The changing face of distribution

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By Bruce Nagy

One-time body-builder Arnold Schwarzenegger beat formidable competitors to win numerous body-building crowns and achieve fame. But he wanted more and moved to the United States to re-invent himself as a movie actor, but it wouldn’t be the last career change. He went on to become governor of California in 2003.

A similar rejuvenation is currently underway among leading wholesalers in the plumbing and HVAC/R business. They’re facing new threats from e-commerce giants like Amazon, while continuing to battle bricks and mortar performers like Home Depot and Lowes/Rona. They’re planning to weather the storm, reinvent their business model, and add sophisticated online and offline capabilities. And they expect to emerge stronger and better.

The Millennial effect

It won’t be easy. Millennials are moving into procurement positions and they’re online savvy. The internet comes naturally to them. Amazon is building numerous B2B web properties and pursuing transaction dominance in high ticket, high margin categories. They’re focusing on items such as furnaces, that are purchased in large volumes every day.

Founder Jeff Bezos has a net worth of about $156 billion, a testament the deep understanding his team has developed in the field of e-commerce.

Amazon specialist and HVAC consultant Bruce Merrifield calls the Amazon construction portfolio “a highly customer-centric value channel.” It includes product reviews, easy to find advice from industry experts, multimedia resources, chat and telephone support, and a Prime member loyalty program offering bonus points for watching product videos.

Big web investment

Each year Amazon invests another $40 million to improve its web properties, with an army of top e-commerce analysts testing and refining its models and algorithms. They identify the most profitable top sellers, then develop Amazon brand knock-offs, delivered to the contractor for a few hundred dollars less.

The Amazon brand is already ranking among the “most trusted” in several categories. Some say Amazon brand product receives preferential treatment on its sites and the company’s legions of lawyers fight unfair competition accusations.

Once a Millennial purchasing agent places an order for 175 faucets, the order is efficiently picked by robots and shipped to the desired endpoint. Delivery progress is, of course, easy to track online.

“There is a lot of talk about what Amazon is doing in our industry. Some might say it’s overhyped, but I think a little paranoia could be a good thing. We’re behind on digital processes,” remarked Sean Kelly, division vice president, Western Canada Plumbing, for Emco Corporation, London, Ont.

“I think the proliferation of new technologies and energy efficient products gives us an advantage,” says Kevin Fullan, general manager – plumbing & HVAC/R, Ontario & Atlantic, for Wolseley Canada, Burlington, Ont. “Not everyone can assess these new entries by sorting through different kinds of information found online. You need to combine some electronic skills with some industry experience to determine what is going to work for your application.”

Time and service

“On the other hand, at the end of the day, the Amazon customer might become mainly price-driven,” added Kelly. “So, we’ll continue to think of ourselves as a partner that can save contractors time.”

Online companies can provide product, but the role of the traditional wholesaler is much more than that and the service aspects are not easy to duplicate.

“We can provide project management support. For example, we can supply plans and layouts with hydronics products, and then package them in the order in which they will be used.” said Kelly. “If a buyer ships enough toilets and faucets for a whole building, they may find there’s no storage on the site for that product. Our truck can arrive when the crane is ready to move skids to the floors where they’re needed.”

“Delivery is going to be more important than ever and understanding who the customer is and our cost to serve them will be too,” says Fullan “I think we’re beginning to work more closely with contractors and manufacturers and in some cases, we can have products shipped directly from the manufacturer to the job site.

“The relationship between manufacturers, wholesalers and contractors is strengthening because it needs to be stronger. We’re sharing data with manufacturers which benefits both of us, and we’re discovering a lot of great product information and learning tools on manufacturers sites that can be mined to better serve and educate our contractor customers.”

Online lacking in expertise

“It’s still a service business. If we hire the best talent and they’re knowledgeable enough to serve contractors better than anyone else, we’re providing the most important part of the value equation,” said Joe Senese, vice president, operations, Groupe Deschenes, Etobicoke, Ont.

“Building relationships is still an important part of this market. It’s not just about products. In fact, installers are inundated with products. They have projects to plan and they need help. Oftentimes we know the right product solution. We have sales reps in certain segments plus generalists. You need some specialists. The one size fits all approach has never really applied in our industry.”

“And expertise is becoming even more important with numerous retirements and a skilled labour shortage. We need to hire bright new people in the right demographics, and then manage the transfer of knowledge from retiring veterans,” he added.

“There are two kinds of expertise that are becoming important,” says Fullan. “Technical knowledge and online skills. We are trying to recruit and retain people who have both of these.”

“For a while we developed some online training tools for people to do some self-training, but it doesn’t work for everybody. To build productive relationships I think we have to master both the electronic and in-person challenges. It’s hard to build a relationship via the computer, but on the other hand the online world offers some obvious strengths in communication and supply chain efficiency.”

Although it’s difficult to argue the importance of expert solutions, relationship building, and high-level service, these may not be the exclusive domain of in-person interactions.  What the customer needs is one thing. How it is obtained could be moving online, in the form of comparison guides, expert primers, chat services staffed by semi-retired specialists, well-produced installation videos, webinars, taped classroom seminars, and manufacturer animations.

New markets

While touting service-based strength in the face of the online threat, wholesalers are also hedging against future disruption by expanding into completely new, albeit related, businesses.

Wolseley has established Kitchen & Bath, Taps and other branded plumbing showrooms. For Groupe Deschenes it’s Mondeau, and for Emco it’s Aquavato and Ensuite. These are high-end kitchen and bathroom showrooms located in larger urban centres. They’re aimed primarily at interior designers, but also at anyone interested in premium brands and unique plumbing products. They’re staffed by design experts who can provide full interior design consultation and support.

For Emco these showrooms are supplied by a dedicated warehouse with national distribution.

Online education

Still, the bulk of the business is likely to remain with contractors – Millennial-age contractors. Ben Landers, a digital marketing expert, wrote recently in Sales and Marketing Magazine that: “Mobile buyers prefer to self-educate…81 percent of them do research online before they have much…commercial intent.”

According to Landers, genuine online reviews correlate very highly with purchases. Other online interactions, not controlled by sellers, include discussion forums, and blogs with reader comments. This ‘more democratic’ tradition is accepted Internet culture. Modern players must learn to turn it to their advantage.

Wholesalers acknowledge that their traditional business is changing significantly. “Whether through online order entry or e-commerce, the prediction is that 30 percent of the business will go online,” noted Kelly. “Some of this will be retained through our own sites and some of it will go to players like Amazon. We will continue to work at providing the very best service to the other 70 percent of the market. We’re social beings. We’re not wired to stay home. I have faith in the human condition.”

“There is a slow changing of the guard taking place in our industry as some of the older people retire and are replaced by younger generations,” says Fullan. “The older guys might come in with a coffee in one hand and their order scrawled on a piece of cardboard in the other and shoot the breeze for an hour in the morning. Those days may be coming to an end. Younger people send the order electronically the night before and contractor owners want the crews to pick it up and go. We’re trying to serve both kinds of customers and it really is a challenge to get it right… We must continue evolving and changing. We may even need to accelerate our evolution.”

“Those who don’t adapt will find that their market is getting smaller,” said Senese. “We’ve been slow to create the omnichannel we’ll need, but we’ve invested in technology in the back end at the warehouse. We know it’s critical to be as efficient as possible with modern warehouse management, GPS, logistics technology, loading mechanisms…”

He describes the company as sharing and analyzing big data with selected manufacturing partners, and it is well entrenched in preparations for full online ordering, job site deliveries and emphasizing its local area advantages.

The local advantage

“If we think about the essential capabilities of a distributor in the digital age, we recognize that community…is local,” remarked Mark Dancer, a Fellow with the Institute for Distribution Excellence of the National Association of Wholesaler-Distributors (NAW), Washington, DC. Distributors can offer “a physical space where products can be explored, experienced…They can help with installation, training and troubleshooting.”

Desco hosts ‘lunch ’n learn’ seminars on new standards and codes, local requirements, new kinds of wall hung instantaneous water heaters, and product choices that impact space planning. They’re doing online marketing and posting how-to videos. It’s a different way of operating, but it still comes back to creating value for customers.

Schwarzenegger also reverted to his core competency. After two terms in state politics he returned to the movies and enjoyed success almost immediately, despite being in his 70s. In 2018 he underwent emergency open heart surgery. Frightening for a while, but again he survived. So too will Canada’s plumbing and HVAC/R wholesalers. According to reports, after he stabilized, his eyes fluttered open and he said to his family: “I’m back.”

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