Disrupting the Distribution Ecosystem
Technology has dramatically impacted many sectors of business. Whether it’s productivity or sales, the past twenty-five years has seen dramatic changes in the business landscape. Distribution and logistics has always been a major element of the go-to-market for any business. Most industries have developed some form of distribution ecosystem that begins with the manufacturer, flows through distribution channels, arrives at the retailer, and finally ends up in the hands of the customer. Technology has dramatically affected many of the traditional distribution ecosystems over the years, and those companies who saw the changes coming and positioned themselves to take advantage of the shifts have been able to flourish. But there are certain industries which remain untouched. For example, the building products industry has undergone relatively little change specific to distribution.
The lack of change in the building products market has to do with many root causes. It is a mature industry, one which is very slow to accept change. There are many decision makers in the distribution chain before products even reach the end users, and at nearly every step there are hurdles and challenges to overcome. Large manufacturing conglomerates are able to force distributors into exclusive agreements that tend to inhibit competition from new entrants or new, innovative products. Likewise, large building products distributors are able to force smaller manufacturers into exclusivity arrangements, which tend to hamstring a manufacturer’s growth potential over the long-term, and this growth limitation is especially apparent when the distributor brings very little value-add to the equation. To further complicate things, the distributor sells to the retailer, the retailer sells to the contractor, and the contractor sells to the end-user. Because of the complexity of the two-step distribution model change simply tends not occur.
Another, maybe even more significant reason for the lack of change is that the building products market has only recently recovered from the building bubble of ten years ago. When the market collapsed in 2007 many building product manufacturers went out of business in rapid succession. Small contractors went out of business, others had to seek and take part-time employment just to make ends meet. Large architectural firms were bidding on small projects they wouldn’t have even considered merely a year before. The industry found itself in survival mode. Sometimes drastic shifts in market conditions can force industries into different, more efficient (distribution and selling) models, but in the case of the building products industry, it didn’t. The building products market is once again facing the potential of another bubble in 2019/20. So how can building product manufacturers turn the upcoming slowdown into an opportunity?
It’s time that building product manufacturers change strategy. The industry has relied heavily on a push strategy, i.e. sell to a distributor who sells to another distributor who sells to an installer who sells to the end-user. When time and money allows, manufacturers then might market to architects who might “specify” their product, although due to the many complexities of the distribution process, the manufacturer could very well have their specifications changed to the bottomless pit of the “or equal” designation.
Successful manufacturers will pivot, utilizing technological advances in direct communication and value-add services to move from a “push” marketing mentality to create and initiate a far more effective and engaging “pull” strategy. The pull strategy simplifies the distribution process by eliminating the multi-level decision making system. Once the pull strategy is put in place, options appear. It allows manufacturers to decide if distributors are adding value or just eroding margins. Manufacturers have a choice to sell direct, which creates leverage over distributors. Product innovation can flourish without the traditional push back along the distribution chain.
KEY THINGS TO CONSIDER:
1. Is it viable to sell direct? If not, why? Then fix the why.
2. Are your sales efforts targeted at fostering relationships along the distribution network or fostering relations with architects and large contractors?
3. Are you creating marketing messaging that differentiates your unique product benefits to protect against “or equal” specifications?
4. What types of value add services do your current distributors provide?
5. How can you foster a pull strategy instead of relying on the traditional push method?