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There’s no doubt the jan/san industry is changing — transformation in several areas has been underway for years. However, looking ahead, distributors are predicting a future that is different from the one they envisioned even a few years ago, according to a new survey conducted by SM.
In the December 2003 issue of SM, a similar survey on the state of the industry found the overall economy to be distributors’ biggest concern. Larger worldwide economic issues forced companies to tighten their belts, there was trepidation over the level of mergers and acquisitions, and yet there was an overall feeling of hope for 2004.
Distributors are still facing powerful challenges from the outside: world economics; nontraditional distributors and big-box stores seeking out a piece of the pie; and increases in the costs of raw materials driving prices higher.
There are also internal issues: outdated or non-existent technology, unqualified salespeople, and shrinking margins.
Sales Sweep
Of those who responded to SM’s survey, 79 percent say their annual sales increased in 2005, 13 percent say they stayed the same and 8 percent saw a decline. The vast majority of distributors foresee 2006 as a year for good sales — 92 percent expect sales to rise.
Bill Nourse, president of Brookmeade Hardware and Supply Co., Nashville, Tenn., says next year’s sales should follow 2005’s positive trend — he anticipates an increase of somewhere between 15 and 20 percent. “I expect to do fairly close to that next year because we have a target for next year and I’m pretty sure we’re going to be able to make that,” Nourse says.
He plans to achieve sales growth by capitalizing on the expertise of his sales staff. “I have more people on the street and we are increasingly working sales plans, looking at what we can do and executing them better,” he explains. “Also, my staff is older and with every year their industry knowledge grows stronger, so they get stronger with their customers.”
Though distributors appear to be optimistic about sales in ’06, they are not just sitting back, waiting for profits from those sales to roll in — they are proactively looking at their companies’ long-term challenges and coming up with ideas for overcoming them.
When asked about their concerns for the next 10 years, 31 percent of those surveyed say increasing costs are their primary concern. Shrinking margins are also near the top of the list as 24 percent say margins are at the forefront of their minds. Survey respondents also noted the following concerns: competition from non- traditional distributors (13 percent); the economy’s effect on business (9 percent); manufacturers selling direct (7 percent); big box competitors (4 percent); consolidation (3 percent); and overseas competition (2 percent).
Costly Materials
The rising cost of doing business is the result of several factors, including skyrocketing employee health-care costs and an increase in raw materials prices — most notably fuel costs.
With increases in raw material prices for manufacturers, which are then passed onto distributors, many distributors are identifying areas where they can find savings. They’re also looking at examining ways to pass on price increases to end users.
Mark Cadell, president of Dutch Hollow Janitorial Supply, Belleview, Ill., says fuel prices have almost tripled in his area since hurricanes Katrina and Rita hit. The company has three diesel delivery trucks that get about seven or eight miles to the gallon, and the company is currently paying between $3.25 and $3.60 a gallon, well above the $1.90 per gallon it paid before the hurricanes.
On top of having to pay more per gallon, manufacturers are passing on price increases from fuel costs to distributors, leading many distributors to apply fuel surcharges to orders as a way to deal with that cost. “You have to figure out how to pass them on to the consumer or you have to eat it, but you can’t eat too much of it,” says Cadell.
Roger Parrott, president of RoVic Inc., Manchester, Conn., says that fuel surcharges are an example of “everyday” charges that are already implemented by many distributors to offset the recent, rapid escalation of delivery costs.
“In the end, we’re finally saying we can’t afford to continue to make non-profitable deliveries,” says Parrott. “Distributors need compensation relief, and so they’ve added fees to their delivery charges because of the fuel crisis.”
Fuel prices have seen the most noticeable increase, though people are being cautioned on the potential increases of other resources. Nourse says only time will tell what predicted increases in natural gas will mean for business. In his area, the gas company is expecting costs to increase 22 percent over last year, but Nourse is not overly concerned.
“We only have, at the most, three months of a major increase in the use of natural gas to heat the building,” Nourse says. “Whatever happens, it is a controllable number because we can run two furnaces in the main room instead of four.”
He also sees the increases in paper and plastics prices. Paper price increases have been pretty steady over the past year, Nourse says. He believes the increases are a result of that industry simply raising prices to keep up with margins. The increase in plastics, however, has been more dramatic. “We sell a lot of bags and I’d guess we’re seeing close to a 100 percent increase [in the price] now over a year or so ago,” says Nourse.
For the most part, Nourse’s customers have been pretty accepting of these increases. He says there has been no real “rebellion,” and while he’s sure some customers have gone price shopping, the widespread increases across all distributorships generally result in end users sticking with their distributors.
Pick Your Battle Plan
While fuel surcharges are one way to react to external forces on a budget, distributors are also seeking out proactive measures to battle higher costs. With the industry’s general concern over sliding profit margins, many distributors say it is inevitable that the overall cost of operating a business needs to be passed onto the end user in a practical way. Several distributors surveyed feel charging extra fees and adding services that they can charge for is a proactive way to remediate declining profits.
“I think there are a lot of things that we in this industry tend to give away,” says Parrott. “If your customer is perceiving value in an extra service you’re providing, they’re more apt to pay for that.”
Parrott cites “fee for service” seminars on topics such as staffing or product rationalization and training opportunities as examples of non-traditional functions that utilize experienced staff time that are not necessarily directly tied to the cost of actual products.
Slimming Down
The increase in raw material prices has an impact on the bottom line of many companies, but there are other aspects affecting shrinking margins. SM’s survey showed slimmer margins as the major concern for 24 percent of distributors.
When it comes to gross margins in the industry, results were divided: according to survey respondents, 34 percent saw an increase in gross margins, 33 percent experienced a decrease and 33 percent saw no change since 2004.
There are many factors that affect a company’s gross margin — Nourse cites such things as higher payrolls and insurance payments associated with more experienced staff, and maintenance of the company’s facility and other assets as those expenses that have an impact on margins.
However, Nourse views competitive pricing as the biggest factor contributing to slimmer margins. As national sellers are able to underprice independent distributors, the local businesses have to decide whether the account is worth keeping, which means pricing under the larger sellers. “Slowly, over time, [underpricing] is a big factor … and that happens in every area, not just jan/san,” says Nourse.
Fritz Gast, executive vice president of P.B. Gast & Sons, Grand Rapids, Mich., also believes margins are most affected by the competitive marketplace. “I think we’re dealing with probably the most sophisticated buyer we’ve ever dealt with because they use the Internet to find comparable products and they come back to you and say, ‘I can get it here for this,’” Gast says.
Time For Tech
In a day and age where a computer purchased a year ago is often obsolete, companies must weigh their options for technology purchases carefully or risk going broke trying to keep up. Staying on top of advancements in technology is one way for distributors to help ease into the future.
In SM’s survey, 58 percent of distributors plan on spending more on technology in 2006, while 37 percent expect to invest about the same amount. Only 5 percent anticipate spending less.
The majority of respondents say they will invest in new or updated Web sites, online ordering, system enhancements software and/or hardware.
Albert Taylor, vice president of operations for Mid American Chemical Supply, Nicholasville, Ky., says technology is a big focus for his company right now as it is looking for new record-keeping, inventory control and bar coding software.
“If you’re going to be on the cutting edge, you have to bring a total package to your customer,” says Taylor. “We now have software connecting all our locations that’s able to better show the customer what we can do for them as far as analyzing their needs and recommending what they need, all the way from product to scheduling employees to budgeting.”
Implementing up-to-date systems and devices is beneficial to internal operations, and while many distributors are seeking to enhance business with new systems, and better software and hardware, many are also looking at the Internet as an easy way to connect their business with the world. Of the respondents who do not yet have a Web site, the majority say they will be looking into getting one.
Distributors who do have Web sites are looking at adding or enhancing their online ordering capabilities. According to SM’s survey, 49 percent of companies currently offer a “shopping cart” function and 75 percent think the number of companies that use it will increase next year.
David Schenck, owner of ProSource, a two-year-old distributorship based in Bloomington, Minn., says developing a Web site is one of his goals. He has a Web address already established and when he does go forward with the site, an online shopping function will be a top priority because it will make ordering easier for his customers. “A Web site really wouldn’t do me that much good without a shopping cart option,” says Schenck.
The Kellermeyer Co., Bowling Green Ohio, has offered online ordering for about four years, says president and CEO Don Kellermeyer. However, he says the company’s Web site is undergoing improvement. “With any online catalog, you have to constantly be changing it because the needs of the customer constantly change,” he says.
To improve the company’s Web site, Kellermeyer says that in the past six months it has added how-to sections, offered specials, moved from an unpriced catalog to a priced one, and offered customer-specific codes for access to pricing records.
He anticipates the company will eventually offer tailored advertising on the site as well. “For example, if you buy a mop bucket, we’ll suggest a wringer and a mop, or if you buy a floor finish, we’ll suggest a floor stripper and floor cleaner,” says Kellermeyer.
One thing the company would like to add in the future is automated credit card processing. Kellermeyer says so much of the company’s attention is focused on the online catalog because the volume of orders that comes from the Web site is constantly increasing and having the credit card processing tool will help the company offer a service their competition doesn’t.
Mind Your Markets
Another business tactic distributors use to diversify their customer base is focusing on a new market. This can be accomplished through an expansion outside geographical boundaries or by focusing on providing products to new types of businesses. Most distributors mention healthcare, industrial, education, building service contractors and hotels/motels/entertainment as the most desirable markets at this time.
In the next five years, 57 percent of distributors say they will expand their focus into new markets.
Cadell says his company recently began working with the hotel/motel market because he sees better profit potential than with other segments. Working with these facility managers offers better business than dealing with health-care facilities in the area, because the same company owns most of them. “If you want in [the healthcare market] you have to play by their game and their numbers. With the independent hotels, it’s not so much a money issue. It’s more about what you have to offer them in terms of quality and service,” says Cadell.
Expanding into the hotel/motel market has had a positive impact on the company’s product offerings. “We’ve added a complete hospitality line with all the amenities like coffee packets, shampoos and soaps and we’ve actually hooked up with a linen company for pillowcases and bed sheets and we’re servicing that for them, too,” Cadell explains.
Feeling Out Your Future
Overall, while distributors foresee a lot of change in the industry, they think there are opportunities to ensure success into the future. The best ways to do this, Nourse says, is to find a niche product to sell and to pay attention to the wants and needs of the customer.
“The customer will always tell you what they want,” says Nourse. “I think the future is far from gloomy; in fact, I think it’s kind of promising.”
As long as distributors are able to seek out the opportunities presented in an adversarial environment, their role in the future is almost assured. “No matter what part of the world you look at, throughout history there’s always been a foundation of merchants,” says Nourse. “If you view yourself as a merchant and understand change, you’ll do fine.”
| Future Looks Promising In looking down the road, distributors are optimistic that the industry will be better off five, 10 and 20 years down the road. According to SM’s survey, in five years, 41 percent of respondents predict a positive outlook, 35 percent see it being about the same and about 24 percent feel the state of the industry will be worse. In 10 years, 47 percent of respondents feel things will be better, 30 percent feel it will be the same as it is now and 23 percent think business will be worse. Mark Cadell, president of Dutch Hollow Janitorial Supply, Belleview, Ill., is one distributor who sees the industry heading toward better times, saying it will keep growing because it offers products that everyone needs. This is not to say that the industry might not look a little different — he thinks more distributors may look at carrying only one product line and there will probably be more acquisitions of smaller companies. “I think overall it’s going to be good … I do think the biggest change will be that the customer will see a lot of distributors tacking on some of the costs that we’re absorbing.” Bill Nourse, president of Brookmeade Hardware and Supply Co., Nashville, Tenn., agrees that the industry will look different in the future. By 2010, he feels the big box stores will continue to expand their presence in the market while equipment and chemical manufacturers who are currently not selling direct, will begin to do so. “You look around at all the companies at the ISSA trade show, for example, and you wonder if there’s going to be enough business for all of them,” Nourse says. “Also, you wonder who’s going to be their distributor because the distributor base is essentially shrinking.” In 10 to 15 years, Nourse foresees an industry dominated by the large institutions, mirroring the consolidations that took place in the electrical, plumbing, and building supply industries. “It was late coming to this business, but it’s here now,” Nourse says. Looking even further ahead to 20 years from now, Nourse feels the big boxes will be commonplace, but there still will be room for the independent distributor because they are flexible enough to deal with the changing demands of customers, whereas larger suppliers are restricted by corporate edicts. Fritz Gast, executive vice president of P.B. Gast & Sons, Grand Rapids, Mich., believes it is too early to say what the industry will look like in the future, but says the way distributors deal with the dynamics in place — customers’ comparison shopping, big box stores and the pressures on the mid-level distributor — will shape the industry over the next five to 20 years. “I think there will always be more opportunities, you just have to be more creative,” says Gast. “We now look at opportunities that we didn’t look at before just because they might make sense now.” |
Have your annual sales increased, |
Do you expect your sales to increase, |
What do you foresee as the biggest challenge to jan/san distribution |
Have your gross margins increased, |
Will you invest more, less or the |
Do you offer your customers online ordering?
If yes, do you expect online ordering to increase, decrease or stay the same in 2006? |
Do you intend to expand your focus to target new markets in the |
Do you think the industry will be better off, worse off, or the |
What about in 10 years? |
