millions of SKUs.
These firms also get 12% of their revenue from assembly and light manufacturing services and they primarily rely on outside sales teams for growth. They also have significant teams of customer service representatives and inside sales staff to navigate the complexity of their organizations for the customer. In one recent business process improvement project, we found that order entry could take upwards of over two dozen steps for a customer service rep.
Many full-service wholesaler-distributors were founded in an era when customer demand and supply were not monitored and managed with the benefit of ongoing updates of electronic data, as is typically the case today. Hence physical inventory had to be stored close to the customer for time-sensitive applications. As information quality and speed have reduced the need for multiple branches, the number of branch managers and sales personnel have decreased.
The full-service model, built over decades through acquisition across many product sectors—with lots of inventory and staff in physical branches—faces the same plight as the department store trying to survive in competition with online retailing. They are simply not made for online commerce and the realities of the digital world.
Trying to take the model of offering full-service to customers, with many branches and lots of support staff, and move it all online is like trying to pair a Sumo wrestler with the tiny Smart car. The model just doesn’t fit. It is cumbersome, confusing and difficult to navigate for online buyers.
(The second part of this two-part series—which goes into more details of how distributors are segmenting their markets with e-commerce sites that cater to segments of customer bases—will appear next week.)
Scott Benfield is a consultant for B2B manufacturers and distributors, and president of Chicago-based Benfield Consulting. He can be reached at [email protected] or 630-428-9311.