Check Points

During the 1992 presidential race, a Democratic advisor gave Bill Clinton some not-so-subtle advice: “It’s the economy, stupid.” A dozen years later, that catch phrase still hits the target. According to a recent survey of distributors conducted by Sanitary Maintenance magazine, the jan/san industry is feeling the pain of the latest economic pinch.

The weakened economy has set the stage for continuing merger-and-acquisition activity — resulting in a narrower playing field. Distributors are also actively seeking new markets while reducing the number of vendors with which they work. The big winners in these tough times are the customers, who have distributors bending over backwards to help meet their demands.

The one area of growth in the last year (and, it seems likely, for the year to come) was technology. Whether online sales will ever be a goldmine remains to be seen. Nonetheless, nearly every respondent to our survey expects their technology spending to increase or stay the same in the coming year.

Tough Times
The hot-button issue for distributors and their end-user customers in 2003 was the economy, hands down. Whether cutting costs or lowering prices to meet demands, distributors are feeling the crunch.

“For obvious reasons, companies are more budget-conscious, so they are shopping more and searching for alternatives,” says George Abi-Aad, president of Royal Paper Corp. in Santa Fe Springs, Calif.

Tourism and industry have been hurt by the downswing in the economy. This has reduced the number of customers for jan/san distributors and also reduced the amount that remaining businesses can spend on maintenance products.

“In our particular state, we’ve seen major businesses disappear from the area. Boeing, Georgia-Pacific and Intalco Aluminum are three in particular,” says Becky Eastwood, president of Puget Safety Equipment Co., Bellingham, Wash. “This has a major impact on our customer base, which includes contractors and medium-sized feeder industries.”

Economic trends impacted hiring in 2003. Sixty-seven percent of SM’s survey respondents said they didn’t hire as many people in 2003 as they did in 2002. But that may soon change.

The National Association of Wholesaler-Distributors, a Washington-based group that supports the interests of wholesaler-distributors, predicts total revenues for the wholesale distribution industry will increase 5.6 percent in 2004.

Positive change may already be underway, says David Holtz, e-commerce/marketing director for Dade Paper Co., Miami. His state has been hurt by its heavy reliance on the travel industry, including cruise lines, resorts, and theme parks. But after at least two down years, Holtz can finally see the light at the end of the tunnel.

“The good news is that things seem to be rebuilding solidly,” says Holtz. “As the travel and resort industries continue to strengthen, we look forward to additional growth. We still have a very solid foodservice base that the Florida lifestyle almost mandates to be successful. We also are key suppliers to hospitals and long-term care facilities, which is a definite growth industry for Florida.”

You’re Hired
After a rough-and-tumble year in 2003, predictions portend a cheerier picture next year. Sales will likely go up and, in turn, hiring will need to increase to meet new demands.

Most companies surveyed by Sanitary Maintenance say they plan to add to their headcounts in the coming year. Distributors hope for anywhere from a couple of salespeople to a doubling of their entire staff.

Finding good workers in a weak economy is usually not as difficult — there is a greater number of qualified people searching for a good job.

“The quality of people has been much better during a slower economy,” says John Gibson, owner of J-Co Janitorial Supply in San Marcos, Texas. “Larger corporate layoffs give us a much better pool to pull from. Our staff is the A-TEAM right now.”

But just how easy will it be to find help if the jobs begin to outnumber job seekers? It may be especially tough if all of your competitors are also looking for folks with the same skill sets.

“The need for finding quality people will remain a perennial challenge,” says Abi-Aad.

New Markets
Although the economy is finally beginning to show signs of renewed vigor, that hasn’t stopped a recent trend: market diversification. When numerous industries were negatively affected by the economic slump, many distributors spent 2003 trying to tap into new, more profitable, markets.

For example, Triple F Distributing in Honolulu is a food-service disposables supplier that also has a history of selling cleaning products and chemicals. The company would like to expand by selling its current product line to different markets. Other distributors who responded to our survey said they want to expand into manufacturing, health care, hospitality, aerospace, food service, retail and educational facilities.

“New markets always present a challenge — whether we can meet the challenge is a question posed to me directly as a sales manager, says Kevin Wong of Triple F. “I want to enter new industries with the products we currently sell. But larger corporations have the manpower, the marketing skills, the buying power to make a major impact in Hawaii. National chains go with the one-stop shops and we, as a small distributor, are often left to pick up the shreds.”

As difficult as it can be to break into a new market or submarket, it is often a battle worth fighting. With consolidated companies looming large, smaller players need plenty of markets to sell to in order to stay afloat in their larger competitors’ wake.

“Our business is and always has been very dynamic, and if a distributor sits still, they will be dead five years from now — if it takes that long,” says Eastwood. “A growing and healthy distributor can’t let anybody call the shots other than himself.”

Many distributors also said in our survey that they hope to explore new product lines in 2004, including safety, paper, packaging and plastics.

“The distributors that can identify the changing needs in their markets and find out how to fulfill them will prosper,” says Abi-Aad. “The ones that cannot adjust will struggle and fade away.”

Power Play
Perhaps the most important and longest lasting trend in the industry has been the continuation of lively merger-and-acquisition activity. Large businesses used the sluggish economy to their advantage by buying out smaller distributors. Of SM’s survey respondents, 88 percent said they expected M&A activity to continue in 2004. Nearly everyone surveyed agreed that this type of power play marks a significant change in the industry. Is consolidation good or bad? It depends on who you’re talking to.

Donald Kellermeyer, president of Kellermeyer Co., Toledo, Ohio, says mergers are necessary because of rising operating costs and increasing demands for better profit margins. His company has acquired two distributors in the past two years.
“Smaller distributors will not have purchasing leverage or be able to afford continued upgrades to meet customers’ demands,” he says.

“We strongly believe that the mergers and acquisitions in the supplier arena can present some concern,” says Holtz. “In terms of the distribution base, I think the merger trend is a result of the marketplace itself. It is harder and harder for a smaller-sized distributor to compete in the broad line distribution market, with large national companies, large regional independents and cost-effective Internet distributors with low overhead.

Buying power often develops competitive price inequities between the large and the small — and that gap often represents the differential in margin that sustains a business. It seems that, like many industries, to survive is not enough, you must grow to stay alive.”

There are fewer players in the field in more ways than one. Many of the distributors left standing are reducing the number of vendors they deal with in the hopes of having a more streamlined operation. Limiting vendors cuts processing costs and eliminates redundant items for better inventory control.

“We found that we were diluting our purchasing power, increasing inventory dollars invested, and reducing our inventory turns by utilizing so many vendors,” says Pete James, general manager of Industrial Paper Products in Burlington, N.C.

Not everyone who has reduced their vendor list did so purposefully. Thanks to industry-wide consolidation, there are simply fewer suppliers to choose from.

“We haven’t actually reduced the number of vendors we deal with — they’ve reduced themselves,” says Wong.

The Customer is King
This new landscape has left smaller distributors scrambling to find and maintain a niche. For most, that niche is customer service. The biggest beneficiary of the poor economy is the customers, who have found distributors falling over themselves to provide the best service possible to gain favor over the bigger players.

“Customer needs and wants will drive the industry more than improvements in products or technology,” says Ken Thorman, owner of McCarty Supply in Cleburne, Texas.

“Anytime we find out that we have lost a customer, other than through attrition, we are out there finding out why,” Gibson adds.

If predictions of fewer and larger distributors hold true, then there will need to be a greater focus on customer service. Distributors must work harder to keep their customers happy and purchasing from them.

“They want to purchase smaller quantities at a lower price, and have it there when they want it,” says Don Plummer, co-owner of D. Gilmore Distributing in El Paso, Texas. And what the customer wants, the customer usually gets.


“You know the rhetoric: business is people and we’re in the people business,” says Wong.
A deleterious result of massive buyouts, Gibson says, is lousy customer service. “This is where the little independent comes in,” says Gibson. “We still treat our customers like people, not numbers.”

Technology: Here to Stay
Despite the bottom dropping out of the tech biz at the turn of the millennium and even with funds limited these days, most distributors have already made at least baby steps into technology investment. Those that haven’t plan to in 2004, and those that have plan to expand what they are doing. And the fate of online ordering (will it become a profit center or not) remains to be seen.

Distributors seem evenly split: nearly 60 percent of respondents intend to increase technology spending in 2004 while nearly 40 percent say they’ll spend about the same. Only 4 percent said they will be spending less on computers, websites, electronic ordering, and the like.

“I think the industry itself is beginning to develop some momentum in the expansion of its use of technology,” says Holtz. “It’s a protracted, cautious approach. Many of the entrepreneurs who comprise the independent side of the industry are careful about such an expensive investment.”

Holtz says his company has been putting its technology dollars toward upgrading its operational system, creating remote order entry for automated sales, and (in a much less extensive way) improving its e-commerce business.

“Our online business, small as it is, still has been very consistent with very few problems,” says Holtz. “But overall, we don’t promote ourselves as an Internet company. Our e-commerce platform, in whatever form it may take, will always be presented to our customers as another facet, another enhancement to our entire customer-service program commitment. This industry has long been, and will long be, an industry that thrives on the direct sales process.”

Despite a pervasive belief that online sales will never fully replace “street sales,” many distributors are nonetheless investing big bucks in their websites. The Kellermeyer Co. offers an online ordering system and an online color catalog. The company spends big on the Internet because, it says, customers demand it. In fact, 57 percent of respondents sell products via the Internet; 43 percent say they do not.

“The system needs constant updating to meet demands,” says Kellermeyer. “Customers want accurate purchasing history so we will install an online system in early 2004 where customers can check their purchasing history by each unit through our Internet system.”

Those companies that are just now entering the online arena have taken big strides to make to reach the same levels as their quicker-to-respond peers.

“Our company has been slow to respond to tech updates so not only do we have to catch up, but we have to implement changes faster and at less cost,” says David Keller, CEO of First Quality Supply in St. Louis Park, Minn.

“The economic challenges are making it difficult for companies that lack a progressive vision or an infrastructure to execute that vision and survive,” says Abi-Aad. “This phenomenon has always been there but with technological advances, the pace of change is accelerated, subsequently not allowing the weaker companies a grace period to adjust.” His company is investing in online ordering, high-tech reporting systems, and in training its employees to utilize the high-tech tools.

There are still distributors — although their numbers are small — who are choosing to forgo online sales in favor of old-fashioned customer service.

“We believe that the online sales is for commodity products,” says Wong. “People buy from people. Yes, they buy from computers when they are faced with only pricing issues or time constraints but as long as there are human beings out there, we’ll be OK. The machines haven’t taken over — yet.”

SM’s survey showed that, of those companies who sold products via the Internet, only about 8 percent of their customer bases ordered online. Predictions are that that number will continue to increase.

Looking Forward
So are things all doom and gloom? Not by a long shot. Sure, 2003 was rough, but industry experts predict a slight boost in revenues in 2004. They also say distribution employment will grow faster than overall U.S. employment. With such positive indicators on the horizon, most distributors are predicting good things for the year ahead.

“We’re looking forward to a great year in 2004,” says Eastwood. “In spite of the down economy that the press has so vehemently portrayed, we have seen growth in general in businesses across the spectrum and we don’t doubt that things are improving nationally.”