The major issues with e-commerce, when it comes to distribution, are easy enough to identify. Our 2016 research on distributor online efforts clearly points to three areas where firms, who are falling behind in e-sales, fail; specifically firms that:
These problems are solved with sufficient effort, planning and time, but some two-thirds of distributors, those who sell less than 10 percent to 12 percent of their annual volume online, can’t seem to push through these issues. With e-commerce growing at 8 percent/year and vendors selling 30 percent of their volume through alternative e-channels, there is plenty of reason to become competitive online. But our research finds the vast majority of distributors aren’t moving forward fast-enough. In fact, many are losing the online battle. The fundamental problem is somewhere else and we tackle it in this installment.
The executive that doesn’t execute
Most public distribution and larger private firms over $500 million in sales are performing well online. It is the vast middle market firms, those between $50 million and $500 million in annual sales, that run the risk of losing the battle for the e-sale. Our work with these firms through research, seminars and field audits finds that the single most important variable for e-commerce success is executive motivation, drive and belief in online capability. If these traits are missing as in regards to online investment, the firm is highly likely to lag in e-commerce performance and, based on the pace of online growth, likely to lose a substantial chunk of existing sales as customers move to buying online.
The seminal question is how could previously successful executives miss so badly when it comes to online activity? The answer is a combination of cultural, firm life-cycle and traditional investment approach that stymies the growth in what, to many, is the future of the $3 trillion in sales North American industry.
Selling is not marketing and marketing is not what it used to be
Most distributors are sales-driven. They have a volume orientation and drive top line sales over profits. They support this with leagues of outside and inside sales professionals who, typically, have significant experience in thousands of products and their application(s). Over the generations, however, many of these products and their applications have entered the commodity space. They are, largely, differentiated by price, and customers often understand the application better than their distributor sellers. Sellers are trained to sell tangible advantages of products and services to secure the order. Additionally, there are experts in products and processes who design solutions for customers. But this is typically done at the Pareto customer base. In most of the four-dozen vertical product-markets representing Durable Goods distribution, half or more of all products are commodities where the customer can self-serve with little need for the cost of sales assistance.
In the past two decades, most mid-market distributors have added the marketing discipline and carved out a managerial or executive slot for a qualified marketer. Firms have engaged parts of the marketing mix of product, pricing, sales-promotion, channel, and fee-based service. Our recent research on fee-based income finds that, overall, distributors secure twelve-percent of overall revenue through fee-based service offerings. It is difficult to do this without qualified marketing.
But marketing online is not selling and shares some parts of traditional marketing management, but not others. Online marketing has much to do with product content, its quality, data and content integrity across systems and publications and current data. The way content is arranged, titled and placed into a taxonomy has much to do with online search success. This is done by product managers who know the products and how users think about different applications. Finally, the field of B2B data analytics rests on extracting variables from search, online ordering and customer demographics to increase the chance the customer will buy. Few of these skills are found in existing sellers and traditional marketing is typically not strong in product management, data analytics, or managing content quality; especially for syndication.
The upshot is that distributors, who want to be successful in e-commerce, have a significant challenge in changing from a sales model to a self-serve model dependent on content, data analytics and systems. Too many distributor execs, experienced in sales management and general marketing, simply don’t understand what it takes to achieve e-commerce success and, hence, underestimate the work needed to drive online sales.
The generational divide and financial horizon
Most mid-market distribution firms are third generation; they started in the years from 1920 to 1950 as North-America began to industrialize. Most firms have a substantial amount of family shareholders, where some work in the business but many do not. These shareholders are wealthy; their stock in the family firm has built up significant value. As the generations pass, however, private shareholders lose passion for a singular industry and treat the firm as a portfolio investment. In essence, they look for diversification of their wealth both to protect and grow it. They correctly see investment in a single firm as risky with an uneven chance for growth. Hence, they often want to sell the firm or take profits out to place into other investments.
The problem with the third generations’ financial need(s), however, runs counter to the needs of the online transition. The software and expertise to manage an online effort can run well into seven figures for the first few years for a mid-size firm. Annual investments, after the initial build-out, run into six-figures for people and systems upkeep. In short, magnitude of investment for online commerce runs counter to the diversification and lifestyle needs of the third generation. Yet, without a competitive online effort, the distribution firm becomes uncompetitive and decreases shareholder value. The cost of capital exceeds the return on capital investment. We caution mid-market distribution firms to carefully assess if they should invest in e-commerce or sell the firm outright.
Energy and time
Harvard Marketing Professor Ted Leavitt was fond of saying, “management is for the young.” Today’s third generation owners are in the twilight of their careers. They look to move out of the family business, into an enjoyable retirement. The online revolution comes at a point where, physically and mentally, many do not have the stamina or want the hassle of leading major change in a sizable organization. Where there is a capable fourth-generation, we find online progress and success is much more probable.
The third-generation wholesale executive has well-earned the admiration for growing a privately-held firm in an increasingly competitive industry. Unfortunately, the changes needed for online success comes at a time in their careers when they want to enjoy the fruits of their labors. They don’t want to spend another five to ten years learning an entirely new means of going to market while changing their corporate culture.
It’s not about a new way to launder a transaction
We ask the question in our research and field audits, is “e-commerce another means to launder a transaction or a fundamental change in the way distribution is accomplished?” The vast majority of executive responses go to, “another means to launder a transaction.” Increasingly and unfortunately, the changes to the distribution firm and advances of online leaders demonstrate e-commerce is a fundamental change in the business. One has only to look at Grainger’s reduction in branches from 420 to 250 or Forrester’s prediction that one million sales jobs will leave the B2B space by 2020. E-commerce and online business significantly changes customer-facing and order-fulfillment disciplines.
There is a growing list of firms who have navigated the build-out of e-commerce software but fail at transforming their firms. We call this a digital washout. This failure belongs to the executive suite, and two-thirds of failures in e-commerce are the failure to anticipate and plan cultural change.
We expect many distribution execs to do their best to adopt e-commerce. Their success is, to some degree, relative to the progress of their competitors. However, highly successful e-commerce firms and new entrants with more efficient business models, will accelerate the scope and pace of change. Far too many executives underestimate the changes their businesses will need to compete online. Additionally, the generational timing for investment and attention to the firm runs counter to substantial change. We caution executives to know what they are getting into before opening the checkbook too far.