Our recent research of distributor sales online finds that slightly more than 60 percent of companies sell less than 5 percent of revenues online. Further research in fee-based services finds that mid-to-small size distribution firms have, to some degree, offset the threat of e-commerce competition by offering unique services. In doing so, they often wrap the product sale into the service and gain an advantage.
Distribution firms with more than $250 million in sales are leading e-commerce growth, as measured in sales, by a 3:1 margin. The firms have more capital to invest in the often expensive software and expertise needed to succeed online. Recent press releases have Grainger at 48 percent of sales online and Ferguson at 20 percent of revenues online. Distributors that don’t have a sizable online presence often cite relationships and longevity as evidence that e-commerce predictions by pundits and experts are overrated. Relationships and generational presence are important, however, do they compensate for a lack of investment, expertise and performance in online activity Our answer is no. There is a growing list of distribution firms with relationships and generational history that are competitive in online technology.
Online technology is delivering an ever more satisfying customer experience. Online transaction software is better; search software gives better results; punch-out is becoming more common; and quotation software is growing in use and sophistication. The upshot is that the customer can go online, at their leisure, and get a good experience; no sales rep, no 9 to 5 calls, no emails and, mostly, no waiting.
We help distribution firms research their customers’ online activity through market research. We find out why, who, and how much the customer spends online. The results are often surprising. In one recent survey, a national client that sold less of 1 percent of sales online found out that its customers purchased 23 percent of the company’s MRO needs online and from competitors. A telltale analysis, prior to the research, gave us a clue the client was losing more online than it was willing to admit. The analysis can be done from internal data and we introduce it in this installment.
The Commodity Review
Commodities are products that are, primarily, differentiated by price. They include, some 30 percent to 70 percent, of what distributors sell. The problem is that commodity sales are not analyzed collectively and over time. Distributors look at sales by customer and, if further analysis warrants, they look at sku sales in dollars.
In e-commerce, we find that commodity products are where the e-commerce competitor strikes first. The product substitute risk is low, customers have purchased the products multiple times, and the spend in dollars is often sizable. In short, the commodity is easy to order online and the customer is confident the product will perform as stated. To understand if commodity sales are under siege, we look at several different analyses for fictitious distributor Rob Roy Supply in Charlotte, N.C.
In Exhibit 1, Rob Roy’s marketing manager, Amy Smart, identifies a basket of commodities as “Rough-In” products and views them over a five year period. The products grow in sales from $13.9 million to $15.2 million in sales over the course of years. For all intents and purposes, it would appear that sales are growing and there is little to worry about from e-commerce competition, right? Well, not exactly. Top line sales dollars are good for financial reporting but not enough for good, competitive market analysis. Factors such as price increases from the vendor, raw material increases and disruptions in supply can spike commodity prices at any time. Hence, the top line dollar has “noise” in the data that muddies the competitive picture. Amy has a problem with the top line data and she needs a better understanding of commodity sales activity without the noise factors. Her hunch is that e-commerce competitors are taking commodity sales, but the report in Exhibit 1 doesn’t support her intuition.
Amy decides to measure piece volume of rough-in sales over the five year period. In essence, she measures sku pieces in each rough-in product category and adds them up for the period. In some instances, like pipe, she has to convert feet to piece volume but this is a relatively simple exercise with a spreadsheet. Amy’s piece volume, for Rob Roy’s commodity sales, yields the analysis in Exhibit 2 (see next page).
From the analysis, a new and different picture appears. Piece volume declines between 2012 and 2013 by 3 percent, rises between 2013 and 2014, and falls through 2016. In essence, the piece volume has declined from 186,000 pieces in 2012 to 179,000 in 2016. What happened? At this juncture, Amy has some reason to believe her hunch is correct. But she should look back over the product history to understand if any new technologies have reduced the number of pieces over the course of time and view the customer base to see if any key customer defections have altered the analysis.
A simple commodity analysis over time is a good way to understand if e-commerce competition is a threat. However, the commodity analysis is only a start. If it points to a decline and subsequent analyses of internal data don’t yield a reason for the decline, we would recommend market research of the customer base to support the internal analysis.
Typically, e-commerce competition starts small with an almost imperceptible loss. Over the years, the loss often accelerates but, by then, playing catch up is difficult. Commodity losses in e-commerce are likely to grow as large distributors increase their lead over their smaller competitors and transactional strategies become more common. The transactional distributor is one that reduces pricing on commodities by 10 percent or more and supports it by reducing costs to serve the customer through a limited sales presence and limited brick and mortar locations. The customer orders online, from a truncated sku offering, but gets a great price.
Too often we find where distributors dismiss the impact of e-commerce as their sales are rising despite low online sales. But rising sales is often a poor analysis. Distributors should look at piece volume, survey their customers, and look at the growth rate of the overall market. If piece volume is down and sales lag market growth, then it is likely that digital competition is taking a toll.