HOME GENTER MERGHANT

BILL FISHMAN

Bill Fishman & Affiliates 11650 lberia Place San Diego, Ca.92128

Another response to my February column came .from 4l Leitschuh, executive vice president, National Building Material Distributors 4ssociation. I am reprinting it here with his permission.

NYONE who had theopportunity to listen to authorTom Peters (/r Search ef Excellence/Passion for Excellence)speak at the recent National Home Center Show was treated to a dynamic insight in assessing the challenges facing the retail building products industry. However, it is unfortunate that Peters may not have beenprovided with the most accurate account of the wholesale distribution function in the retailine of building products, as was outlined in-this column in February.

In the article, which provided a summary of industry information given to Peters, the demise of the independent distributor was cited as the product of retail success in "taking over" the distribution function through direct buying and a search for increased margins. Not true!

Today's building material distributors are keeping pace with a changing market place, increased competition, market restructuring, and are aggressively moving ahead to meeting their retailers' needs. From just-in-time delivery systems to computerized inventory analysis, distributors are working with retailers to develop services that genuinely add value. And today's retailers are willing to pay fbr that value.

In fact, retailers have been one ofthe major forces fueling the change. During the early 1980s, the emergence of the warehouse home center concept drove many retailers to a price panic. Every store on the block offered a "lowest price guarantee," so virtually every buyer had to scramble to find the lowest-cost sup- plier. Buying practices changed too. Purchasing huge truckload quantities direct from manufacturers became popular because the landed cost, on an item for item basis, was very low. The idea of value-added services went out the window as the price emphasis grew to gigantic proportions.

Today, however, more retailers and distributors than ever before are analyzing all the costs associated with purchasing a product. Retailers are moving away from price competition, and are searching for a partner who can help them differentiate their stores through valueadded services. Distributors have responded by developing one-on-one relationships with retail customers to identify specific programs to make retailers more profitable.

Another factor that's come into play is retailer disillusionment with direct buying and captive distribution. Some retailers who experimented with their own distribution centers became frustrated because the supposed savings never materialized. They bought large quantities of product and stored them in their own warehouses, only to find themselves overstocked at the end of the selling season.

After trying it on their own, retailers concluded running a captive distribution center wasn't as simple as it looked. On some lines, stockouts were a constant problem; on others, there was always excess inventory. Getting deliveries to the right place at the right time with the right paperwork was a headache. Turns began to fail as inventory management grew lax. And since theonly customers being served were their own stores, there was no competitive incentive to of'fer outstanding service.

Other retailers discovered they missed the extra services available throueh distributors. They wanted one-on-oni contact to discuss their operations' requirements, and needed an expert to work with themon merchandising, employee training and inventory control. When they truly added up all the costs of handling distribution themselves, plus the headaches of running a warehouse, they concluded it was more efficient to let someone else do ir.

That "someone else" has emerged as the wholesale building material distributor. In actuality,both retailers and distributors have evolved to the ooint where they view distribution as a partnershiprather than an adversarial relationship. Distributors have dramatically updated their operations and are sophisticated enough to help even the largest chains get more from their inventory investment. Retailers are taking the time to evaluate their purchasing practices to determine which distribution channel gives them the best value.

Competitive times in home center retailing have never been tougher. From all indications, retailers are beginning to realize that the way to succeed in the maturing market is to become a low-cost operation. It's not surprising then, that building material distributors are playing a larger role in supplying home centers. Particularly over the last two years, a steadily growing share of items once purchased direct from manufacturers ls now being channeled through building material distributors. Manufacturer-direct andbuyinggroupr purchases appear to be declining, according to the current market profile statistics.

In fact, in six out of the l0 core building material categories, the average percent of total product volume purchased from distributors increased. Direct buys from manufacturers decreased in nine out of l0 categories. Building material distribution is gaining ground as a competitive weapon for home center retailers intent on competing into the 1990s. It is far from the demise communicated to Tom Peters and ifanything represents a new era of profitability for the value-conscious retailer.