Distribution Panel - February 2012

The flooring distribution industry has consolidated somewhat during the economic downturn. Nevertheless, distributors provide a vital service that is very difficult for anyone else in the supply chain to replicate. We decided to check in with several successful distributors to see how the operating environment and marketplace have changed, and what they’ve done to remain competitive. Included were Steve Johnson of Butler-Johnson Corp., based in San Jose, California; Jeff Striegel of Elias Wilf, based in Owings Mills, Maryland; and Jonathan Train of Swiff-Train, based in Corpus Christi, Texas.

Q. How has the role of distribution changed in the last five years as a result of the challenging economic conditions?
Train: Distribution has had to find ways to reduce operating costs and counteract shrinking margins. Distributors have helped their margins by implementing more private label programs and being more proactive in product design with their suppliers. This has helped with greater differentiation among all product categories.
Johnson: There has continued to be a collapse of the supply chain with more vertical integration, resulting in smaller windows of opportunity and tighter margins. That being said, new opportunities exist in niche products with our best supply partners.
Striegel: As our industry began to reach maturity in the past decade, the role of distribution continued to evolve, much the same as the roles for retailers or manufactures have been redefined. However, if a distributor waited until the downturn hit to get going, it was probably too late. The evolution of distribution is the process of change for larger distributors as they’ve morphed into becoming logistics providers, blended with the right balance of local personal service that can really only be provided on a regional basis…people still buy from people!

Q. How do you blend the necessary expertise of logistics (trucking, warehousing, and inventory control) with the fashion, retailer training and merchandising expertise that it takes to be successful in the flooring market?
Johnson: The perfect blend of all these factors is what gives us a competitive advantage against new routes to market and our competition. I would say that almost everyone believes that they do a good job blending all the above. Can we get better? Of course.
Striegel: It’s a combination of two key pieces. First, cost reduction and efficiencies of technology, such as bar-coding, operational software, benchmarking of key operational benchmarks, inventory management program, and team buy-in to a new way of thinking in terms of doing what it is we do. Today, as the distributor has greatly reduced cost and eliminated waste, we have emerged as a low-cost service provider. The net effect is that while some manufacturers may choose to go direct and eliminate the distributor, they can’t eliminate the cost of distribution, and no one can do this better than a well managed, efficient local/regional distributor. Second, it’s success through partnering…an old axiom, but in reality a needed compass as to what a distributor does and where they do it. The old days of trying to take a product message to the entire market just isn’t possible today. It’s about having a clear alignment of partner account programs that focus the effort and energy of distributors to aligned accounts, and specifically catered to fit each specific account group, segment and channel. In the past three years Elias Wilf has redesigned and rebuilt literally every single sales program we take to market. It’s not about what we want to do for the dealer, but rather what they want and need for us to be doing!
Train: You juggle! Typically, a distributor is outstanding on a couple of these points, good at others and lacking on the rest. I think our strengths dictate which customers gravitate toward our company.

Q. How has the “made in America” preference that some consumers have gravitated toward as a result of the high unemployment rate affected your private label programs? Or has it?
Striegel: I think this is absolutely a growing consumer trend that’s truly being driven on multiple fronts, such as the ongoing nightmares on other products out of China like dog food poisoning, the lead poisoning found on children toys and jewelry, and the ongoing political rumblings of anti-China sentiment. The recent ITC ruling (regarding engineered wood from China) should only help drive wood back to made in the U.S. Let’s face it, if it just comes down to who can sell the product for the cheapest possible price, we all lose industry-wide. Wilf is fortunate in that we have aligned with Mannington, Quickstep, and Somerset, all of which carry the moniker of made in USA. In fact we were very proud of Mannington’s position here, and just loved their “Let’s Make Some Noise” video. Also, we were elated at the recent Somerset decision to build an entirely new U.S. plant for their engineered line, as they switch all production from China to the U.S. Quickstep wasted no time in building a state of the art facility in North Carolina, adding almost 1,000 jobs.
Johnson: Made in America and “green” have some similarities. When a consumer expresses interest, it’s helpful in making a sale. But a consumer’s preference for either green or made in America products evaporates if the product is not price competitive.
Train: I don’t think it has had an impact. We have promoted several made in America campaigns and see little difference in customer demand. The world has gotten smaller and customers expect good products regardless of origin.

Q. How does the distribution of tile products differ from, say, wood or vinyl?
Train: Tile has a whole other set of logistical and costs issues. It is has the highest freight factor per truckload/container. Therefore, transportation and distance are larger barriers. It also creates greater warehousing challenges. I would also say styles come and go much faster than other categories.
Johnson: With tile, the supply chain is chaotic, and the route to market is showroom driven. So as a distributor you need to be able to have a high level of competency in areas that are normally handled by manufacturers, such as purchasing expertise, display design, generation of your own marketing materials, fashion selection, etc.

Q. Extending credit to retailers is a key service that you provide. How do you minimize the risk associated with providing this service? Have your terms changed much as a result of these challenging times?
Striegel: To start, Elias Wilf runs a very tight credit posture within the general market and limits risk to credit worthy accounts. In our industry, the risk/reward of becoming a bank versus a vendor simply can’t be rationalized. Wilf may lose a little business with this position, but the trade-off is we also minimize our risk. That’s the front-end position of not extending credit where you shouldn’t. To illustrate this point, total annual credit write-offs have been less that one quarter of one percent over the past five years. On the back-end, the real protection comes via the credit insurance program we have through ACI, which for the most part insures all accounts in excess of $7,500.
Train: We have had to take on more risk. Our standard terms are the same. But we have increased personnel in order to stay close with our customers during these tough times. Communication is key to supporting our customers. We look at this as a long term relationship and we do everything we can to provide the credit needed to run their business.
Johnson: Our terms have not changed. Our eye on compliance has increased, and credit analysis can be as much an art as a science. To that end each case is reviewed on its own individual merits and risks.

Q. What criteria are most important when selecting the lines that you choose to represent?
Johnson: Fashion, price, and exclusive representation with partners that want to be successful together.
Train: This is still a style and design business. Fashion comes and goes and you have to stay up to date with what can sell and what can’t sell. We make sure we are within the right price point. We do not necessarily go with the lowest up front cost. We consider the whole value proposition a supplier offers. We also run a few what-if scenarios to see if we can live with the potential outcome if a line does not turn out as planned.
Striegel: There must be a real need, not simply a cannibalizing of redundant lines, which isn’t good for the manufacturer, distributor, or for the marketplace. Next, there has to be a legitimacy to the vendor, as launch failures impact distributor credibility much more than successes. We remember products like Edge Ceramic, an epic failure, and a costly one for all that got involved. Fortunately, we passed on this one. Finally, the more successful distributors understand how vital a seamless relationship is with their key suppliers, and always need to be aware of how other decisions with regard to product can impact those relationships. It’s not a matter of asking permission per se, it is extending the courtesy of discussion.

Q. Do you think that the Internet will eventually enable the producers to sell the end-user on a direct basis? Why or why not?
Striegel: We believe the Internet has a very specific role within the overall industry. From a direct sales perspective, it most likely will be relegated to a small percentage of industry sales. The real role is all about providing product information and helping consumers sort through all the information to be better informed in order to make a smart and good decision. Statistics bear this out in that over 75% of all consumers inquire about flooring on the Internet, and from a sales perspective, less than 5% of industry sales are over the Internet.
Johnson: Look at the electronics industry—just like the big boxes the Internet will eventually settle into a percentage of total business, further cutting into share. But since the flooring business is a tactile, service and installation dependent business, I do not believe that the Internet percentage will be as large as other industries. The use of minimum advertised price, which is starting to creep into our industry, will help stabilize the system for branded products.
Train: I think the Internet is wonderful and essential for the buying process in terms of product knowledge and design ideas. However, I do not see the Internet becoming the major vehicle for the final buying process.

Q. What makes those distributors that are sought out by key manufactures so attractive to them?
Train: We have a lot of well-established long term distributors in this country. Having to start over for a supplier is very difficult and costly. Knowing that a distributor can survive a downturn in the economy is very attractive for a supplier.
Johnson: Many manufacturers have tried and failed at the functions that distribution performs at a high level. Our relationships in the market and our ability to extend credit are also valuable.

Q. Do you consider an exclusive agreement with a supplier an asset or a hindrance? Which way is that phenomenon trending?
Johnson: For us it is the minimum barrier to entry. The resources committed to promote and market a product are at a premium in this environment. It would take some very unusual circumstances for us to consider dual distribution. We already have multiple routes to market. In these times it is trending both ways.
Striegel: In our opinion, exclusivity can only be viewed in one perspective…it’s the only way. The industry has changed in many ways, and one of the most obvious is the compression within flooring distribution. It’s not like it was 25 years ago when there were so many distributors and so few suppliers that the manufacturer felt that the best way was have dual markets and let the two distributors fight over it and keep each other honest. Today, with the proliferation of lines and suppliers, there really aren’t enough distributors to even cover all the lines that exist. The key is that the distributor certainly needs to understand the unspoken obligation that comes with exclusivity, and secondly the manufacturer and distributor need to work together strategically within the market.
Train: Exclusivity on some level is essential for a distributor. It shows true partnership and it allows us to invest the necessary assets in the line.

Q. What is the best way to motivate a retail sales associate (RSA) to promote your products?
Johnson: Have the best people and give them the tools to be successful.
Train: There are thousands of RSAs so I believe there are thousands of ways to be effective.

Q. What role does the distributor play when it comes to product installation, if any?
Train: I think there are huge opportunities for our industry to become more involved in installation. We all need to be more involved in this process and all take more responsibility. Too often we point fingers at each other. We need to develop standards that hold everyone accountable. But most importantly, we need to show the consumer we are up to the task. If we don’t, she will spend her dollars elsewhere.
Johnson: It varies by line but it includes active training on changes, means and methods of installation with our dealers. And we’re part of the claims process.
Striegel: It plays a vital role. Flooring is not a very complicated product with regard to installation, however, it can be complex. Wilf views installation training with sales and installer groups virtually the same as we view sales or product training.

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