This two-part podcast series will cover four leading trends that are impacting the distribution industry and discuss best practices for distributors looking to succeed in this changing environment.
In part one, John Drosos and Andrew Horvath cover the first two trends that are affecting distributors which pertain to the go-to-customer model:
Andrew Horvath: Hello and welcome. My name is Andrew Horvath, and I am a director and co-leader of the distribution practice for the Alexander Group. I’m joined today by John Drosos who is a principal and also a co-leader of our distribution practice for the Alexander Group. We would like to introduce our two-part podcast series, where we will cover four leading trends that are impacting the distribution industry and discuss best practices for distributors looking to succeed in this changing environment. As technology and innovation continue to change the way products are designed and how customers gather information, interact with supply chains and ultimately purchase goods, distributors who have long relied upon the legacy sales structures and relationships selling are searching for new ways to maximize profitable sales. Driven primarily by digitization, distributors are wrestling with omnipresent e-commerce giants like Amazon that provides slick user interfaces, millions of SKUs and rapid delivery. In addition, manufacturers are exerting more direct sales influence over profitable customer segments and reducing the value and associated cut of margin for distributors. Overall, these factors have resulted in a low growth environment for distributors, particularly those who have not explored new opportunities and investments in talent and technology within this data-driven reality. In today’s podcast, we will cover the first two trends that are affecting distributors, which pertain to go to customer models. The first is current challenges associated with industry consolidation. The second is the requirements and opportunities for e-commerce within distribution. Our second podcast in this series will cover trends three and four, which are associated with talent: the transitioning workforce and its impact on distributors and consequently, the need for development of new roles. Now I will pass it over to John, who will start the discussion on trends within the go-to-customer model.
John Drosos: Thanks, Andrew. First item I’ll cover, as Andrew mentioned, is consolidation, which is hitting all segments in the distribution industry. Distributors face the impact of consolidation on two fronts. Distribution market itself and also in the manufacturing space. Prior in the age of dumb products or commoditized products, or whatever you might call them, manufacturers had pretty low barriers to entry. But as products become smart and this is something we’re seeing across the board on the manufacturing side, but in general, manufacturers who have not invested in R&D are being left behind. Startups are being purchased by forward-thinking manufacturers, leading to pretty consequential supplier consolidations. Distributors are also merging to take advantage of economies of scale in a low margin environment. Think Amazon driving that trend. Bigger distributors are gobbling up local and regional players to extend geographic reach or product breadth. Consolidation is leading to a re-evaluation of who truly offers value to end users and who owns the end user relationship. Manufacturers who invested in smart technology may seek to control the value of increasingly complex solutions by serving key customers directly. The sales coverage approach allows them to maintain control over the conversation and prevent multi-line distributors from value engineering their solutions or substituting cheaper alternatives.
Distributors are also refocusing on core markets to streamline operations and strengthen relationships with key customers. Core market focus leads to a need for differentiation. Traditionally, distributors distinguish themselves by having the most trucks or biggest product catalogs. Today’s customers, however, are more interested in solutions in how their required outcomes are being solved by distributors. Assuming operational competency, the key to differentiation is a well-built value proposition suite. Building the correct sales and marketing messages around the larger business issues that distributors solve is essential to demonstrate value to customers. As they look to concentrate on core markets, distributors are segmenting their customers to reduce dependency on their largest accounts and generate new sources of revenue. Traditional coverage is not aligned with the optimal combination of channels because it does not consider potential spend. Building the correct coverage by channel and determining that the right resource deployments are in line with the channels are of particular importance. I’ll hand it back to Andrew now, who’s going to cover our second trend as it relates to changes and go-to-customer models.
Andrew Horvath: The second trend impacting go-to-customer models within distribution is the demand for e-commerce. Many distributors have built their sales models around the relationship – a face-to-face personal service-oriented approach to sales. As the B2B customer journey is changing to be more digitally-driven, customer needs demand for distributors to develop an e-commerce strategy and channel. Distributors must understand that not all customers act the same or have the same set of needs. Distributors who focus on customer segmentation to fully comprehend which clients do, in fact, require a face-to-face sales relationship contrasted with those who can and should order online, such as those who conduct repeat orders or purchase commodity-type products, will drop their cost to serve and capture more margin. This success will be generated not only in the efficiencies of servicing customers in the right way but also from a cost standpoint. That is, distributors that have customers with repeat orders using an e-commerce tool for purchases versus the time allocation and expense of sending an account manager to handle the sale ultimately reduce cost to serve. Using this approach, distributors can provide these types of customers with the conveniences of ease of ordering and quick deliveries, reducing the possibility that they may move to competitors like Amazon. However, as distributors deploy an e-commerce channel and move accounts from being served by the sales force to being served by the website, the impact and the sales force should be addressed. New sales compensation models should be developed to mitigate the loss or perceived loss of these clients from the sales representative’s account basis.
John Drosos: Thanks, Andrew. To summarize, four trends are impacting distributors. Today we discuss the impact of two of these: consolidation and e-commerce as they relate to go-to-market channel strategies. Our second podcast will encompass the third and fourth trends, workforce transitions and the development of new roles. We hope that you enjoyed this podcast. If you would like to learn more about Alexander Group’s distribution practice, please contact us through our website at alexandergroup.com.