Dealing with the direct sell: Contractor's Corner

By Dave Stafford

Phil came into my office. His face was red, and he was grinding his teeth. He looked like he was going to have a coronary. “What’s wrong?” I asked. “That @#$% buyer just told me he was going to buy direct from the mill and asked me if I’d like to do the installation! It was all I could do not to strangle that guy.” There is nothing that will enrage a dealer more quickly than finding out a potential client is planning to buy his products direct from the mill and “save a bunch of money.” It has happened to all of us, and it’s a bitter pill to swallow.

Sooner or later, as a commercial dealer or contractor, you’ll face direct competition from one or more of your mill partners. Some are more prone than others to cut the dealer out of a lucrative job when there is pressure from a large client. Others are more reluctant to burn their dealer network. A few, understanding the complexities (and consequences) of eliminating the dealer, flatly refuse. Sadly, those are few in number.

Here are some questions, answers and comments that just may help you deal with this frustrating scenario:

What contributes to a direct sale environment? Mostly, it comes down to the mill selling directly or facing reality: “If I don’t agree to sell direct, I have zero chance to sell the product.” When a buyer is auctioning off the spec for a very large job, they can set the ground rules—for that job or for that type of purchase—either because of a large single purchase, overall annual volume, financial strength or some combination of all three. “We are going to spend $1.1 million for flooring this year. We can prove this by our previous annual purchases.” Or, “This is our bid document where the architect estimates that flooring will comprise $300,000 for each of our proposed four locations during the year.”

Presented with such a situation, when will the mill partner roll over? Some of the finest mills have a policy of no direct selling, since it burns their large dealer network. However, if the potential order is sufficiently large so that even an established dealer might have trouble handling the financial outlay, and the client has money in hand, then they’ll consider it. It may also be part of the sales strategy of a mill when the client has huge annual expenditures for flooring, such as a government agency like the General Services Administration.

What kind of customer demands the direct sale scenario, and what are the typical components that make this possible? Large retail chain stores, church organizations with central purchase programs, federal and state government agencies, large school systems, and corporate offices with multiple locations are just a few. The driver on all is an extremely large anticipated product volume that can be proven to exist, usually of a few products and colors, where the design of the area has already been established, and the product may be drop-shipped to either the desired location or to an installer in the area.

What is the downside of the direct sell for the mill partner? The biggest may be the damage to their reputation with their dealer network. There have been cases where a direct seller has been treated as a pariah within a geographic area because they burned a prominent, well-connected dealer—bad news travels like wildfire. The mill’s reputation may also be damaged after the sale because the buyer chose an inept, untrained installer who blamed the bad installation on shoddy manufacturing or defective products. “That’s the best we could do with that patterned carpet. It was just way off when they made it.” Now the mill has to send in their own tech rep to see if corrective measures are possible, or contact one of their local dealers to undertake remedial action. A few mills have learned expensive lessons this way.

How might the mill structure the direct sale to protect itself and take care of the dealer? There are several things a mill can do. One is to insist that the sale be handled by one of their key dealers to organize, receive, inspect, deliver and install the product for a negotiated fee. “We will sell the product to you, but insist that one of our dealers be involved.” The mill may build in a per-yard or square-foot credit to the dealer to underwrite his efforts. With the mill’s recommendation, the client may be willing to pay a somewhat higher installation price, too.

A direct-selling mill may require payment in advance or upon delivery or in stages for multiple shipments. If there is no local dealer willing to perform installation, the mill may recommend an installer by name or by certification level, such as CFI, CII or Masters II. There are some flooring contractors that specialize in performing installation only (no product sales) by traveling the U.S. and abroad, where they install Axminster or other patterned carpet, large carpet tile jobs in the occupied office environment or chain store build-outs.

What is your best defense against the direct sell? How can you go on the offense? My best suggestion is to carefully do your research on the client before spending a lot of time. Ask about how they have handled previous projects, whether purchased locally or through a central purchasing authority. Even if there is a history of a direct product purchase, it may be left up to the local office. If you find out the client is leaning toward a direct buy, then ask how they plan to handle receiving deliveries, inspection, storage, re-delivery to the job site (multiple times), selecting, managing installation, project inspection and signoff. I have used this approach to explain the intricacies of moving from design concept to reality and seen buyers turn pale as they realize the risk for them in buying direct. “Well, how much would you charge to do all of this?” is the usual response. In one classic case, I quoted a job both ways, and the buyer—who checked my prices—found he was losing money by buying direct and increasing his risk substantially.

When do you fold your hand and move on? Take a hard look at the situation and decide if you can make enough money selling labor and project management to warrant the time and risk involved. One thing we did for our personnel was to work up a rate sheet for the value for each component in the delivery process so that they understood what our time was worth: receiving, product inspection, monthly storage fees, insurance, delivery to job site, personnel mobilization, price per yard or square foot to install, quality standards inspection, warranty, and any items that may be pertinent to a specific project.

With a hard-nosed client who’s only looking at product cost and a mill eager to sell to anyone but unwilling to provide any dealer participation in the deal, sometimes it is better to just walk away.

How may the dealer orchestrate a payback when the direct sale becomes inevitable? Refuse to show and specify that mill’s products. When talking with mill reps, that was always a topic discussed. “What is your policy of selling direct, and under what circumstances?” Does their answer make sense, and is it accurate based on their reputation? In more than one case, we refused to specify their products because we didn’t feel we could trust them not to undermine our sales efforts.

How can one use this direct sale scenario to strengthen their relationship with the mill? Offer to work closely with the mill to do what you do best, for consideration when a direct sale is the only solution to getting the job. The mill has its problems, too. Under the right circumstances, any mill will sell direct, I don’t care what you may be told.

Can the dealer participate in a direct sale and actually make more money with less risk? When there is an extremely large product sale, it may use up your credit line with the mill and damage your other potential lucrative projects. There is always a risk that the client may not pay you on any timely basis for a product sale, and you could be left to twist slowly in the wind if the client goes bankrupt. If the mill will take the sale on a direct basis, they shoulder that risk, not you. If the mill will provide some type of credit or commission to you for making the sale, and help you get the project management fees and make a reasonable profit on installation, then yes, you could come out way, way ahead.

Case study number one—government office rehab: Needing about 45,000 yards of carpet, the client decided to restrict product to two mills. After receiving formal bids from several local dealers, the client determined the price was just too high, and canceled the bid, negotiated directly with the two mills, got a direct-sell price and then put out a bid for receiving, storage, delivery and installation to the mill’s approved dealers. Since the government understood the components of delivery and installation, and the mill offered a small rebate to the dealer, it was a win, albeit a smaller one for the dealer.

Case study number two—corporate office call center: A multi-location build-out of telephone call centers, where there was a cookie-cutter design from its central office, required about 20,000 yards of carpet or carpet tile. Floor plans were provided and carpet was shipped to a recommended dealer to coordinate delivery to the site in stages as construction was completed. Bids were taken, and the award was based on dealer/contractor reputation, experience with similar jobs, and pricing. No consideration from the mill, but the dealer made a reasonable profit from project/labor—and the dealer’s reputation was enhanced for efficiently delivering the job.

Case study number three—large building complex: A huge bid for multiple buildings to be erected over two or more years required over 140,000 yards of broadloom. From the start, only the major mills were involved, but bids had to come through their key dealers. The buyer understood that the product cost was of such magnitude that no dealer could assume that risk; therefore, there had to be a cooperative association between the mill and the dealer. Once that was agreed to, a bid could be entered. The mill and the dealer worked out special terms specific to the project. In this case, the mill and the dealer were joined at the hip; each was dependent upon the other. A resounding success for both.

Case study number four—disaster: A government client decided to buy some 21,000 yards of carpet tile from a mill agent and go elsewhere for installation. This was done to simplify the client’s year-end purchase process and satisfy Small Business Administration purchase goals. So another award was made to a local contractor under a small business set-aside for installation. As it turned out, the contractor under-bid the job, substantially. When it was time to install, rather than use the recommended adhesive, he bought a cheaper alternative that was found to be incompatible with the carpet tile—several months after installation. The result was a total loss for the government, bankruptcy for the local contractor, and a complete repurchase by the government. Loss was estimated to be over $1.1 million!

With direct selling, there can be some good, some bad, and some disastrous consequences. A direct sale might make you furious and leave you vowing vengeance again the mill, but don’t burn all the bridges. Make it work for you.