How eroded has distribution channels become?

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Recently I took a trip to the Grand Canyon, a beautiful part of our country. It looked exactly like what I remember from a childhood visit – with the Colorado River running through the canyon more than a mile deep below the rim. And yet, at one time, millions of years ago, there was no canyon, and this river actually ran straight through the top of what was once the Colorado Plateau. Even as an adult, I am amazed at the thought that, through the incredible power of erosion, a single river has carved out one of the most spectacular and immense geological features in the world.

What is channel erosion?

The key ingredient here was, of course, time, and in geology it takes a lot to understand how the earth changes. However, other instances of erosion – for example, those that occur in the business world – generally operate at much faster rates. Profit margins erode as products or services become commodities, not over millennia, but often over decades or even years.

Market share is eroding for major incumbents as new entrants with more efficient business models or better technology enter the market. While this erosion can be slow and gradual – as with Kodak and digital cameras – it can also accelerate rapidly and be quite dramatic. For example, Netflix was founded in 1997, went public in 2002, and within eight years had eroded Blockbuster’s $5 billion market capitalization to just $55 million, a decline of nearly 99%.

So when we talk about erosion, we are really referring to three key elements:

  • Long-term decline
  • Acceleration over time
  • Trends that tend to reflect permanent changes in trading conditions.

This process can occur in any industry and affect almost any facet, but one area in particular where we have seen erosion is occurring among distribution channels. In this erosion of channels, traditional distributors are seeing their customers find other ways to purchase products, whether through retailers, online-only resellers, or directly from manufacturers.

As a result of these new “affluent” channels, distributors have begun to see both their customers’ mind share and wallet share decline as customers adapt to different ways of obtaining products. , often more practical.

Canal erosion in numbers

So how bad has channel erosion become? Recent research by HMI Performance Incentives reveals some interesting results. As shown in the table below.

  • While distributors still control the majority of contractor spend (about 72%), that number is slowly declining. In the current environment, less than 20% of entrepreneurs buy exclusively through distributors. So the question is, where does the rest of their money go?
  • Although the amount of purchases may still be low, retail and online-only vendors are taking more and more of the wallet. More than 90% of entrepreneurs now make purchases from retailers such as Home Depot and Lowes, while at least 66% now purchase at least some materials from online-only vendors like Amazon, SupplyHouse, and Zoro.
  • What is perhaps more alarming, however, is that almost 30% of entrepreneurs today earn at least half of their purchases directly from the manufacturers, thus eliminating the “intermediaries” of the distributors.

This omnichannel shopping trend isn’t new to building materials, but it seems that, like many things, the pandemic has accelerated it, in part because inflation and supply constraints have forced these entrepreneurs to buy products wherever they can find them. In fact, of the top five reasons entrepreneurs give for staying with distributors, four of them (product availability, delivery, brands carried, location) relate to logistics and availability.

This indicates that as the overall environment has become more challenging, entrepreneurs are looking for a simpler and easier buying experience. As shown in the table below.

Loyalty of contractors to distributors

It also suggests that in times of crisis and disruption, the traditional distribution channel has not always been able to meet the needs of entrepreneur customers, and as a result, these customers have been forced to look elsewhere. Based on this behavioral data, it’s not a stretch to imagine that as entrepreneurs get used to the benefits of this omnichannel experience, their new habits will only take root.

Research by McKinsey in B2B Decision Maker Sentiments would seem to support this, as he found that “even though in-person engagement has re-emerged as an option, buyers have made it clear that they prefer a cross-channel mix, choosing in-person, remotely and digital self-service interactions in equal measure.

So should I be worried?

Should traditional distributors be concerned about this data? Yes and no. For one thing, omnichannel expectations from customers at all levels continue to grow – this has been true in the consumer space for some time, and as we’ve learned, B2B trends tend to follow B2C trends. . This means traditional distributors who lack a strong digital presence and limited omnichannel services can expect to find their market share, share of mind and share of wallet all remain under pressure.

On the other hand, this changing dynamic offers opportunities for retailers who are ready and willing to innovate to slow down, or even reverse, the erosion that their chain is experiencing. By investing in features such as multi-channel communication services where customers can receive text-based updates from inside sales reps and robust e-commerce platforms with self-service capabilities, retailers can ride the wave of digital innovation rather than succumbing to it. Based on the data, these components become table stakes for customers, and distributors who are able to recognize this – who can identify table stakes from added values ​​- and adapt accordingly will be best placed to take advantage of it. upcoming changes.

Lincoln Smith has over 20 years of experience designing performance incentive programs for manufacturers, distributors and service partners to help drive spend share of wallet, loyalty and grow commitment. He is a Certified Incentive Professional (IP) by the Incentive Marketing Association (IMA) and sits on the Board of Directors of Incentive and Engagement Solution Providers (IESP). Prior to joining HMI Performance Incentives, Smith worked as a strategist for Agency.com, helping organizations transition to digital business models. Reach it on LinkedIn. And to learn more about the purchasing behavior of entrepreneurs, download the full report.

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