UNTARNISHED

There’s no denying it — times are tough. In the past two years more than 400 public companies have filed for bankruptcy protection. Since March 2001, 2.6 million private-sector employees have lost their jobs. And the national unemployment rate has peaked at 6 percent, with 8.8 million Americans out of work.

The economy’s troubles boil down to this: more jobs are being cut than created, and consumers aren’t spending enough to lift the economy out of the dumps.

The jan/san industry has not escaped these problems. Many of the markets that make up distributors’ clientele, including government and health care, have been especially hard hit by the economic downturn.

All is not lost, however. At least one link in the supply chain is weathering the storm well. Wholesalers (also called re-distributors or master distributors) say the depressed economy hasn’t hurt them. In fact, in some cases it has actually helped business. While it may sound like an economic anomaly, wholesalers’ success is just a byproduct of the unique services they provide. The best news of all: wholesalers say they can help distributors survive and thrive during these trying times.

Multi-Purpose Service
“This industry knows we are a key ingredient in the distribution chain,” says Jeffrey Scheck, vice-president of the Miami-based wholesaler Sweet Paper. “Our strength is moving large quantities of goods quickly and efficiently through the system.”

While moving product may seem like a simple service, it is one that distributors are beginning to appreciate more. As manufacturer minimums get higher, many distributors cannot afford to order and house the larger quantities. The wholesaler is able to house product beyond the practical capabilities of a distributor.

Traditionally, large distributors use wholesalers primarily for fill-ins between their direct orders, and for unusual items, while mid-size distributors use them to find products they don’t stock, and smaller distributors use wholesalers as their warehouse.

Manufacturers can sell larger quantities to a wholesaler and ship to one location, which saves the manufacturer money in terms of credit exposure, and freight and shipping costs. Plus, the manufacturer knows it will be paid in a timely fashion, says Jim Merfeld, director of merchandising for A.W. Mendenhall, a Chicago-based wholesaler.

The manufacturer rewards the wholesaler by extending to them discounts above what they offer distributors. The savings are passed along to the distributor. Although wholesalers’ prices are still typically higher than buying direct, the savings are made up in convenience, selection and storage savings.

“Distributors buy from us because they can mix and match products from more than 150 vendors, all on a single order,” says Merfeld. “It makes ordering easier and reduces the number of vendors they deal with. They can do one-stop shopping.”

It is an idea that seems to be working. While many other businesses are reacting to the economic slowdown by cutting jobs and product offerings, wholesalers are actually growing.

Growth Against the Grain
“It’s somewhere between a war and a jungle out there, particularly in this economy,” says Dan Merkel, executive director of Advantage Marketing Group, a Chicago-based alliance of member wholesalers. “But a number of our guys are actually expanding facilities. The theme I’m hearing is they are focusing on growth. Those who aren’t expanding facilities are expanding their product offerings and adding new salespeople to handle new channels of distribution, perhaps automotive or industrial.”

Callico Distributors of Taunton, Mass., is growing its business by adding new products and product lines. It wants to broaden its bundle by reaching new markets, including beauty, medical and automotive.

“We are in a growth mode,” says Callico’s president, Mark Callahan.

Similarly, Lagasse Inc. of New Orleans is bringing product and marketing services to its customers for specific end-user categories, including schools, health care and lodging.

Also in growth-mode is Bunzl Distribution Inc., St. Louis, which has introduced a private label line called Prime Source, says Terry Frank, executive vice-president of marketing, logistics and warehouse operations. The new line gives Bunzl’s distributor customers a way to differentiate themselves in the crowded marketplace.

“This is a very opportunistic time for wholesalers to prove their worth and benefit from the sluggish economy,” says Steve Schultz, president of Lagasse. “Our message becomes more resilient in a sluggish economy. We just completed our first quarter; we had the best financial quarter in our company’s history, and we did it without layoffs. In a bad economy, the wholesaler can thrive, not just survive.”

Win-Win Situation
Adding new products and increasing sales staff are just some of the ways that re-distributors look out for their customers. Wholesalers seem to realize that, in order to be successful themselves, they must help distributors succeed.

“Keeping our customers competitive is key,” says Scheck. “Re-distributors are perfectly set up to help distributors during these times. Use our warehouse, not yours; use our inventory, not yours. Even use our trucking through drop shipments, not yours. The re-distributor is set up to allow distributors to maximize resources and minimize costs during good or bad times.”

Norshel Industries in Croydon, Pa., has seen its relationships with distributors improve since the economy took a nosedive.

“Many distributors have seen that it is more economical to buy smaller quantities of a product line from Norshel than a larger minimum order from a manufacturer,” says Norshel’s vice president, Aaron Liebowitz. “The distributor is able to take care of the end user by utilizing our inventory for just-in-time delivery. At the same time, the distributor is able to avoid tying up money in inventory that sits on the shelf.”

Re-distributors of America has seen business boom recently, says Michael Hunt, vice president of sales and marketing. Hunt believes this is because wholesalers make it possible for distributors to purchase a variety of manufacturers’ product lines from one source without worrying about multiple-mill minimum-order requirements. Distributors can make smaller and more frequent orders while tying up less cash and achieving a better rate of return on their investment.

“In today’s tough economic times the name of the game is turns and cash flow, which is the service that re-distributors provide,” says Hunt.

By purchasing from a wholesaler, distributors receive triple the return of buying direct, according to the Sanitary Supply Wholesalers Association (SSWA). Wholesalers provide instant availability, improved cash flow, faster inventory turns, greater ROI, sales growth and quicker deliveries.

In fact, SSWA claims that for each dollar a distributor invests in inventory, it would make a return of $8.32 if it bought from a wholesaler. Over a one-year time period, a distributor who invested $36,400 in inventory from a wholesaler would receive a return on that investment of $302,848. Buying direct from a manufacturer, the same distributor’s annual investment would be $30,000 with a ROI of only $90,000.

“If you can invest a dollar with me, turn your inventory faster and sell the product quicker to your end user and get paid quicker by your customer, then the margin you make on that sale is enhanced beyond the one dollar you invested with me,” says Schultz.

Most wholesalers also provide business development tools, including catalogs and online capabilities.

“Many of our customers could tell you how providing them with a top-quality color catalog, with all their company information on it, at a fraction of the cost of in-house production, has been a very profitable venture for both of us,” says Leibowitz. “Our smaller and medium-size distributor partners now look much larger and more professional to the end user.”

Bunzl offers an e-catalog that allows customers to place orders online and to search for new items. Sweet Paper customers, equipped with a password, can use the wholesaler’s website to create customized brochures, check inventory and pricing, update orders, and see pictures of products.

“We have to get to a point where half our industry’s transactions are done electronically,” says Schultz.

Most wholesalers SM spoke with are doing just 10 to 15 percent of their business online.

Sore Subject
Of course, wholesaling is not without its controversies. The biggest of these today is the new category of “dual distributor” that has invaded the marketplace.

“Dual distributors sell to both distributors and end users,” says Hunt. “Dual houses have the luxury of subsidizing lower-margin redistribution business with higher margin end-user business. This creates an unlevel playing field.”

When a wholesaler sells to end users, it creates problems not just for other wholesalers, but also for his distributor customers.

“Our goal as an organization is to help grow our distributor partners’ businesses by working with them, not against them,” says Hunt. “By selling to end users, we would lose the trust factor that our companies have built with them over the years.”

“We need our distributors to know with confidence that we will not be going after their end-user customer,” adds Leibowitz. “We want to help our distributor partners sell to hundreds of their end-user accounts — not take their biggest few opportunities and sell them direct.”

It can be tempting to go after end users, especially as their ordering capability increases. Still, every wholesaler SM spoke with said they have resisted that temptation.

“Our customers know we will not compete with them, even when the end-user account grows,” says Scheck. “It enables us to work hand-in-hand to service the end user.”

Dual distributors can end up creating problems for the end user as well.

“If you are buying product from a re-distributor and in turn shipping that to an end user, in some cases those products may have the name of the re-distributor and could create confusion with the end user,” says Schultz. “We are completely invisible to the end user. Our name does not appear on anything. The end user will never know what or who Lagasse is. The product shows up in the name of our customer.”

Changing Reputation
After decades of struggle, wholesalers are finally finding a foothold in the jan/san industry. In fact, this is one of the last industries to embrace redistribution.

“The classic chain is manufacturer-wholesaler-dealer-end user,” says Merkel. “For some reason, this industry skipped the wholesaler in its early days. It skipped the natural chain. Everywhere else — stationery, prescription drugs, right on down the line — you always find wholesalers in the mix.”

In the beginning, most jan/san distributors looked at wholesalers with disdain. “In the early days you heard some very derogatory labels attached to wholesalers,” says Merkel.

When Callahan got into the business 30 years ago, re-distributors were for people who couldn’t pay the bills or meet manufacturer minimums.

“Today it’s an accepted channel for any distributor to use and is utilized by all,” says Callahan.

Schultz has also noticed the shift. He believes distributors are shifting their view of wholesalers from a fill-in service to a strategic partnership opportunity.

“We’ve transferred in the past five years from a necessary evil to a logistics enabler,” says Schultz.

Chain Link
Although distributors are beginning to see the benefits of wholesaling, manufacturers have been a bit slower to catch on.

“Manufacturers need to remember what our function is in the supply chain,” says Leibowitz. “The manufacturer must make sure everyone in their company, including independent reps, looks at us as a vital part of the supply chain, not as their competition.”

Michael Hunt agrees. “The relationship could be improved if manufacturers began treating distributors that buy through re-distribution as if they were as important as their direct-buying distributors,” he says. “The distributors buying through re-distributors may be smaller in size than their direct buying distributors, but they still are loyal and, when added up, represent a large chunk of potential business to a manufacturer.”

To do this, Hunt says, manufacturers need to empower the re-distributor with more tools than price alone. Wholesalers can help manufacturers reach more distributors than they could ever sell on a direct basis and can also help them introduce new products and promotions on an accelerated basis.

Sweet Paper has found a way to partner with its manufacturers to promote both companies’ interests. The wholesaler uses an automatic fax and e-mail service to inform customers of promotional items. If a manufacturer has excess stock that it wants to move more quickly at a special price, Sweet Paper can let its 6,000 customers know about the special prices within 24 hours.

This partnership is a sign that slowly but surely manufacturers are beginning to see the light.
“Manufacturers are beginning to recognize the real cost of self-distribution, and that self-distribution isn’t always in their — or their customers’— best interest,” says Bunzl’s Frank. “As the industry’s sales forces decline, the manufacturer and distributor’s relationship is evolving toward team selling.”

An area that could still use improving, however, is how manufacturers manage their contracts, says Frank.

“The abuse of these contracts can severely disrupt market pricing, and unfairly disadvantage the distributors,” says Frank.

“We have also had problems with manufacturers who have printed standard guidelines in the contracts for representing their lines as a wholesaler, but do not enforce their programs evenly with all wholesalers,” says Leibowitz.

Talk is Cheap...So Talk
While the Internet and other high-tech tools have helped improve communications in the jan/san industry, the wholesalers agree there is still room for improvement.

“Our industry still plays it close to the vest,” says Schultz. “This industry is fairly good at communicating transactionally but we are at the infancy of communicating strategically. We need to share our independent knowledge to improve the industry. We would all benefit from a more efficient, streamlined supply chain.”

Wholesalers would like more free-flowing discussions among their peers about such topics as e-commerce, minimum orders, product introductions, and the role of manufacturer’s reps.

“The communication could improve if the communication was more of a broad approach that brought all of the parties together at the same time versus hoping the message got passed along the distribution chain,” says Hunt.

Merfeld agrees, adding, “The communication could be more urgent, more immediate.”

All told, however, the wholesalers are pretty happy with their increasingly important role in the jan/san distribution chain. In the end, they agree, all of the players in the industry have the same goal — to satisfy end users’ needs at the lowest possible cost. And that goal is never more pressing than in a weak economy.

“At the end of the day, the end user is the boss of all of us,” says Merkel. “If the consumer wants Product A or Product X, it’s very difficult for the distributor to have all of those, and that’s where the wholesaler comes in. Every day we fill a need and that’s why we continue to flourish, especially in an economy that is uncertain.”

Becky Mollenkamp is a freelance writer based in Des Moines, Iowa. Email comments or questions.