The Big Boxes: Feeling Boxed In?

Ray York recalls a day last summer when he helped a customer with questions on window cleaning products, ultimately selling that customer $100 in product. He also remembers that customer coming back to the store an hour later to return the products he had just purchased.

“I asked him why,” says York, president of Fenton Janitorial Supply, Fenton, Mo. “I asked if he wasn’t interested in window cleaning anymore, and he told me that he went to Lowe’s for something else and found the stuff for less money.”

Distributors in the jan/san business may have similar stories of the frustration of operating in cities or towns that have “big-box” stores.

“People take advantage of us,” York says. “They come in and they pick our brains and then they go and try to find the prices cheaper somewhere else.”

York compromised with this particular customer by matching Lowe’s price. And while he didn’t make any money on the deal, he says, “At least I kept Lowe’s from making that sale — however small it may have been to them.”

Big-Box And Jan/San
Most distributors are well aware of what big-box stores bring to the table for customers. They have massive facilities full of marked-down supplies and their business model is based on high-volume turnover rather than support and services. You know who they are: Lowe’s, Sam’s Club, Wal-Mart, Home Depot, Costco and other large, national retailers.

These stores have their eye on the jan/san market. That is nothing new — they have maintained a presence in the market for the past 10 to 15 years. Today, however, they are expanding their reach through a variety of measures, including the implementation of delivery services, an expanded focus on Internet business and other value-added offerings.

The opening of the Home Depot Supply is one example of a big-box store’s expansion into the jan/san market. In 1997, Home Depot acquired Maintenance Warehouse, which was renamed Home Depot Supply. This division carries maintenance and repair operations (MRO) products, including cleaning supplies and equipment.

The Home Depot Supply division made several acquisitions in 2005. “These acquisitions give us strong entry points into the $400 billion professional market,” according to a statement on Home Depot’s Web site. “We intend to continue growing in the market both organically and through future acquisitions.”

Home Depot is also attempting to secure lucrative government contracts. In 2003, it obtained two General Service Administration contracts, making it easier for government buyers to procure products through its catalogs and retail outlets.

Home Depot plans to expand product offerings and services in all of its subsidiaries and business extensions, including Home Depot Supply, according to the company’s Web site. “We have more than 1,560 stores featuring contractor service desks and our ‘The Home Depot Supply Inc.’ offers facilities maintenance professionals next-day delivery of thousands of maintenance, repair and operating products from its 20 distribution centers.”

While Home Depot has expanded market offerings through its physical locations, Office Depot launched a Web site in April 2002 called Janitation Depot, which offers an array of janitorial products and breakroom supplies. It was created because of the high demand for paper products on Office Depot’s main Web site.

Of the “big-box” companies contacted, only Lowe’s and Sam’s Club returned calls, though they declined to comment on specific business direction or plans for jan/san-market expansion.

A Lowe’s representative wouldn’t disclose information on the company’s market presence, other than saying that the company’s customer breakdown is roughly 25 percent commercial business customers (CBC) and 75 percent consumer. “We don’t break down CBC, whether that’s sanitation or maintenance, or electrical or building contractors,” the representative said.

That the company will continue to focus on commercial business, however, is obvious.

According to the company’s 2004 annual report: “We are continuing to focus our efforts on the commercial business customer. With our ongoing national expansion making store locations more convenient, our logistics systems ensuring we have the appropriate inventory levels … [Lowe’s CBC] experienced comparable sales increases of twice the company average in fiscal 2004.”

The Web site also says the company is encouraged that its commercial business is growing in all markets, not just lumber and building materials. “Our ‘commercial business customer’ initiative also performed well in 2004, with comparable store sales of over twice the company average, and double-digit comparable store sales increases in 15 of 18 merchandising categories.”

Big-Box Sprawl
Big-box stores entered the jan/san marketplace approximately 10 to 15 years ago. Stores opened in urban areas first and then spread to rural locales. The competition has presented challenges to the independent distributor, but many distributors carry products beyond traditional jan/san items, so they have encountered the threat from national competitors before.

Michael Clarke, president of JC Paper, Fremont, Calif., says about 30 percent of his business is jan/san products; the rest lies in printing paper.

Costco was the first big-box store to enter his geographic area about 10 years ago, selling commodity items at low prices. Costco’s strategy drove down JC Paper margins for the same products. Costco then began selling ancillary items as well.

Costco’s increased market presence paved the way for other big-boxes’ entrance into the jan/san market. “Costco took [the market] first and then [customers] went to the Office Depots and the Staples and the more retail-like stores,” says Clarke. “You had your regular loyal customers, but your basic walk-in types have converted over to these other places, probably because of a convenience factor.”

Clarke is bracing for similar competition for his jan/san customers. “I know we’ve already seen, on the janitorial side, the napkins and toilet paper starting to show up in Costco.”

To battle this competition, Clarke has adjusted his business to focus on customers who seek out the value-added services he provides. While he feels the walk-in customer generally shies away from higher product cost at the expense of “value,” he is confident the professional customer will embrace services because they are looking for a long-term business partnership, not a one-time sale.

Because of the rural location of his business, John Treat’s company avoided big-box competition until about five years ago, when a Wal-Mart Super Center and a Home Depot opened. Treat is president of Treat’s Solutions Inc., in Ada, Okla., a rural town of 25,000.

“Now, after they have engulfed the large cities, they’re attacking the rural markets, so I guess everybody is in the same boat. It’s no longer a ‘I’m-not-affected-but-you-are’ type of situation.”

York says Lowe’s, Home Depot and Sam’s Club are the three major players in his geographic market. He believes the biggest effect on his business has been the loss of smaller “mom and pop”-type accounts.

“Big corporations aren’t going to necessarily send someone down to Lowe’s to buy a trash can or chemicals, and [big-box stores] certainly don’t have outside salespeople,” says York.

Many of the “mom-and-pop” shoppers, which used to be the core of York’s business, are now shopping at big-box stores because, while they were shopping for other items, they noticed jan/san supplies were priced lower than what they could get them for from their local distributor.

Formidable Threat
Experts say the competitive pressure big-box stores exert on traditional distributors should not be underestimated.

The tactics that big-box stores use to expand within these markets are “relentless” says Mark Dancer, vice president and principal for Pembroke Consulting, Philadelphia.

“They’re large, publicly traded companies. They have aggressive management, and they’re constantly looking for new ways to add revenue and new ways to offer fee-based services to their customer base.”

Distributors should realize that big-box operations have a very aggressive marketing game plan. “Some things fail, so they try again,” Dancer says. “Distributors should never interpret something that seems to not be working well for a big-box as a signal that they’re not going to pursue their products in those markets.”

One thing big-box stores have offered recently is delivery, Clarke says. Traditionally known as “cash and carry” operations, many big-box outlets are now extending their reach into the pool of professional customers by providing delivery — a move that threatens the very core of what jan/san distributors provide.

Other notable changes big-box companies have implemented are the addition of traditional “value-added” services like payroll and benefits consulting or acting as the human resources department for small business customers. Whereas distributors are focused on the product and what services can enhance the product, the big boxes are increasingly looking at what they can do to enhance their customer’s overall business.

“They are constantly innovating and trying to widen their customer base, increase their loyalty and offer them new services,” Dancer says.

Focus On The Competition
Most distributors say they are more concerned about big-box competition today than they have been in the past.

But, there is a consensus among traditional jan/san distributors that big-box operations will have to expand their inventory of jan/san products to really compete.

“In order for them to grow, they have to expand,” York says. “There’s only so much market that they can absorb for a particular product, and they have to find other products in order to diversify and expand.”

Treat says he was worried when big-box stores came in, and is still keeping his eye on big-box competition. “I don’t think I’d turn my back on a biting dog,” he says. “Even though you might think that the chain isn’t long enough to get you, I think we have to watch and continually look over our shoulders, but at the same time I’m seeing many opportunities for distributors to continue having success.”

Toot Your Own Horn
With manufacturer consolidations so prevalent today, many of these now-larger suppliers are apt to view big-box stores as a viable way to get large quantities of their product into the marketplace.

In the paper goods market, Clarke says there are only about four major suppliers in his area. Those manufacturers must turn a large amount of tonnage or they may have to shut down a mill.

“A lot of times, it’s ‘Let’s strike a deal with Wal-Mart or whoever,’” says Clarke.

Manufacturers are dealing with big-box related pressures as well. Recently, while speaking with a representative from one of the large, nationally traded manufacturers that York works with, he learned the supplier was losing business due to Sam’s Club’s sale of competitors’ products.

On the other hand, manufacturers find relationships with big-box stores attractive because of the market share they represent.

To combat this trend, distributors must become more aggressive in establishing win-win business relationships with manufacturers.

Distributors, for example, can show manufacturers the value of a long-term business partnership. “Distributors need to ask their manufacturers what they’re trying to do to grow their share and then offer new programs to support those objectives,” says Dancer.

He suggests distributors try things like customer programs for launching new products, coordinated efforts to penetrate new accounts, or sharing customer point-of-sale information so that the manufacturer and the distributor can generally improve supply chain visibility. “Distributors should really try to find ways to help take cost out of manufacturers’ businesses,” Dancer says.

Winning The War
Too many distributors concern themselves with surviving the big-box onslaught when they could be looking for ways to leverage a big-box presence into more business, contends Wally Bock, a small business profitability consultant based in Greensboro, N.C.

“I don’t think it’s just a survive thing,” he says. “I think it’s a thrive thing. I think you can be more profitable because you can let [big-box stores] carry away all those price sensitive ‘C-list’ shoppers and you can go after the big ones and the high profits.”

A productive approach, rather than a knee-jerk fatalistic reaction, to the big-box competition has distributors taking a second look at their own business strategies — and growing even stronger as a result.

“[Big-box competition] can cause a lot of pain and heartache and it requires distributors to step up and take a fresh look at their strategies,” Dancer says. “It can be painful. But [big boxes] can make at least some of the channel members stronger in the long run.”

Treat agrees that distributors can beat out big-box stores, but he says that complacency will get distributors nowhere. “We’ve got some bumps in the road, but it’s not the end of the road,” Treat says. “We can see that there are some tough times right now, but my favorite saying is, ‘Tough times never last, but tough people do.’”