Are we at a Disruption Point for PHCP Distribution?

According to recent Department of Commerce data, U.S. distribution sales dropped 6.7% during the first half of 2023 while online sales continued to accelerate. In a recent survey, Distribution Strategy Group found that for distributors that have eCommerce, 19.7% of revenue comes from digital channels. This survey found this percentage to be an acceleration over 2020 (11.6%) and 2021 (14.5%) numbers. While these numbers appear to be trending in the right direction, there is an elephant in the room. With top distributors such as Global Industrial boasting 60% of revenue coming from online sales and big box giants like Home Depot and Ferguson gaining wallet share, the majority of the market is falling behind. (Read more here and here)

 

Why are Distributors Falling Behind in eCommerce?

For starters, many established distributors and wholesalers, especially in older industrial segments such as heating, ventilation and air-conditioning (HVAC), plumbing, industrial safety, electrical, and others, still rely mainly on a branch network, distribution centers, and an internal and external sales force to sell and distribute products. When asked their biggest challenge in building a B2B eCommerce business, 41% of distributors picked a lack of money as the most important inhibitor, according to a 2018 B2BecNews survey. “For many distributors with longstanding leadership teams, using eCommerce as a tool is not something they are familiar with,” says Layer One CEO, Chad Albrecht.  “This results in a sticking with what works mindset that creates internal obstacles for eCommerce growth.” (Read more here)

At a recent ASA event, Albrecht had a conversation with a distributor about their online sales. “This distributor's point of view was that they really haven’t seen a shift in buying behavior favoring digital.  When I asked about the customers that weren’t buying from them anymore, they hadn't considered that.”  Albrecht goes on to say that this form of confirmation bias is extremely common.

These trends may signal the start of a disruption point for distributors that rely almost exclusively on relationship-based branch sales. While there is certainly a population of contractors that prefer to buy in-person from branches, the pandemic showed us just how comfortable most are buying online. Counter sales are not going away anytime soon, but ignoring your clients who would prefer to buy online is just turning away business. All is not lost, with only 37% of distributors between $50 million and $100 million in revenue offering eCommerce, there is still time.

 

As a Distributor, how much should I Invest in eCommerce?

The first thing most distributors face is wrapping their head around how much to invest in eCommerce. Assuming a distributor with 25% gross margin and looking at pure sales and investment, consider the following three factors.

1. Where am I in the journey of enabling eCommerce as a viable channel within my business?

For distributors under $500 million in sales, a rule of thumb is an investment of 1-3% of the total revenue in eCommerce. Early on, a smaller investment (0.5%-1.0%) is common with most companies starting when they hit $50 million in revenue. At the $100 million revenue mark, a 3% eCommerce investment plateau often occurs (Figure 1). This investment should be guided by a partner that has a track record of growing distributor sales and be integrated with organizational strategy.

2. What are my raw eCommerce sales as compared to my overall sales?

eCommerce growth of total sales should be “tied at the hip” with the overall increase in revenue (Figure 1). By the time a company reaches $500 million in sales, it's not uncommon to see 40%-50% of total revenue attributed to eCommerce. Ensuring a quality strategy by $100 million in sales will allow for the acceleration from 4%-5% eCommerce revenue to the 50% mark. The strategy to achieve that kind of growth should include a process to effectively onboard new customers to the site, incentivize the sales team, and create a rewarding online customer experience to name a few.

 

Figure 1 - eCommerce Growth vs. Investment

 

3. What amount of overall sales can be viewed as “assisted” by the presence of eCommerce?

In Distribution Strategy Group’s 2023 State of eCommerce, they cite 5% of all sales being “assisted” by the presence of eCommerce. This means for a distributor at $100 million in sales, at least $5 million is enabled through eCommerce (yielding an approximately 50% ROI).  There are many indirect factors, for instance, a customer may be buying at the counter, but they may have ended up there as a result of the eCommerce offering. Distributor websites should provide value by offering customers a way to shop and learn about products before buying through other channels. (Read more here)

 

As the big nationwide distributors continue to invest more and more in eCommerce along with the threat from Amazon Business and big box retailers, now is the time to take a serious look at your digital strategy and investment in eCommerce.

Layer One are experts in maximizing B2B eCommerce. We have extensive experience implementing, customizing, and building features that improve customer experience to grow sales.

 

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