Case in point: I was speaking with a distributor who was doing big business in drop ship fulfillment for an Internet retailer. I was curious about the nature of that business and proceded to question him as to the impact it was having on his financials.
What I learned confounded me. He said that he viewed it as purely incremental business. I had to agree. Selling ones and twos a couple of states away is clearly business that he was not previously enjoying. So I asked about the impact of the handling of a fairly large number of small orders on his general warehouse operations. He equivocated a bit, saying that he didn’t really think it meant all that much. He believes his people could always work a little harder and besides, he hadn’t added “significantly” to his staff of pickers, packers and shippers. I noted his posturing and concluded that at the very least, he was paying some additional overtime.
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Then I asked the big question. “How are the margins on that business?” This was where equivocation moved to posturing. I got a bit of a lecture on the nature of Internet selling.
“Well, the fact is that Internet selling always comes down to price,” he said. “Once a consumer has decided on the product he wants, he is simply searching for the lowest price.” I could literally hear him parroting the pitch his Internet retailer customer had put on him.
I reassured him by saying that I imagined what he said was true. Then, based on his disclaimers, I asked if I could assume it was pretty low-margin business. He reluctantly admitted, yes, it was a very narrow margin.
“So, you’ve decided to go with the ‘bigger truck’ strategy,” I said, referencing the old joke. Defensively he replied, “I’m getting significantly greater volume and that qualifies me for better rebates from my suppliers.”
I asked him if the one or two points of extra rebates really covered much of the double-digit discount he was extending to the Internet seller. I took his silence as my answer.
I kept pressing him to consider the ramifications of his strategy and asked him what impact he thought this practice was having on his business.
“Well, none really. This is all business that is going into territories where I don’t currently sell.”
“So you think selling at price points significantly under your normal prices for your regular customers is OK, based on the rationale that it’s not in your immediate territory?”
“Yes,” was his response.
I asked him if he thought there were no similar sales coming into his trading area. He replied that he wasn’t really sure. I explained that Internet sellers set up their fulfillment partners to ship only out of state to avoid having to pay state taxes on the transaction.
“OK, so what?”
So that means they have another fulfillment partner in a neighboring state that ships orders into your trading area. Do you still think this has no impact on your business? The silence was deafening.
Clearly, my friend was not seeing the full picture. He had justified his business decision by presuming that his action was only negatively impacting someone else’s business and had no impact on his own. That is not the case.
But what is the smart play here? Distributors need to understand that this is a zero sum game. In fact, it could become a zero margin game if things keep going the way they are. A decision to cut off the Internet company or to push for a higher margin would not stop them from filling orders and selling into his territory. However, continuing at status quo would suppress his gross margin and put downward pressure on all pricing in his marketplace — a dilemma to be sure.
How can distributors fight back? Establishing an Internet presence themselves is an option, but going that path alone is a pretty steep climb. Working with a group of other distributors or with their program group would likely be easier.
One thing is certain — not having an Internet strategy is not an option. We are only just beginning to understand the full impact the Internet is having on the aftermarket. We’ll look at more of these issues next month.
