Chicago Strategy Associates and the Kellogg Center for Global Marketing Practice of the Northwestern University’s Kellogg School of Management led a second-half 2016 research collaboration with the National Association of Wholesaler-Distributors (NAW) and The Institute for the Study of Business Markets to create a fresh perspective on how manufacturer and distributor dynamics could be improved through broader adoption of forward-looking channel strategies, managerial policies, and best practices. Much was already being discussed about the soft side of partnering, such as culture, mindset, and trust. What the research aimed to provide was compelling new thinking about hard business strategies, distribution policies, and in-market programs that create an environment of joint growth and winning in the marketplace.
Research conducted as the basis for this white paper indicates that the state of the last-mile distribution working relationship between branded product manufacturers and their key downstream partners is at an all-time low. Only 34% of distributors and 37% of manufacturers in our research indicated that their business goals were well aligned.
But for large, nationally scaled distributors with more than $1 billion in annual revenue, the percentage that see strong alignment with their manufacturing partners doubles to 68%, a dynamic that plays out consistently in our data. As with manufacturers, only 36% of all distributors say that trust and information sharing with their manufacturing partners are increasing significantly.
Ninety percent of large $1 billion+ distributors see the benefits of greater trust and information sharing. Indeed, manufacturers we spoke to indicated they are intentional in putting more and more attention against fewer, larger distribution relationships. These manufacturers and large distributors indicate that the scale of investment required to win in today’s technology-rich and Internet-enabled communications environment favors fewer, bigger partnerships.
But risk also drives the evolution of distribution relationships, and risk cuts both ways when it comes to business—and distributor—size.
On one hand, a high degree of dependence makes it dangerous for a distributor or a supplier to engage in opportunistic behavior, or employ undesirable tactics, because that partner would presumably have much to lose should the relationship deteriorate. The ability for large players to swing a significant chunk of business to competing manufacturers or distributors encourages stability on both sides of highly consolidated distributor–manufacturer markets.
But we have also seen that the likelihood of being trapped in outdated and unsustainable partner business models rises dramatically when significant revenue concentration is tied to status quo distribution structures.
So the world of distribution is polarizing, and with few highly specialized market exceptions, we are seeing forces drive continued consolidation and concentration of distribution systems:
- Markets are splitting into polarized segments of product offering and distribution model. One group of distribution relationships will be driven by fulfillment scale and transaction efficiency; the other group, by decision technology innovation and value added effectiveness. An important B2B lesson to be learned from how consumer market distribution systems evolved: It will be less and less viable to straddle the opposing worlds of efficient discounting and effective service delivery.
- Less-differentiated, more-commoditized products will increasingly be provided by one-stop, broad-line, offline and online fulfillment houses. This market segment will be characterized by relentless price competition, lower margins, efficient fulfillment and logistics, and highly routinized demand generation.
- More differentiated products—those offering unique end-user outcomes and requiring higher-touch end-user selection education—will be provided by distributors with advanced demand generation technology, sophisticated analytics, and new decision support tools. As with most technology-led market disruptions, this group will likely be populated less by existing legacy players, and more likely by highly disruptive and new, innovative distribution models.
- Price transparency and sensitivity are increasing. In our research, less favorable marketplace price compression was an area of strong agreement by distributors and manufacturers: more than 80% of distributors and manufacturers alike indicated an increased downward pressure on prices. The ability for end users of all sizes to easily assess and compare prices is seen as fueling an acceleration in the distribution model polarization:
- More commoditized products and fulfillment channels—the ‘Wal-Mart’ of B2B distribution—will find less and less margin to support brand preference-building, and will instead compete by offering easy, convenient one-stop supply systems where end users can bundle together their discounted purchases.
- For differentiated product distributors, the challenges of getting beyond unit prices to drive total cost of ownership decision making will increase demand generation costs (more on this later). Another B2B lesson from discount-driven Wal-Mart’s experience in the consumer market: they failed miserably at every attempt to diversify into higher-margin luxury goods.
- As B2B distribution models polarize, it will become harder and harder to play both sides. Said another way, relying on commodity product scale to subsidize differentiated product effectiveness will become a very risky path.
- Markets are over-saturated with distribution. One of the unintended consequences of the recent economic recession was the branded product rush to add more points of distribution in hopes of capturing greater share:
- Only 49% of manufacturers in our research felt their markets were over-saturated with sales and distribution resources. Many of those manufacturers shared privately that market disruption risk and fear of unintended revenue loss stymied their desire to work more closely with fewer distribution partners.
- More than three quarters (78%) of distributors in our research felt differently: they saw too many distributors chasing too little high-value revenue. The proliferation of loosely managed “distribution pins in the map,” in their view, led to unhealthy levels of channel conflict and escalation in price, margin, and service deterioration.
The bottom line for both distributors and manufacturers could not be clearer: the need for greater discipline, tougher choices, and stronger and more mutually beneficial system-wide relationships in distribution is now mission critical. This outcome will only occur if both sides develop and stick to more strategic, mutually beneficial policies and
The time has come to walk away from partners—upstream and downstream alike— that are unwilling to let go of unhealthy, conflict-breeding, status-quo arrangements and beliefs. A new generation of winning, mutually beneficial, distributor–manufacturer business models will take shape.