Big-Ticket Issues

It has been a turbulent few years for many power equipment manufacturers, some of which have grass-roots origins dating back nearly a century. Today, many operate as large, international, often publicly traded companies. Many were impacted by the same acquisition fervor that changed the face of distributor and end-user customers in recent years.

It was inevitable that this new, more corporate demographic would cause these manufacturers to take a step back and reassess how they go to market — and who they go to market with — in light of their own new structures as well as those of their customers.

The biggest trend: there has been a marked shift by equipment manufacturers toward researching, educating and driving sales at the end-user level. Continuing consolidation at this level has created larger players — building service contractors (BSCs), BSC buying groups and national-account customers, all with enough clout to negotiate a “direct” sale. Distributors, generally threatened by the idea of direct selling by manufacturers, see this approach as an affront to the very essence of the traditional jan/san supply chain. Manufacturers, for the most part, are more optimistic. Not only is direct selling inevitable given market dynamics, they say, but the distributor can adjust to what the former sees as a “win-win” transformation.

As direct sales become more common, distributors will continue to be essential players, says Janet Dolan, president and CEO of the Tennant Co., a manufacturer headquartered in Minneapolis. Dolan does warn, though, that distributors must evolve beyond the “transactional” role they sometimes fall into. There will be rewards, but there will also be pressure to adapt and become more aggressive business and marketing partners with manufacturers.

“There is much more opportunity for the distributor to be involved in understanding the strategy and the financial model of the customer, and to constantly try to understand where the customer makes money and how [the distributor] can help them do that,” Dolan says.

Successful distributors know, “what they bring to the table that is of value, what the end user wants, and what they can provide to make that customer more successful,” she adds. “When you know that, and you’re confident, you have nothing to worry about.”

Mike Malone, executive vice president of sales and marketing for Windsor Industries, a Castlerock Co., agrees that the distributor will remain an integral part of the process, but the role of the distributor will change.

Windsor is gradually shifting its market focus in an effort to better understand end-user customers’ needs. While reiterating the importance of the distributor in customer support and in driving long-term sales, Malone says Windsor has put a plan in place to hone in on the needs, desires and requirements of the end-user segment.

“What we’re trying to do is understand the customer and their drivers,” he says. “We’re going to make our distributor-partners part of that equation and we’re going to arm them with the tools to address the customer. We think that’s the value we bring.”

Windsor’s goal is to aggressively drive national-account business with large players, hotel chains, for example. But Malone understands driving national account business requires a different plan of action than driving local business, and he realizes the local distributor can do that more effectively.

“We define where you (the distributor) bring value, where we bring value, and we go forth with the business,” Malone says.

Manufacturers agree that the distributor needs to be involved in most transactions with end users. What those distributors do and how involved they are is less defined. In fact, each manufacturer has a unique plan for distributor responsibility, roles in the transaction, and compensation.

Though hesitant to disclose the intricacies of the arrangements they make with distributors when a direct deal takes place (e.g. compensation), most manufacturers are up front about their companies’ desires to involve the distributor in each transaction, follow-up, service, etc. Most manufacturers agree a customer is more satisfied with a purchase if there’s a distributor involved.

“It depends, because each situation has a different set-up,” explains Walter Anderson, president of PowerBuff Inc., Greensboro, N.C., of manufacturer-to-user sales. “With the latest one we did, we paid a finder’s fee to the distributor and then the distributor participates with service and set-up. In fact, in most instances, the end user prefers to have a local distributor that he can contact for service and if he has any questions,” he continues.

“In each instance, the deal would be designed to benefit both the end users and the distributor,” he adds.

According to Joe Carotenuto, vice president of sales and marketing for Nilfisk-Advance, based in Plymouth, Minn., “An increasing percentage of end users think they have the power to buy direct,” he explains. “In those situations, our job is to funnel them to the distributor. For those that truly have direct buying power, we need to have programs in place to be able to work through our distributors to service their national needs. When a distributor helps us with a large national account they earn pre-sale and post-sale revenue,” he continues.

“We present direct customers a solution that involves the sales and service of our distributor network,” he adds.

These deals, though direct, involve distributors.

“We present direct customers a solution that involves the sales and service of our distributor network,” he adds.

For many, each deal has its own set of characteristics that are considered as part of the agreement.

“It depends upon what service [distributors] provide,” explains Dolan. For Tennant, a deal hinges on the financial value of the contract, a customers’ expectations and what they’re willing to pay. “Then you decide what you can provide at that price,” she continues. “It could be on a retainer, or per transaction.”

“Our view is that distributors are a key link with customers,” says Dolan. “But their role has to be very specific and value added for the end user, just as our role has to be very defined.”

Greg Rau, president and CEO of Minuteman, Addison, Ill., is one of the few manufacturers who doesn’t believe that direct selling will become more common in coming years. Although it has been going on in the industry for some time, he believes it will not become as widespread as others anticipate.

“If you’re a company that strategically makes a decision to go after and sell the end users, you can sell them once, but once that sale is made you have to service them, you have to train them and you have to answer questions,” he says.

“The reason many successful distributors have been able to build tremendous customer bases is because they offer more than product,” Rau adds.

The Forces At Work
Manufacturers say the trend toward direct selling is an inevitable result of the consolidation at every level of the industry.

On one end, bigger, consolidated customers are using their increased purchasing power to push for direct deals from suppliers.

“Consolidation provides economies of scale and the ability to go beyond local or regional sales into national and global markets,” says Carotenuto.

“As end users go beyond current geographies, we must be able to service their needs.” Carotenuto says his company accomplishes this by working through its network of distributors.

“As the large end users consolidate, and the end users get bigger and bigger, obviously they come direct to the manufacturer, and in a lot of cases we’re forced to work with the bigger end users,” Anderson says.

Manufacturers have accepted the more-important role of the customer today, and some see advantages in this structural change. Namely, product specification, feedback and insight are coming from the people who work closely with the equipment.

“You’re defining a relationship based on the needs of the customers, and I think that’s a good thing,” says Malone. “It requires you to think outside the box, think about being a partner in the supply chain. Sometimes [distributors are] the sales piece, or the after-market support and they never touch the project. What we do seek to do is have the most efficient supply chain structure,” Malone says.

Every manufacturers’ view of the customer varies slightly, but none deny that end users are today viewed as more formidable players in this industry.

“We are not in a guaranteed-income world,” says Dolan. “We’re in a world where the buyer will always determine the price/value in their mind.” Then that buyer looks at its ability to negotiate price, she adds.

Others see ramifications that could stem from directing too many resources toward end users. Carotenuto believes that the end user is the one who’s short-changed in the long run if he or she doesn’t have interaction with a distributor. By sacrificing the service, follow-up and education, the user is missing what he could get from a distributor.

It’s cyclical, he adds. Often, end users that buy direct will buy through distribution the next time after realizing what they gave up for a direct deal.

Carotenuto says that at Nilfisk-Advance, when selling to large, national-account customers, distributors are involved.

Dolan believes manufacturers and distributors should be partners in addressing customer needs .

“All of us are striving to be an intermediary for the customer,” Dolan says. “We’re all striving for solutions. They want to solve their cleaning problems, and they expect a partner who’s going to pull together everything to do that.”

The Bright Side
Distributor demographics have also affected avenues for getting products to market.

“As an industry matures, fewer outlets for distribution exist and direct selling opportunities naturally increase,” says Carotenuto.

And though this can cause temporary hiccups in the supply chain, some industry manufacturers feel that consolidation among distributors ultimately weeds out inefficiency.

Malone believes that the distribution process in the janitorial supply industry is inherently inefficient. Consolidation, he feels, can promote better industry streamlining. He cites other industries such as the electrical and pipe-valve wholesalers and says that they are far more consolidated, yet they operate much more efficiently.

“Other industries have consolidated to a much larger extent and it has driven better relationships, performance, and better value,” says Malone. “It ends up being good for the customer.”

Rau agrees that consolidation is driving that inefficiency out of the market. “Both on the manufacturing and distributor side, profit margins have eroded so that weaker companies cannot survive. You’ll end up with stronger channels to bring the product to the marketplace on a more efficient level,” Rau says.

Growing Pains
Like the distribution and end user segments, consolidation also can be challenging for manufacturers.

A common criticism is that the manufacturers’ focus tends to shift to the biggest distributor and end-user players, often at the cost of good communication with small and mid-sized distributors.

David Devon, national sales manager for Thorne Electric, a division of Koblenz, headquartered in San Antonio, Texas, says that although manufacturer consolidation has carved out a niche for his company, he wonders whether a truly synergistic effect has been created within large, consolidated companies.

Devon believes consolidation has created a blur in the distinction between brand names. “I think the brand recognition has gone away a little bit to where customers are more open to a variety of product brands.” Individualized customer service can suffer, as well, since companies take on a broader focus, he adds.

Because of these perceptions, Tom Dyszkiewicz, vice president of sales for NSS, headquartered in Toledo, Ohio, believes that being one of the few domestic privately-held, family-owned businesses remaining in the equipment industry creates an advantage for his company.

“We have a lot of flexibility, we have a value proposition of being close with our customers, and our ideals match up well with that of the distributor market,” he says.

Talk It Over
The power equipment industry is facing other challenges, as well. Overcapacity on the supply end has caused “channel stuffing” by some manufacturers, or selling of the same brands in multiple channels. Over-supply has also led to the erosion of profit margins, both of which make for unhappy distributor partners.

Manufacturers are also taking stock of their own consolidation, mergers, acquisitions and partnerships, and assessing how they can leverage them to the greatest benefit of their customers.

And every manufacturer is working to provide new innovations, unique products, and opportunities for the distributor.

Education and communication can lead to stronger partnerships in times of change, says Anderson.

By making a bigger effort to understand each other’s expectations, relationships can improve, he adds.

Rau summarizes the sentiment of most manufacturers:

“The key to any good business relationship and partnership is communication. If we as a manufacturer can sit down with a distributor and discuss all facets of our business relationship and understand we’re working for the benefit of both our companies and the customer, we’ll minimize disagreements and/or confusion in what our roles are in the selling process.”

Dialogue, indeed, will go a long way toward alleviating supply chain stress.

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