Key Trends Threatening Growth

For years, the sales growth playbook for wholesale distributors was relatively simple: build a large infrastructure to quickly deliver a wide selection of products to end customers, master lean operations, and provide service and issue resolution. However, recent macroeconomic, industry and technological shifts have disrupted this tried-and-true model.

Alexander Group has identified four trends across all distribution markets that potentially threaten distributor growth. To reverse these trends and reinvigorate sales growth, savvy distributors need to reevaluate and preemptively adjust their go-to-customer models.

Four Key Threats to Distributor Growth:

1. The ‘D’ Word, Redefined: The threat of disintermediation (removing intermediaries from the supply chain) has existed for years. Distributors fought off disintermediation by excelling in parts of the sales process that were too costly or operationally demanding for suppliers to handle. However, with margins under pressure, many suppliers have begun investing in the people, processes and tools to move to a direct sales model for all customer types. While full disintermediation remains a real threat, the growing risk is partial disintermediation. Smart suppliers target specific customer segments (read: the most profitable segments) and sales process steps to handle in-house and abdicate lower-value customers and steps to partners. Partial disintermediation can quickly force distributors into a role of fulfillment to a low potential slice of the market and severely limit growth.
2. Omnichannel Moves Beyond Retail: Major retailers have contended with the move toward an omnichannel or multi-channel model with mixed results. Successful retailers have met demands from customers who want to shop in a variety of ways: by strategically placing brick-and-mortar locations, investing in interactive websites, developing mobile apps, and maintaining phone sales capabilities to offer the customer the ability to shop wherever and whenever they please. Demand for an omnichannel model is quickly moving into the B2B world for the same reasons (speed, ease, convenience) that caused it to spread in retail. Distributors can no longer rely on the legacy sales model based on territory reps and storefronts – they must adapt channel coverage models to include inside sales, web-based self-service, and apps that feature secure virtual storefronts. Leaders will figure out ways to cover customer segments with the right blend of people and tools, thus optimizing cost to serve and strengthening relationships with buyers.
3. Failing to Differentiate by Demonstrating Unique Value: Value propositions in the wholesale distribution world used to be simple: price, variety and availability were enough to win the day. Distributors focused on operational excellence to drive these differentiators and maximize volume in businesses with thin margins. However, operational improvements have a natural plateau and former levers for differentiation have become table stakes. Leading distributors have begun to crack the code on creating value propositions – the messages that marketing, sales and service articulate to suppliers and partners to demonstrate a particular value. Value propositions are built upon voice-of-the-customer research and a revenue segmentation model that identifies the most critical needs (e.g., risk mitigation, large project experience, vertical expertise) for each segment. Enabling customer-facing resources to deliver the right messages at the right time demonstrates knowledge of the needs of both suppliers and customers and helps cement the place of the distributor in the value chain.
4. Not Investing in the Right Places: Since the recession, distributor sales organizations have learned to squeeze maximum productivity out of existing people and infrastructure. As measured growth continues, organizations must determine where to invest to grow existing markets and expand into new ones. Revenue leaders with limited resources often have to choose between hiring more sales or support resources, building additional branches, adding productivity tools, or increasing pay to attract a higher level of talent. The right answer is rarely moving “student body left” to any one of these areas, but rather understanding supplier and customer needs to be able to adjust levers in a measured way that maximizes ROI. Understanding growth opportunities at the most granular level can help organizations structure investments to create world-class sales organizations.

Threat #1: Disintermediation

When suppliers move to a direct sales model, distribution partners suffer. For large distributors, losing a key supplier can mean a reduction in product line, an increase in competition and a drop in both top and bottom lines. For small and mid-sized distributors, losing a supplier can lead to extinction. However, distributors have retained a central place in the supply chain because the benefits to the supplier of going direct to all customers rarely justify the costs. Distributors recognize the continued threat of disintermediation. Smart organizations that understand the key issues underpinning this threat will position themselves best for future growth.

Suppliers have used a variety of methods to displace intermediaries: direct sales forces, company stores, vertical integration with owned distributors and online portals. Alternative strategies to selling through the distribution channel hinge on a few questions:

• Is the supplier’s required investment in infrastructure (e.g., distribution centers) justified by the marginal increases in revenue and margin?
• Can the supplier satisfy customers’ expectations for delivery and service?
• Can the supplier grow the share of its customers’ wallets by controlling the entire sales process?

What has changed?

Today’s buyers are increasingly more sophisticated and demanding. Large organizations frequently prefer to buy from partners that have: global presence, on-demand fulfilment capabilities, dedicated account teams (sales, support and technical service) and deep knowledge of their business and end customers.

Serving all customers remains an expensive proposition for suppliers, so many organizations incorporate trends to segment, size and prioritize buyers. Advanced segmentation models allow suppliers to partially disintermediate distributors by taking a nuanced rather than binary approach to coverage. The question has shifted from Should we sell direct or indirect? Organizations now ask, What segments should we serve with a direct model? or What sales process steps should we perform ourselves?

Partial disintermediation allows suppliers to pick those buyers and activities that are most profitable and in line with their value propositions.

Suppliers are evolving the revenue generation organization (sales, marketing and service) to support direct-to-customer models. VPs of sales and marketing are investing to upgrade sales talent, adding features to productivity tools (e.g., Business Intelligence and CRM), increasing quality and availability of training, and strengthening value propositions to demonstrate value and become trusted advisors to buyers.

What are the risks?

The aforementioned trends can significantly impact the growth prospects of distributors large and small. Consider some traditional distributor value propositions:

• Superior customer service
• Operational excellence
• Broad geographic reach
• Complete product line

These strengths guaranteed distributors a place in the supply chain because suppliers had neither the skills nor the appetite for the capital investment required to outperform distributors in these areas.

However, manufacturers rely on segmentation and technology to insert themselves into the areas of the value chain once dominated by wholesalers. Smart manufacturers realize that their end customers are far from homogeneous. Customers vary widely in terms of buying preference and behavior, wallet size, profitability, service demands and alignment with value messages. Segmentation models provide manufacturers with answers to the question, What types of customers (and how many) should we sell to directly? At some point (based on potential volume, profitability and cost to serve), it makes economic sense to remove distributors from the equation. The danger to distributors is that manufacturers take the growth-oriented customers direct and leave distributors with the rest.

Technological advances have removed barriers to manufacturers servicing customers with a direct model. Advanced web portals, app-based ordering and telesales enable manufacturers to cover large geographies without building regional centers. Amazon.com has also become a delivery channel for manufacturers.

How can distributors continue to grow alongside manufacturers?

If the trend of partial disintermediation continues and more manufacturers consider selling direct to the most profitable segments, how can distributors expect to thrive? Most distributors fall into one of two camps:

1. Those who treat growth as a zero sum game. There is a finite amount of gross profit dollars out there, and we’ll fight our manufacturer partners to capture it.
2. Those who consider growth a team sport. We can work with our manufacturers to figure out how we can help each other grow.

For those in the second category, growth can come through several strategies. Consider the following high-level sales process:

Manufacturers typically compensate distributors for performing activities across this process.  Disintermediation impacts this model by allowing manufacturers to take on all steps for some customers (We run the play for our top accounts; you find other customers.) or some steps for all customers (We find and convert customers; you fulfill it.). In each instance, distributors have options to earn based on what value they provide in the process.

Manufacturer performs all steps for select customer set: As mentioned above, most manufacturers are unable to (or choose not to) cover large swaths of the market directly. A manufacturer might decide to explore a direct strategy for their top 10 accounts, many of which may be the distributor’s largest accounts. If customers are on board with this model (a big ‘if’ depending on the relationship with the distributor), the distributor has to make up a large amount of revenue and gross profit dollars elsewhere. The silver lining is that by drawing a line below the tenth largest account, the manufacturer has abdicated the rest of the market to the distributor.

Manufacturer performs some steps for all customers: Alternatively, a manufacturer might prefer to complete a certain step (e.g., acquisition) in-house. In this instance, manufacturers will likely reduce distributor pay because the distributor is performing fewer tasks.

A reduction in scope is not necessarily a bad thing. Some distributors find customer acquisition difficult and prefer to focus on fulfilment. If not asked to acquire customers, the distributor can reduce investment in lead generation and focus on operational excellence. However, there is a risk of being pigeonholed into a fulfilment arm, where the manufacturer’s sales team limits growth. To avoid “fulfilment prison,” distributors must prove that they can outperform manufacturers in value-added steps.

Distributors are well aware of the threats that partial or full disintermediation present. Smart organizations understand that there is enough opportunity in the market to thrive alongside manufacturers that pursue direct-to-customer models. Organizations should consider the following:

1) The abilities of their manufacturing partners to serve customers directly
2) What their own customers value
3) How their own organization meets these customer needs

Distributors who can answer these concerns will position themselves best for consistent profitable growth.

Threat #2: Mismanaged Omnichannel Models

Until recently, go-to-market models for wholesale distributors were relatively straightforward. Distributors located branches near customer sites and deployed territory-based generalist sellers to cover all buyers within a geography. Account lists were easy to create, the model was relatively simple to manage and sellers engaged all customers with frequent face-to-face visits. Today, three key changes have altered the distribution marketplace, forcing distributors to reexamine sales coverage models:

• Changes in customer buying preferences – Buyers who prefer purchasing through Amazon to waiting in line at stores are demanding one-click purchasing in the B2B setting. Developed e-channels are table stakes for a growing number of segments.
• Imbalance between profitability and cost to serve – Sales leaders want high-cost field resources to spend time on the most profitable growth-oriented customers. Unfortunately, inertia often keeps sellers focused on buyers with whom they are most familiar and who may not justify seller costs.
• Increasingly complex buying processes – Consider the cast of hundreds involved in a typical hotel construction project: corporate planners, consultants, designers, architects, franchise owners, procurement departments, manufacturer sales reps. Sales leaders have realized they cannot possibly expect territory sellers to manage all influencers on their own.

Actions leading distributors take to maximize profitable growth

1. Incorporate buyer behavior and account-level sizing to segment customers and differentiate sales coverage (see Figure 1).
2. Invest in e-channel capabilities, skilled inside sales account managers and influencer-facing specialists to assign the right cost and skill resource at the right spot in the sales process.
3. Build rules around account assignments, rules of engagement and sales manager accountabilities to ensure complex models result in growth, not customer confusion.

The result is a coverage model that is intelligently complex and delivers differentiated growth by placing the optimal combination of resources against well-defined customers and influencers (see Figure 2).

Figure 1

Figure 2Modernizing coverage models is not without risk, however. Sales manager roles require redefinition and training to avoid botched handoffs and roles moving outside defined swim lanes. Sales compensation plans that pay a commission rate on territory volume can encourage sellers to landlord accounts and undermine the process to promote or relegate accounts to different segments. Failing to train customers to buy in a company’s preferred way can disrupt relationships or create too many exceptions to the standard model.

The risks are real, but they are manageable through well-designed programs, processes and tools. What distributors cannot risk, however, is hanging on to legacy coverage models as the market and competitors embrace change.

Threat #3: Uninspiring Value Messages

Another strategy for sales organizations seeking consistent profitable growth is to empower sellers with accurate, tailored and impactful value propositions.

During a recent engagement with a distributor client, the topic of value propositions came up. The head of sales claimed that customers buy from the company because “they get products from us faster and cheaper than from anybody else.” The industrial sales leader disagreed. While visiting one of their largest warehouses, she placed two identical orders–one from the very same warehouse she was visiting, and another from Amazon. The order from Amazon (for goods that were in stock at the client’s warehouse) came a full two days earlier (and cost less) than the order from the same facility.

The story above illustrates one key shortcoming with value propositions: If they cannot be backed up with evidence, they absolutely will not lead to measureable differentiation. Best-in-class value propositions are the product of a sound process and share three key traits: accuracy (backed up by evidence), specificity (tailored to resonate with unique buyer segments), and impact (move the customer or prospect to action).

The process

Well-managed value proposition creation processes follow a specific progression. First, organizations collect voice of customer inputs in a frequent and consistent manner. Valid methods include web surveys (e.g., net promoter score with additional qualitative feedback), focus groups (e.g., customer councils), or face-to-face discussions between customers and sales leadership or executives. Second, distributors map key customer needs (e.g., acquiring new customer of their own) to their own specific strengths. Lastly, sales or sales operations leaders have a mechanism to disseminate messages (e.g., playbook) and measure their efficacy.

Stakeholders differ from distributor to distributor, but three teams are almost always involved in creating impactful messages: sales (understands the customer needs), marketing (understands strengths and weaknesses across competitors) and product management (knowledgeable on features and benefits). The combination of these three teams can align the tactical benefits of products we sell to the needs of the customer and present data that show how and why we are the best at solving specific customer needs.

Traits of powerful value propositions

For value propositions to answer the question “Why buy from us?”, they must satisfy three criteria:

Accuracy–One of the hardest things to do for a distributor leadership team is to admit when they don’t stack up well against competitors in areas long considered strengths. When distributors are losing on price (according to voice of customer) they ought to consider new segment-specific pricing strategies. When they are losing on delivery time, an ops review may be in order. When interactions from the sales force are not frequent or high-quality, there might be opportunity improvements needed in the go-to-customer model or sales talent. In any case, before sales leaders develop value messages in sales playbooks, they must verify the evidence and pressure test it with trusted customers.

Specificity–Are value messages based on price, specs, or availability inherently bad? Certainly not. However, transactional value propositions often fall flat when used with customers who value higher-level sales motions (ROI, risk mitigation, value co-creation). Segmentation models that dictate customer coverage must also influence the types of value messages. Total cost of ownership, new market planning and minimization of field resource downtime are all higher-level value propositions that distributors can solve through products, services and people.

Impact–Any worthy value proposition should move customers to a decision, preferably a buying decision. The “so what?” of a value proposition should include a concise business case as to why a partnership with your distributor team is best. Data-backed messages tend to resonate best of all.

Next generation value propositions are a necessity in today’s ultra-competitive market. Distributors who follow a healthy process and craft messages that move customers along the buying continuum will flourish.

Threat #4: Not Investing in the Right Places

A swelling economy has many distributors looking to reinvest gains into the revenue generation organization. Investments in sales, marketing and customer support will cover multiple roles (field sellers or generalists, product specialists, industry specialists, inside sales, first-line sales managers, channel managers, sales operations) and digital tools. In a growth environment, one key question emerges: Where should distribution revenue leaders invest to create the greatest ROI?

To answer this question, revenue leaders must examine three key inputs:

• What growth phase is the organization in?
• Are our jobs (sales, marketing, support, ops) well-focused, with the right ratio of sales to support roles?
• Are sales roles assigned the right type and number of accounts?

Growth Phases

Distributors fall into one of four growth phases: Start-up, Volume growth, Re-evaluation or Optimization. Each phase has a related investment strategy based on the commercial organization’s complexity, current share and expected growth compared to the market.

1. Start-up: When share is low (overall, by segment, by region) and growth potential is high, investing in the sales organization is simple. Hire a seller, give them a patch of land, pay them a commission and they will generate $500k-$1M in gross margin¹.
2. Volume Growth: When complexity increases (new plus existing customers, more products, slowing growth rate), the investment decision becomes less clear. Field sellers still may be the right option, but inside sales and customer support may also require buildout.
3. Re-evaluation: When growth dips below market and cost becomes the main issue, distributors may realize that the old growth equation (add a body, get $500k-$1M GM) no longer holds. Organizations that pull out of the dip fastest will invest in lower cost channels (inside sales, digital) and reallocate field investments to the most profitable segments.
4. Optimization: Specialization and focus is key to the fourth growth phase. In this environment, industry or product specialists thrive, inside sales teams continue to grow, and support roles and digital tools free up time for sellers to be more productive.

Role focus and support ratios

Sales roles require focus to reach maximum productivity. Field sellers who spend 40% or more of their time on engaged selling (account development, needs assessment, solution development, proposal) are considered best-in-class. Most distributor roles, however, fall in the 15-25% range. Common issues that decrease engaged selling time include account “landlording” (sellers accumulate too many accounts, perform maintenance on largest customers only), administrative or customer service requests, or broken processes. At a median level of $105k total target compensation (TTC) for a field seller¹, ROI will be limited if the job is spending the equivalent of one day per week generating sales. Rather than hiring three new field sellers, organizations might be better served cleaning up roles and hiring one new seller and two new support or operations resources to take important non-sales tasks off of the sellers’ hands. Healthy distribution organizations have a sales-to-support ratio of 1:0.75¹.

Segment focus and workload

Common questions Alexander Group hears from distributors include: “How many accounts should a seller have?” “When does it make sense to split a territory and hire a new seller?” “Should sellers be generalists or focus on one type of customer?” Answers to these questions depend on growth phase, customer set, market share and other factors, but they must be answered to understand where the next sales dollar should be spent. We have seen examples of field sellers with 1,000+ assigned accounts–far too many to actively service no matter what the product or industry. When workload exceeds bandwidth, multiple investment options exist. Distributors can hire another field seller and split territories, which typically results in growth for customers that were not previously visited. It may make sense to hire an inside sales rep to take the smaller customers off of the hands of the field seller to encourage the field seller to go deeper into remaining accounts and to increase touchpoints to smaller more remote customers. It may also make sense to build up the web channel to move the long tail of smaller customers to a self-service model. The associated ROI with any of these options depends on upstream inputs but must be considered before committing to an investment.

The New Plan for Growth

The role of distributors is changing at an increasing rate. The trends mentioned above, while not all new to the industry, are coalescing to create an uncertain path to growth. Organizations that can build on existing strengths and create optimized go-to-customer models will have a distinct advantage to define the role of the distributor and control their own fates. Those who wait and pursue “business as usual” as a plan may find themselves relegated to ever-shrinking pockets of opportunity by smart suppliers, nimble competitors and demanding customers.

To learn more about our point of view and experience solving revenue growth challenges for clients, please visit Alexander Group’s Distribution practice.