The e-commerce imperative and rise of channel conflict

Distributors are getting better at e-commerce, albeit slowly, and not fast enough to head off difficultly with manufacturers.

Eighteen months ago, yours truly finished a long-term project on the West Coast. Coming back to my home in the Chicago burbs, I realized that it was time to spruce up the four-decade old place. The last kid had finished college, moved away, and it was time to make the place modern before downsizing.

The perennial advice in remodeling is go for the bathrooms and kitchen. We tackled the two and a half baths with vigor.

As with most things inside the home, my better half makes the big decisions and since the full-baths were gut jobs, she picked out the new fixtures, vanities, tile, etc. Our contractor, a stalwart of the burbs, has a relationship with two area wholesalers (both in this magazine’s Top 100), and my wife went online to view their offerings. She got no further than their websites; neither of the firms have an e-commerce offering.

They have web order entry for contractor accounts, advertise showrooms or have links to manufacturer literature. But neither of these sizable firms had an e-commerce catalog with standard-formatted content, an online faceted search feature, product ratings and reviews, etc.

Wanting to honor the contractor’s relationship, I suggested we go to the Big Box site(s), review fixtures and use the detail to help purchase from one of the local wholesalers. But this idea was quickly dismissed. One of our showers is an odd size. When we called the local wholesalers, only one had a shower base that fit. When we looked on the Big Box sites, one had four and the other eight models that would fit. All of the models were in stock or no more than a day’s shipping distance. To top it off, the one unit stocked by the local wholesaler came up with poor reviews on the Big Box sites.

In the end, because of the ease of product review and comparison by going online, the comfort of shopping from home, and the fact that the Big Box we selected, Home Depot, was willing to bring in non-stock fixtures for a physical review, we decided to buy everything there. We simply told the contractor to go and pick the material up. Goodbye local wholesalers. 

What’s the issue in e-commerce?

Since 2013, Benfield Consulting has conducted three major research projects on manufacturer and distributor e-commerce. In sponsored research conducted this year, we reviewed the online capabilities and predictions of 170 distributors and 115 manufacturers in the approximately $700 billion North American MRO/Industrial/Institutional sectors. What we found was rather astonishing.

Some 62 percent of distributors sold less than five percent of their annual demand online. This was better than the 74 percent who sold less than five percent online in 2013, so some progress has been made.

However, after two-decades of B2B and B2BC e-commerce, what does it say when two-thirds of wholesalers consummate scant business online? Does anyone really think in 2016 that wholesale firms who don’t have a top-notch e-commerce effort won’t lose sales? Does anyone really think that manufacturers don’t already know this and are finding new channel partners who have invested in the technology?

For wholesale firms who swear they aren’t losing sales because they don’t have an e-commerce effort, consider the follow research statistics from our work and Forrester’s ongoing research in B2B e-commerce:

B2B e-commerce grows at eight percent per year and will cross the $1 trillion in sales mark in a few years!

For the past three years, 80 percent of distributor online sales have been transacted by 20 percent of the distribution firms with several of these online efforts growing at double digits.

23 percent of MRO sales for industrials were purchased online and 17 percent of outside contractor installations for industrial and institutional verticals were purchased online (2015 research).

Not to have a top-notch e-commerce site, in 2016, doesn’t make sense. One of my theories for lagging online presence is what I call “The ‘I talk to other wholesalers’ Effect.” Imagine wholesalers who show up at association meetings, trade shows, etc. and discuss, among other things, e-commerce. If a wholesaler talks to 10 companies, he will likely find six out of the 10 diminish the need for e-commerce investment as they sell less than five percent online. Two of the wholesalers sell, usually, 6-10 percent online, but aren’t setting the woods on fire.  And my bet is that two out of 10 that sell 80 percent of online demand don’t talk about how well they do, how much they are growing, and how they smile all the way to the bank — and back.

In short, if you want to talk to wholesalers who are succeeding online, talk to someone who sells 15 percent or more of their total demand via e-commerce and is growing sales at a quick pace. Too often, we find distributors with poor online performance haven’t done basic research on their customers, what they purchase online, how much they purchase online, who they purchase from online etc. Forecasts are that 70 percent of B2B demand will, eventually, move online. Today, for all Durable Goods, in B2B/B2BC sectors, the online sales figure is around 15 percent of total demand and online sales grow at four times the traditional market!

The manufacturer problem

Channel conflict has, more than less, been diminished over the past two decades. There hasn’t been much large-scale change that creates industry-wide unrest. This is changing.

Our manufacturer survey finds that half believe their distributors are not moving online fast enough, and half believe channel conflict is increasing because of it. Today, manufacturer online sales are growing with 71 percent of transactions coming from distributors and dealers, 22 percent are direct to the end user, and six percent come from second party sites like Amazon Business, E-Bay, etc.

We believe that 22 percent of manufacturer online sales via direct to the end user is significant; it is a large number.  Additionally, while six percent of demand from second-party entrants is small, sites such as Amazon Business grow at a 20 percent CAGR.

Our read is that manufacturers should know where distributors sell product and how the transaction is made to know if their channel partner(s) are succeeding online.  Today, only 25 percent of manufacturers measure point-of-sale information of their channel resellers. If manufacturers can’t get point-of-sale information, they should survey end-users by geography and segment to understand their online activity.

The risk to the manufacturer, from staying with channel partners who are slow to engage e-commerce, is significant loss of sales potential and possibly loss of the repeat sale.  Again, the B2B e-commerce channel grows at four times the pace of traditional channels. The upshot and imperative is that manufacturers will need to measure the online progress of existing channel partners.

If online growth is not forthcoming, the manufacturer should confront the issue and, possibly, seek other avenues to market. This is especially true with public companies as shareholders and analysts are not all that tolerant of stagnant or declining sales. 

Complicating factors

Good, competitive e-commerce is expensive. We estimate a mid-sized distributor will spend $2 million for a complete e-commerce software bundle and this is in the first few years — and this doesn’t include changing the organization’s culture to drive sales online.

The problem, for some wholesalers, is the capital spend and the inconvenient fact that online sales growth is not remotely close to hiring an outside sales guy and massaging comp plans to drive sales. Additionally, many wholesalers are reaching the third and fourth generation of private ownership. Companies with this dynamic have multiple shareholders who often value dividends over promises of sales growth from future investment.

Distributors are getting better at e-commerce, albeit slowly. They are actively seeking input from software vendors, associations and non-competing peers. We hope they vet their research, however. Talking to a kindred spirit whose online performance is poor, is likely not a source of good advice or guarantor of future success.    

Scott Benfield is a consultant for B2B manufactures and distributors. He is the author of six books and has been quoted in Forbes and The Financial Times. He can be reached at (630) 428-9311 or scott@benfieldconsulting.com.

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