The PPE Channel In 2020 - Modern Distribution Management

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Download handouts (PDF) : www.mdm.com/iseaslides
The PPE Channel In 2020:
Perspectives From Two Outsider Observers
May 4, 2015
www.ircg.com
WWW.IRCG.COM
8:00 AM to 10:00 AM
www.mdm.com
INDIAN RIVER CONSULTING GROUP
About IRCG
2
Midsize consulting firm founded in 1987 that provides advisory
services for manufacturers, distributors, private equity and
other ownership groups.
Our expertise is in market access, which measures how well
resources are aligned with growth opportunities.
•
Strategy development and execution
•
Channel design & management
•
Sales effectiveness and compensation
Well-recognized for our industry depth, experience
and practical approach
•
Senior Research Fellow for the NAW Institute
•
Multiple permanent instructors at Purdue’s UID
•
Multiple NDAs with members of this association
and this industry, both predators and prey
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INDIAN RIVER CONSULTING GROUP
About MDM
3
Market research and publishing firm for
wholesale distribution/industrial product
markets. Publisher of Modern Distribution
Management and www.mdm.com, the
resource since 1967 for distributors.
MDM Analytics is the leading market analytics
firm in North America for industrial and
construction product markets.
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INDIAN RIVER CONSULTING GROUP
Agenda
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The multiple forces shaping the industry today have not been kind to
the safety passionate manufacturer or distributor who leveraged
specialized knowledge to build businesses with high service and
selling costs. We are no longer seen as a growth industry.
Industry Structure & Trends
The PPE Market & Channels
Q & A Session
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INDIAN RIVER CONSULTING GROUP
From the ISEA Member Survey
Top Pain Points
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• Distributor private label
• Distributor mind share
• Currency
• Most larger distributors are order takers and not value sellers
• Focus on price has resulted in a "race to the bottom" for both distributor
and manufacturers margins
• Distributors not wanting to stock product but expecting fast delivery
• Competitive low-cost, non-certified, Chinese imports
• Getting the Sales Force to go after New Channels
• Finding long term young people to pass the torch to
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From the ISEA Member Survey
Dumb Things Industry is Doing
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• Distributors are focused on price and not feature value selling that helps
their own bottom line and reduces their customer's costs too
• Many are not partnering with a supplier/customer but instead just
chasing every dollar and trying to be everything to everyone
• Commoditizing safety equipment
• Loss leader pricing
• Fighting against smart safety regulation and pretending that voluntary
compliance is enough to continuously improve worker health and safety
• Selling direct to end users and bypassing distribution
• Letting distribution become the safety advisor over the manufacturers
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Industry Re-Fragmentation
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Structural changes are accelerating
• E-Commerce is maturing: B2B>B2C>B2BC
• Emerging hybrid models
• Polarization
By size
• By specialty vs. broadline
•
• Integrated Supply still carves its share of market
Three critical differentiators: Technology, talent, analytics
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What got you here won’t get you there
Today’s Core Distributor Challenges
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1. The accelerating trend away from
relationship buying to advantaged
players & rabbits*
2. The internet buffet of choice and
transparent race to the bottom
3. The erosion of selling service as
a differentiator in the market
4. Increasing customer
sophistication
5. Aging of old school sales reps
and a limited pipeline of
replacements
6. Markets are aligning by size
where larges buy from larges
*http://blogs.hbr.org/cs/2012/07/the_game_buyers_play_with_
vend.html?utm_source=feedburner&utm_medium=feed&utm_
campaign=Feed%3A+harvardbusiness+%28HBR.org%29
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The punch line is that the old model is
not a best practice for the future.
Success will be about doing new
things, not doing the same things
better.
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Weapons of Mass Disruption
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1900
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2015
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Changing Distribution Models
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Multi-channel
−
Branch
−
Catalog
−
Relationships
−
Call centers
−
Digital platforms
•
Changing customer buying behaviors
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Integrated functions: Market, sell, service, order
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Serving highly fragmented markets
How does the old school distributor with only a self directed sales
force compete with these new and better alternatives. What if the
issue isn’t margin erosion but rather chronic low labor productivity
that needs margin to prop it up?
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Changing Distribution Models
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U.S. Industrial MRO Markets
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Annual survey of largest 40 distributors in U.S.
• Total market size = $210 billion
• Safety PPE = $5.4 billion (2.6%)
• Respiratory/Test = $2.1 billion
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Source: MDM Analytics,
Economic
Census, mdm.com
INDIAN RIVER
CONSULTING
GROUP
U.S. Industrial Distribution Markets
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Market share
1. Wolseley Industrial Group: $11.6B (Ferguson)
2. W.W. Grainger: $10B
3. HD Supply: $8.9B
4. MRC Global Corp.: $5.9B
5. Airgas: $5.1B
6. Motion Industries: $4.8B
7. DistributionNOW (NOW Inc.): $4.1B
8. The Fastenal Company: $3.7B
9. MSC Industrial Supply: $2.8B
10. Applied Industrial Technologies: $2.5B
2014 U.S. revenues
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Source:
MDM
Analytics, mdm.com
INDIAN
RIVER
CONSULTING
GROUP
U.S. Industrial MRO Markets
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Safety PPE = $5.4B
10%
Respiratory/Test = $2.1B
Protective Clothing 38%
38%
16%
Gloves & Footware 30%
Eye & Face Protection 16%
Test Eqpt
27%
Head Protection 10%
Hearing Protection 3%
30%
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Fall/Misc. 3%
Respiratory Eqpt
73%
Source: MDM Analytics,
Economic
Census, mdm.com
INDIAN RIVER
CONSULTING
GROUP
U.S. Industrial Distribution Markets
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Key safety channels in U.S.: Large & Specialty
W.W. Grainger………………..$1.7 billion (safety & security)
Airgas…………………………$675 million (safety)
The Fastenal Company……..$400 million (safety)
DXP Enterprises……………..$200 million (safety)
VWR International
Sonepar/Hagemeyer/Vallen
WESCO (Conney Safety Products)
Arbill
Mallory Safety & Supply
Northern Safety & Industrial
Orr Safety
Safety Today
Stauffer Glove & Safety
Wise Safety & Environmental
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Source:
MDM
Analytics, mdm.com
INDIAN
RIVER
CONSULTING
GROUP
Agenda
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An adequate product with strong market access channels will always
achieve market dominance over the better product with weaker
access. Channel design has become the single most critical
competitive differentiator in the new century.
Industry Structure & Trends
The PPE Market & Channels
Q & A Session
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PPE is a channel led business, buyers choose the supplier before the brand
What Is A Marketing Channel?
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The wiener is the product; the bun and condiments are the channel;
and all the customer wants is a good lunch
A channel is an interdependent group of firms who
are involved in how a product is used or consumed
Marketing channels connect end customers with
suppliers by providing demand creation, logistics,
financing and support services
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They can provide lower cost coverage with their gross
margin basket, they can pull through sales by winning ties
when the customer is indifferent, and they can lower
transaction costs independent of order size
Members include distributors, buying groups, agents, reps and brokers
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They survive if they perform activities more cost effectively than those they buy
from (suppliers) and sell to (customers)
Gross margin (channel compensation) pays them for their value added
Channel players can be eliminated but channel functions cannot
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Acting as a primary when you are tertiary creates poor market access
Product Position Considerations
Product Lines
This is why
some primary
PPE is direct
Portion of Revenue
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#1 - #5
Primary
#6 - #20
~60%
Secondary
All the rest
Tertiary
~30%
~10%
Distributor objectives
Manufacturer strategies
Primary
Products
• Drive volume
• Premier brands and door openers
• High turns support lower margins
• Leverage market power
• Corporate incentives, often volume based
• End customer brand building
Secondary
Products
• Fill product gaps and expand wallet
share
• Recognized brands
• Medium turns and margins
• Be “easy to do business with” (ETDBW)
• Functional pricing with loyalty rebates
• Direct demand creation
Tertiary
Products
• Drive profit
• Safe brands
• High margins support lower turns
• Be extremely ETDBW, with simple pricing
• Direct incentives to sales reps
• Wide and multiple channel availability
Manufacturers can be very successful selling at any of these levels
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>90% of distributor sales is to customers who purchased the same product before
Bought Versus Sold
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A product is sold when a customer chooses it from competitive alternatives
for the first time
• A sales rep is often, but not always, involved
• Sometimes there is a thoughtful evaluation of price/performance criteria
• With channel led business the customer doesn’t care or their choice is
independent of price/performance criteria (they choose the distributor
first)
If the product is satisfactory it will be purchased again (bought) when the
customer’s requirement reoccurs- generally independent of sales efforts or
investments (interruptions are often irritating)
When the product is repurchased it is bought, not sold, as the market has
been made
• The size of the long tail repurchase rate measures brand power and
customer switching costs
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This buyer represents a small and shrinking portion of the industry spend
“Safety Passionate” Customers
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Plant Safety Engineers have passion that stems from
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Pride and professionalism (“This is what I do, it’s my degree, it’s my job”)
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Emotional commitment (“I want all 500 to leave the plant in the same shape as they
entered it”)
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Business risk (many stories about huge fines, painful OSHA audits, etc.)
The face frequent internal battles, which they want help in fighting
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With purchasing: “this is my realm”
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With production: “sometimes I am seen as the enemy of productivity”
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With staff: “they don’t want to look dorky or be uncomfortable all day”
Much of what they value most from distributors has nothing to do with
safety expertise
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More flexible in delivery, sourcing and replenishment (mass customization)
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More responsive with faster call backs and heroic recoveries (market power)
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Proactive advice on cost savings and supply disruptions (“With IDG I have to call
them”)
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Information and support that saves time (“We’ll never hire a second safety engineer”)
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This buyer represents a small and shrinking portion of the industry spend
“Safety Passionate” Customers
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“Ring fencing” products offers a partial escape from the ghetto
• Everyone knows most items do not require application support (at least after
initial purchase) and can be sourced from many places
• Safety engineers and specialty suppliers engage in a subtle dance over what
share is required to get the extra services
• Safety engineers negotiate with purchasing over
what must stay in the safety basket
(“it’s covered by regulations”)
Your internal champions often feel
like they’re standing alone
The growth in safety services and consulting is
larger than the margin decline in the products space
What do you do when the service provider specifies “good enough
or equivalent” brands to purchasing?
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This is a primary shareholder value play for the large distributors
Private Label Is A Catch All Term
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In a channel led business driving private label
is a smart move for distributors- strong brands
are their door openers and they will not stop
There are branded products provided by a
manufacturer
There are generic products provided by a
manufacturer
These same products can be provided by a
distributor or a retailer under their name
It is not about the products, it is about the brand
promise
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Ignore this at your peril as it costs lots of money with little return
Where Is The Bulk Of PPE On This Curve?
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Introduction
Product lifecycle chart
adapted from Geoffrey
Moore, Dr. Diane
Badame, USC
Marshall School and
IRCG
Growth
Maturity
Decline
Industry revenue
Industry profit
+
0
Early adopter, high cost
and risk tolerance,
critical need
Early majority, value
driven, seeking
competitive advantage
Late majority, cost
driven, risk averse
Laggard, risk averse
Marketing
Strategies
Awareness
Differentiation
Loyalty
Harvesting
Competition
No direct competitor
Growing
Extreme
Extreme or declining
Product
Few and often
customized
Increasing breadth to
cover niches
Full product line
Trim back to high
volume, high profit
Price
Skimming or
penetration
Gain share and deal
Defend share and profit
Focus on profit
Inform and educate
Stress competitive
differentiation
Brand value
Minimize
Exclusive with high
partner investment
Restricted with focus
on value add
Open to maximize
coverage
Migration to lowest cost
channels
Typical Customer
Promotion
Channels
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Agenda
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Take a break and when you come back don’t sit with stupid people,
coworkers from your own company, or competitors
Industry Structure & Trends
The PPE Market & Channels
Q & A Session
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Anti Trust Disclaimer
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Plan on being deposed in the next 24 months about this meeting
• It is important to be able to enthusiastically tell the whole truth
• If you aren’t deposed- then you can be happy either way
We are NOT going to discuss any specific customers or any specific
products or any specific prices or any specific geographical markets,
or any specific distributors, or any specific manufacturers, however
IN GENERAL*
• We can speak freely industry trends and forces of change as long as they
are not linked in any way to the specifics described above.
• We can speak freely about trading practice alternatives and channel
economics
We are not going to make any agreements, either explicit or implied,
with any other participant with respect to our future trading practice
plans or intentions
• Every firm must make their own commercial decisions unencumbered by
any other participant in this room
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Group Discussion
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Discuss the questions and statements below in your group.
1. Without divulging any of your future commercial plans,
what was you biggest take away from the presentation so
far? (everyone shares)
2. Does your group have any questions for Tom or Mike on
anything discussed so far?
Select the group member with the longest tenure in the PPE
industry as a spokesperson to share your questions with Tom
& Mike
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