E-Trends in the PHCP Channel
PHCP industry prognostication is something we all do and rather poorly the further out we stretch the time period.
Hence, for this installment, I’ll stay with existing trends for predictions on the effect of e-commerce in the PHCP channel. Given the disruptive nature of e-commerce, despite detractors, these trends still offer plenty of near-term head-twisting for the industry.
1. All that is branch will be something less. Many years ago, when I was a trainee for a growing regional distributor, the branch manager and the branch location was the go-to entity for the business. E-commerce will wring redundant costs out of the channel including excesses in brick and mortar and branch specific employees. Especially hard hit will be customer service and outside sales. When the customer can self-serve and compare multiple prices online, the need for sales assistance becomes less. Additionally, the branch manager position will decrease in importance. The branch location is fast becoming a logistical entity; indeed many branches are being closed. As branches decline, so will the branch manager position.
2. Big content wins big. Leading e-commerce wholesalers will put hundreds of thousands and maybe millions of SKU’s online. We recently read of a leading HVAC distributor who has more than 500,000 SKU’s online. In addition, where regional competitors struggle to sell more than 5 percent of total sales online, this firm has 30 percent of demand from e-commerce. This trend to build-out SKU’s will continue as long as the content is accurate, current and rich.
3. You can’t go big SKU’s without PIM. Product Information Management software is critical to managing quality content. Distributors have thousands of vendors for hundreds of thousands of products. Each SKU typically has somewhere between 40 to 50 descriptive and application attributes that are used to populate both the content management and ERP system. A quality PIM software is essential to building out big content; there is no substitute. Stripping out content from competitors or getting it through various buying-groups or content development firms is a start. However, syndicating content and using it in a variety of forms to attract incremental sales is almost impossible without PIM software.
4. You get what you pay for. Our message is, for a mid-market firm, expect to own a competitive e-commerce software suite and employ specialists for around $1.5 million. This effort will also take several years to complete and integrate into the ERP system. We are constantly bombarded by software vendors who say our estimate is way too expensive. Our experience is that far too many of these software vendors are not the best in class; their functionality is truncated, they don’t have vibrant user communities, and they appeal to a small audience. When you purchase e-commerce software, our suggestion is do the research, look over the functionality in detail, and buy the best in class. Bluntly, there is a lot of junk out there so caveat emptor. Additionally, the technology will become less expensive over time and there are some SaaS options for transaction software but buy still reigns over rent when it comes to existing options.
5. The showroom is online. The fixture showroom, a rite of passage for major line distributors of yesteryear, is moving online. If the wholesaler doesn’t have a good online presence, its physical showroom traffic will suffer. A case in point is yours truly. Several years back, we gutted the bathrooms in our house in the Chicago burbs. Two local and sizable distributors with major lines, were preferred by our contractor. Unfortunately, neither firm had an online presence with fixtures and associated products. Both firms lost the order to Home Depot who gladly shipped in non-stock fixtures so we could view them at the closest store.
6. Fee-based services will offer differentiation for mid-sized and small distributors. Our 2016 research finds that small and mid-sized distributors have moved further into the value chain and offer fee-based services for their customers. Services include light manufacturing, application specific assembly, and post-sale technical service. Small and mid-sized wholesalers can’t compete with the big budgets and e-spend of the large firms. Hence they will survive by differentiation of their service offerings for key customers.
7. Vendors will sell more direct and more to entities from outside the traditional wholesale channel. Today, product vendors sell some 30 percent of their demand direct and through non-traditional online entities serving wholesale channels. We expect these online entities to grow. Recently, Amazon Business landed a $5 billion/10 year contract that was, in part, supplied by a number of wholesale distributors. Full-service distribution is under siege from lower-cost, more efficient, and more online-savvy competitors. Traditional distributors who don’t take these competitors seriously, will lose sales.
8. Old style channel supports, monies, and volume rebates will likely decrease. Yesterday’s sales and marketing between vendor and wholesaler was push. E-commerce is self-serve and pull via rich content and in-depth analytics on the online customer. Self-serve customers don’t respond as well to push marketing and personal selling. Hence we expect programs and monetary supports of the past to decrease with the funds being spent to improve the online connection between manufacturer, wholesaler, and end customer.
These trends are already underway, and they will grow as online commerce grows and Millennials move into managerial and executive roles. Today, B2B e-commerce is approximately 15 percent of demand and has significant growth potential as some 60 percent or so of the market is predicted to go online as technology improves and online buying dominates.
Scott Benfield is a consultant for B2B markets involving manufacturers and distributors. He can be reached at 630-428-9311 or Scott@Benfieldconsulting.com.