The jury is still out on whether Amazon will make a serious push into selling construction supplies, one of the country’s leading experts on industrial distribution told dealers recently. But that doesn’t mean Amazon-like companies also won’t bother to enter the space, he added. His advice was to build a three-tier model that combines technology with the personal touch to achieve what tech can’t produce on its own.
The coming “quantum leap” in knowledge about running a good distribution company will come on the sales and marketing sides of the business, not in operations, F. Barry Lawrence told attendees at Epicor’s BisTrack users conference in Orlando, Fla., on Nov. 16.
Lawrence, program coordinator of the Industrial Distribution Program at Texas A&M University’s Read Center for Distribution Research Education, said people have been questioning the value of distributors for 50 years. That question often is propelled today by technological advances in the buying process and the rise of online stores.
That led Lawrence to talk about relevance and how Amazon really makes money.
“We’ve been studying the dot-com threat for 20 years,” the academic said. “All the other dot.coms died, as the math told us they would. But Amazon persisted because the investors let it. … “[And from that] there’s a model that emerged here. In video games, they put the platform out there and for three or four years they don’t make money. Then they start monetizing it … by selling little things at small prices, and over time what makes you a success is how big is the platform.”
“Amazon has built a huge platform,” Lawrence continued, “but it makes money off of web services, Amazon prime—it’s a platform model.” Does this means there’s inducement to move into other channels? Yes, Lawrence said, “And you can do that with aggressive pricing.” But when do you achieve enough relevance, you can focus on making money.
“I would argue that Amazon is pretty much there, so it’ll be selective,” Lawrence predicted. “That said, they may stop short of your industry. Or they may jettison it. Or they may develop spin-off models. Or others may create an Amazon-like presence. I always believed it would be the distributors that would take control.” But firms like Grainger haven’t done it yet, he said.
Given that lingering threat, LBM dealers must find ways to stay relevant. Cost-cutting measures help, Lawrence noted, but might not be enough. His view is that dealers should stress service and their knowledge base.
To illustrate that, Lawrence showed a three-layer pyramid model that Texas A&M created as part of consulting work with an electronics company. The bottom level represented e-commerce, where low-value transactions could occur easily, consistently, and 24x7x365.
“E-commerce is getting easier and easier, and by the time it becomes a necessity for you it will be easier to adopt,” Lawrence said. “But the strategy for doing that, you need to do now.” In the case of the electronics company, one side benefit of creating an e-commerce was getting a new line of business from hobbyists. “Because this is an electronics company with lots of engineer customers, who like online services, up to half of its sales now go through this route,” Lawrence said.
The middle level of pyramid had two functions: inside sales reps and business analysis. The Internal sales force would take some of the e-commerce and related inside data, then add information from external databases. It then put them together and began saying, “OK, with which customers should we have a conversation?” Lawrence said. The inside sales person worked on a relationship basis, learning what worked and didn’t work for the customer and then making suggestions. This group gathered knowledge.
Part of the top level of the pyramid was occupied by outside sales reps using a customer relationship management system to collect and refine data from the two lower levels. These outside reps handled “A+ customers” or key target accounts, Lawrence said. The outside reps provided value-added services, and their responsibility largely was to build relationships. Notably, Lawrence added, this electronics company put its social media work at that same top level, because social media to that firm was about relationship-building.
