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Out of the Fire: Repositioning Independent Distribution

Part Four: Expand your options

by Neil Gillespie and Allen Ray

Tower of Power's 1997 release "Rhythm and
Business" featured that song of the same name. It teaches that it's what you don't know that fuels growth rather than what you know. But you need to commit to learning what you don't know. We want you to think deeply about that, for it is the key to a return to prosperity.

It has been difficult to get people excited about growth opportunities lately. Mention growth strategy and distributor executives look at us like we've lost a few screws. That's unfortunate. Since the economy is not going to roar back like it did following the last recession, you need to think about growth differently from ever before.

There are definitely some emotional barriers that need to be overcome before anyone can think about growth. Growth requires channeling energy into exploring new opportunities. We don't sense a lot of emotional energy out there. Here are the reasons.
If you just suffered through the worst decline of your lifetime . . . here are some thoughts that have danced in your head:

1. You feel that you are overwhelmingly dependent on the economy
2. The wind is knocked out of your sails from the loss of volume, company value and profits
3. You don't have the emotional energy to try something just to see it fail, and you are still mourning
4. You think the only ways to grow are to sell more stuff to existing customers or find more
   customers for your stuff (and these strategies are not yielding what they used to)
5. It's easier to sit back and wait for the economy to improve
6. You may have mentally capitulated to closing the doors and giving up
7. You don't really know your true set of growth options

The most dangerous of these reasons is the lack of emotional energy that has frozen most into sitting back and waiting. They are very disappointed that they had it made in 2007 and 2008, only to see their wealth evaporate suddenly in 2009. That would take the wind out of anyone's sails.

You need to heal from that. But don't take too long. The biggest killer of businesses is failure to react to the environment by adding to the core business. Mature businesses in steadily declining markets will perish unless they supplement their core markets by getting into "adjacent" market opportunities.

To Refuel, You Need to Associate with Different People
Expanding into market adjacencies takes learning, and that takes reigniting hope and energy. So you better do something to heal up fast so you can focus. That usually requires associating with some different people to learn from them and get emotionally refueled. You will not be able to sustain a new attitude if you keep associating with the same people who will yank you back into their trough.

The second most dangerous of these is the tendency to sit back and wait for the economy to come back like it did in late 2003. It is NOT going to. You are going to have to think in several new directions simultaneously for growth. Why?
We don't want to throw cold water on an already chilly topic. But here's the reality:

• Most of the growth in our economy comes from businesses with 500 or fewer employees. They provide 70% of the new jobs in the economy according to our own Small Business Administration.
• Credit has been cut off from small businesses. That spells a lack of fuel for the most important growth engine in the country. If you don't have at least $10 million of free cash flow, you're probably not going to get a look from a bank unless you are rock solid.
• If small business can't get fuel, unemployment is going to stay high and consumer spending will stay low because of it. It doesn't matter how many retraining programs the government sponsors. There are no jobs in which the retrained people can land.
• Though large corporations are flush with cash, they're not investing it unless they see consumer spending tick up significantly. They've reduced staff, optimized profitability and are simply pocketing the cash.

We're in a decline and we don't expect a robust recovery due to the aforementioned factors. So what does that say about your options?

How to Expand Your Options
Look horizontally across trades, as well as maximizing your position within your existing vertical market simultaneously. Look at selling additional products, adding new services and explore these simultaneously.

One of the problems inherent with a robust recovery is that we get satisfied with reaping the growth that the recovery dishes out and many times that's all we can handle with the existing people resources. So we abandon our investigative efforts and our skills go dormant. It's time to wake them up.

In a previous article in this series, we discussed how distributors indicated that they had difficulty in growing on multiple fronts and finding people to head up growth initiatives.
Those are real issues. The Who, the group that graced your screen during the halftime show of this year's Super Bowl, wrote in their 1974 release "Join Together": "It's the singer, not the song, that makes the music move along." So let's go with that for a minute. Perhaps it is not all about the right people but teaching people to think and see the world differently, replicating that capability in a number of your people so you can develop simultaneous growth initiatives.

A New Set of Lenses
To get this going in your company, you need to see growth opportunities through a new set of lenses: six of them to be exact. The sixth explodes out into a whole new set of opportunities by itself, totaling more than a dozen types of opportunities. Learn to think like this and you can begin to see your way out of the most difficult of situations.
Your mission: get something going in each of these six areas. That creates diversity, which reduces risk of failure in any one endeavor.

Here is the new set of lenses:

1) Maximize core customer retention
Keep more of the growth you already got. Nobody likes to delve into the reasons you lose customers or significant share at a customer. If you learn the reasons and fix them, you keep others from leaving. Then offer your best customers special privileges to retain them. The best customers give you tens of thousands or more in annual volume, high gross profit dollars per order and they pay on time. Use these criteria to profile your customers. Those that are larger with small gross profit dollars per order are killing you. But they also represent the biggest potential profit improvement in your company if you expand the mix that they buy.

2) Get more business from core customers
Improving the product mix purchased by existing customers is the fastest way to improve profitability known to the industry. Why? It raises the average gross profit dollars per order relative to fixed transaction costs to fulfill the order. You should go all out with marketing and sales practices to promote this behavior.

3) Take share from competitors' customers
This is admittedly more difficult. If you do it the wrong way, you typically end up cutting price. So what's the right way? First of all, you need to put the right people on this task. Not everyone is suited to going on the prowl vs. maintaining existing accounts. You need meat eaters on this task, but a different kind of meat eater: one with cunning and patience at the same time because this is a longer process. Share takers realize that it's the relationship with the opposition's salesperson that needs "breaking." They study the strengths and weaknesses of the competitor while observing how customers are reacting to these. Then they position themselves as the positive opposites of their competitor and that awakens latent dissatisfaction in a positive way. Eventually they wear the customer down and they see why they have to leave "old Joe" in the cold. Want to know more? Get a hold of the book "The Wedge" by Randy Schwantz. You'll never view selling the same again.

4) Create demand
Distributors often communicate that their role is to fulfill demand. The manufacturer is supposed to create demand for the product. Right? I wouldn't count on that in my local market. Most of us fall prey to the feature/benefit selling trap, which does nothing to create demand. Everyone forgot that the product was invented to serve a functional need or solve a problem. So what is the problem? Get back to reminding your market about the seven or so biggest automation application mistakes, or tooling mistakes in the shop, or supply chain management mistakes or supplier selection mistakes. Then reveal the solution.

Make movies of each one of the "seven" in a marketing campaign, post them on YouTube, on your Web site. But above all, it's going to take a whole new way of marketing and selling to get people to spend more to solve their problems. You need to remind them of the issues they have, and then introduce the solutions.

5) Get high early share of the fastest growing segments
The media have chronicled it well: green market opportunities are pretty much all you hear about for growth. But just how big are these, and how good a bet are they? We'll address that.

First, you need to understand how to look for the fastest growing segments locally as well as regionally and nationally. For example, when a major auto assembler like KIA moves into western Georgia, it brings a caravan of tier one and tier two OEMs behind them. You can find out who these companies are by asking local authorities. They'll give you a list with phone numbers and might even have them posted on their Web site. Roden Electrical Supply did this in Montgomery before the Hyundai plant even opened its doors.

There are more ways to sense local developments. Check with the county and municipal authorities regularly for new business registrations, construction permits, etc. The tax authorities are another source, because they frequently make concessions to major new employers long before they arrive. Zoning officials are another good source of what's going to happen. If they zone a new area for commercial development, say retail, while residential development has been under way, it might be time to have a branch out there.

Aside from the niche opportunities afforded by the green movement, all the macroeconomic growth is in the services sector. The senior care market, health and wellness, discount retail, cheaper alcoholic beverages, and local business are the biggest bets according to Entrepreneur magazine and other sources. According to the Bureau of Labor Statistics, the long-term prognosis for manufacturing is continued shrinkage by almost one percent annually, while services industries will grow by 1.2 percent, health and education services leading the way. Industrial distributors should start getting better at penetrating the commercial market.

Solar and wind power are tenuous bets. Currently, their growth has been sustained by grants that improve payback on investment. The paybacks will be entirely too long until the cost of using the technology approaches the cost of coal energy in most areas of the country. Subsidies "subside" by design and there's the risk.

This is going to be a game of spotting better competitors in an industry and following them rather than betting on specific industries for growth. Just as guides take hunters to the big game, you might need some guidance here, too. Specific companies will survive because they learn how to expand their core business using all the tools in this article.

6) Expand into adjacent markets
Here's the big revelation: your traditional markets shrank. Even if markets come back a bit, they are shrinking long term. When you are dealing with a shrinking core, your survival and future prosperity depends on getting into adjacencies. These involve expanding into other markets that leverage your core expertise.

Adjacencies take the most creative thinking of any growth opportunity. They get you thinking out of the box and into a new pool of demand that you previously would not consider serving. That is a sound strategy because it is not dependent on economic growth.

It is imperative that you expand your core business out of your existing vertical industry. Here's the hard reality: you have to start thinking like a distributor of more than industrial products. You have generic distribution skills. Broaden the products sold and customers served.

That may mean you have to acquire another type of distributor to get decent lines. Then add services like recycling services and preventative maintenance services, which might mean joint ventures with engineers and contractors. You may not have tackled something like this before, but you're going to have to learn, because you need to broaden your sources of revenue.

If industrial, electrical, safety, HVAC and plumbing distributors will all suffer from a shrunken market, then it makes sense to combine operations under one roof where there is significant customer overlap between companies. This affords operational cost synergies. You can integrate back rooms and still keep market focus with your front room sales and marketing.

Generate a Set of Multiple Options
Here's a more complete list of the types of adjacencies to consider. Your job is to brainstorm the possibilities in each adjacency type, then rate them on the size of the opportunity vs. the degree of difficulty to implement them:

a. New customer types
b. New product categories
c. New services: recycling, preventative maintenance
d. New store formats like store-in-store, trailer store
e. New marketing techniques (i.e. Internet marketing, catalog marketing and storefronts)
f. New channels of distribution (mostly for manufacturers, but distributors can set themselves up as master distributors or joint venture with other distributors to access other markets)
g. Different value chain position: be a manufacturer, distributor, dealer, installer
h. Geographic expansion

You will probably look at some of these opportunities and realize you don't know how to operate in that market. But that's a sure sign that you are on your way to growing. Growth is all about having the humility to admit that you don't know how to do something, then getting busy discovering what it takes to succeed.

How did the founders of your business start it in the first place? That's where you need to get back to: the spirit of the American entrepreneur that is hungry to discover whatever it takes to succeed. If you can rekindle that spirit, that's where the healing begins. The burning desire to discover what it takes to succeed in something new is what will get us all Out of The Fire.

A fire, after all, is pure selfish consumption. Learning to do something new is about adding new value to benefit someone else, which is the key to growth. It draws your best efforts to bear on an opportunity. Embrace the challenge.

Neil Gillespie is a veteran distribution consultant, speaker and author. Neil worked for GE and Eaton corporations before launching his distributor consulting practice in 1995. Gillespie helped Roden Electrical Supply of Knoxville to grow more than 500% over 11 years while more than tripling EBITDA percentage. Neil has distilled his profitable growth methods in his "Eight Steps to Breakthrough Growth." His book "Discover Your Core, Then Go For More" is now available. Contact Neil at neil.gillespie@growthwizards.com.

Allen Ray has 45 years experience as a distribution business owner, information systems, marketer of product data and consultant to wholesale distributors. Allen advises clients on strategies to stop "Profit Leakage." Allen is collaborating with Neil to help distributors boost productivity and discover new growth opportunities, providing expertise in "Leadership Productivity" and "Pricing for Maximum Gross Profit Dollars per Order." Contact Allen at allen.ray@growthwizards.com.

This article originally appeared in the July/August 2010 edition of Industrial Supply magazine. Copyright 2010, Direct Business Media, LLC.

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