Strength In Numbers

“Don’t get left out in the cold.”
Just about every business owner has heard this phrase during countless chats with salespeople.

For buying groups, it’s become an anthem they’ve been pitching to distributors for several years. Why? The emergence of so called “big-box” stores as well as industry consolidation threatens independent distributors like never before.

Buying groups, also known as marketing groups, are organizations that unite numbers of independent distributors into a more competitive business force. Emerging in the early 1960s, buying groups saw their biggest growth in the 1990s as distributors shrank under the weight of bigger and better-financed competitors.

What do buying groups offer members? In a nutshell, better pricing and more pull with manufacturers.

In addition, value-added services and national account opportunities available under the banner of a big buying group have helped level a playing field that, for years, has been tilted in favor of conglomerates and global chains.

Group Affiliation
Keith Marcoe, president of NISSCO, a Dulles, Va.-based group purchasing organization, says that as the jan/san marketplace evolves, it’s clear that affiliation with a buying group is strategically necessary for distributors.

“In our industry where competition at the street is so fierce, buying power and leverage becomes crucial,” Marcoe explains. “What’s happening to the independent distributor is he’s still able to compete, he’s still able to go out and sell, but his leverage gets less and less each time his margin erodes.”

For instance, each time a distributor buys product from a supplier at a price two percent higher than his competition, he loses money when he is forced to sell the product at the same price as the competition.

Alan Sadler, president of Triple S, a North Billerica, Mass.-based national distribution networking, sales, marketing and logistics organization, says that as new entries such as “big-box” stores continue to move into the jan/san industry, they are encroaching upon what was traditionally the jan/san distributor’s marketplace.

“The new entries have compressed margins,” Sadler explains. “So the distributor is having a difficult time generating cash to cover expenses and to create a profit.”

That’s where a distributor’s association with a buying group essentially pays dividends.

Today, the creed of buying groups is one that grants distributors access to manufacturers that otherwise wouldn’t take them on, as well as access to discounted pricing and incentives they couldn’t achieve independently.

Some groups, however, offer nothing more than rebates, which is no longer beneficial to distributors on its own. Distributors are asking for more.

“There are too many groups where the focus lies solely on rebate processing,” says Marcoe. “They don’t have any functionality. They’re just a lock box for rebates. The group has to fill the role of finding innovative ways to capture and keep new profitable business for the distributor and the supplier. But if all the group has is rebate processing, that isn’t good enough. Distributors want a group who is going to go out there and grow their business with them and for them.”

However, getting an independent to take the leap into a buying group’s circle is easier said than done.

The Independent
According to a December 2006 survey sponsored by Pro-Link, a Canton, Mass.-based marketing and buying organization, 60 percent of 700 ISSA member distributors say they have joined or have considered joining a buying group for better pricing, advice and help, to secure better products and to be more competitive.

Mike Nelson, vice president of marketing for Pro-Link says the survey also found that of those distributors that don’t belong to a group but know other distributors who do, more than 64 percent say the distributors in groups have benefited or are overall satisfied with their membership.

On the flipside, distributors also indicated why they would not join a buying group. They noted that they prefer their independence, do not feel that groups have enough benefits, do not believe they need one and, lastly, they joined one and did not like it.

“Like most businesspeople, many jan/san distributors are very independent,” says Nelson. “They like running their own show as long as they can. However, the many changes in our industry have made many distributors look for alternative ways to be both independent and still part of an association, giving them some form of business advantage in their market.”

Marcoe says there is a very interesting dynamic in the buying group business because of the mentality of the distributor. “Especially the successful independent distributor, they’re very wary, very mistrustful, very cynical about everything,” he states. “They’re cynical about relationships with their manufacturers, their customers, they’re very close to the vest about their business and they’re very headstrong.”

That cautious attitude runs contrary to buying groups’ main selling point — bringing people together to share in the greater good. “There clearly has been a wariness on the part of the distributor,” Marcoe explains. “A wariness about trusting the group and a reluctance because of his own independence.”

Most independent distributors are stiff-arming group associations in order to remain independent because of their lack of knowledge of what a buying group is. That, however, is likely to change.

Marcoe says the jan/san industry is polarizing and that the middle range of distributors is where the erosion is taking place.

“It’s that guy who sits in the middle who wants to stay independent and thinks he’s a big player,” Marcoe explains. “Those guys are falling by the wayside. They need a group or they’re not going to be able to compete against the larger distributors. If they think they are going to stand out there on the end of the limb alone, it isn’t going to happen because more and more they’re going to become more disadvantaged.”

Common Misconception
Many distributors are hesitant to join a buying group because they believe their independence is lost once they become a member. Buying group leaders say this is a common misconception.

Nelson says when a distributor joins a buying group it doesn’t give up its sense of independence or entrepreneurship.

“We can co-exist very well with distributors who are independent business owners that want to remain that way,” Nelson notes. “We bring new tools for them that they can use in their market. It’s still their business, they’re independently owned and operated and all we ask is that they support and work on the programs we develop. It certainly doesn’t change the legal or financial aspect of their business.”

Tobie McKown, president of The United Group, a Monroe, La.-based marketing and sales organization, says that distributors are able to maintain their independence and at the same time get a better understanding of the conditions in the marketplace, and best practices for facing business challenges.

“As an independent you can’t share information with anyone locally,” McKown explains. “It’s difficult to do that. By joining a group, that openness in ownership and everyone being equal, the concerns they have are ones that they want to remain independent, not being swallowed up by the large companies, and those concerns are nationwide.”

The innate desire for distributors to be their own boss, to build their own business, and to do things on their own is not going to go away because it’s part of the fabric of America, Sadler says.

“If we can bring a distributor a better business proposition, as a good business person they’ll want to take part in it,” he notes.

Virtually Connected
Groups are also guiding distributors in the right direction with offerings that don’t necessarily benefit their bottom line. McKown says that The United Group’s members are able to share information with each other in real time through its Web site.

McKown says members are able to search for other members by market segment or location. Members can also search by suppliers that they have a relationship with and search by product. Distributors can also do a keyword search to see what other members are buying and from what suppliers. This information helps them cooperate in purchases.

Another area the United Group has had great success with is its member forum on its Web site. McKown says distributors can post a question and other members can respond to their question with their own views and their concepts.

Pro-Link offers its members a piece of software that distributors can use to build their own catalog, says Nelson. Distributors can upload the software onto their hard drive and select whatever products they need and the program formats everything and puts in the selling copy, the picture and the price where they can use that on an end user by end user basis.

Nelson also says Pro-Link offers a financial benchmarks program that provides key financial and operational data about each member’s business. It has an independent third-party organization that crunches all the numbers and reports back to the distributors to show how their company lines up against the other members in the group as well as industry-wide benchmarks. “It also provides them with some suggestions or areas to look at within their business on how to better improve their operations and ultimately their profitability,” Nelson adds.

On The Horizon
The groups interviewed for this article project that there will be more distributor participation in buying groups in years to come.

“We should certainly expect to see greater distributor participation with buying groups,” Marcoe says. “As the marketplace gets more competitive and margins continue to erode, distributors truly need the benefits buying groups can provide that they can’t access on their own.”

On the other hand, the number of groups is expected to decline as distributors and suppliers make strategic decisions not to participate with certain groups.

“Every day we see both distributors and suppliers quitting groups that represent nothing more than rebate processing,” Marcoe explains. “Groups that don’t offer formal effective programs that provide new, profitable sales for both the distributor and supplier members will not survive.”

Nelson projects that the jan/san channel will continue to change and distributors should recognize that.

“Too much business is going to the ‘box mover’ type entities and cutting independent traditional jan/san guys out of the mix,” Nelson notes. “For those guys, this change has got to be the thing that they recognize in the next three to five years before it’s too late.”