Special B2B Ec mmerce Rep rt for Owners of Independent Distribution Supply

How are small and midsize independents competing online against the national behemoths?

© 2014 Market Corral. All rights reserved. Researched and written by Media Frenzy Global, December 2014

Table of Contents

Introduction........................................................................................Page 1Key findings and takeaways.........................................................Pages 2 – 3Methodology.....................................................................................Page 4The SMB revenue-growth leaders: What are they doing differently?.............................................Pages 4 –10 Revenue sources.......................................................................Page 5 Competitive threats..............................................................Pages 5 – 6 Competitor inroads...................................................................Page 6 Credit card purchasing............................................................Page 7 Website investment..............................................................Pages 7 – 8 Website analytics.......................................................................Page 9 Internal perspectives..........................................................Pages 9 – 10Conclusion........................................................................................Page 10Acknowledgements...........................................................................Page 11

IntroductionFor decades, supplying local businesses with essential products and services has been the domain of small to medium-sized (SMB) distributors. Hospitals, schools, manufacturing plants, retailers, and most other businesses rely on these suppliers for every type of consumable, including safety, maintenance, repair, electrical, janitorial, printing, food service, and packaging.

These wholesalers, often third-generation operations, have counted on loyal customer relationships for steady growth and profitable margins.

Enter the Internet. Early on, a number of entrepreneurs thought they could bypass physical wholesalers with an online B2B marketplace, but they failed to gain a critical mass of customers and faded away.

More recently, however, players with sufficient scale, logistical savvy, and financial resources have mounted a new and credible assault on this marketplace.

• From the bricks-and-mortar side, Grainger and Staples have pinned their corporate growth strategy on displacing local and regional distributors by investing heavily in websites, ecommerce functionality, and digital marketing.

• From the online side, the ubiquitous Amazon.com has rolled out Amazon Supply, which—like its consumer businesses—focuses on breadth of selection, easy searching, and deep discounts.

Given this volatile environment, Market Corral commissioned survey research to determine how SMB suppliers see their current market position in ecommerce.

We wanted to learn:

• Is there a clear performance differentiation within the SMB peer group?

• How does SMB performance compare with the leading national players?

• Which of the national competitors are causing concern—and have they taken sales away?

• Are faster-growing SMB companies doing anything different in regards to ecommerce? Are they experiencing different results?

• How optimistic are these distributors about the future? How comfortable are they with the status quo? 1

Key findings and takeaways1. The majority of B2B distributors are well below the national benchmark in ecommerce revenue share.

Only 27% of respondents reported an ecommerce revenue share at or above the B2B industry average of 22%.

Ecommerce revenue will continue to be an opportunistic growth channel as online buying surges. With business professionals tasked to move faster and do more with less, B2B buyers have decided that efficient online purchasing is critical to their success. The majority of SMBs should consider adjusting their ecommerce priorities to ensure they are satisfying contemporary buyers’ needs.

2. Slower-growing SMBs fail to invest in ecommerce at levels that generate revenue for both the fast growers and the national players.

It’s safe to say that ecommerce performance is tightly correlated to investment. Not surprisingly, we found the fast-growers are investing more in their sites and are seeing the greatest ecommerce success among their peers.

Those SMBs looking to catch up in their ecommerce performance must make the necessary investments to satisfy online buyers if they want to begin experiencing the success of their higher performing peers.

3. Analytics are largely ignored by most SMBs.

Only 30% of respondents reported that they review key analytics including site visitors, pages and products explored, and conversion rates.

The old adage “You can’t manage what you can’t measure” definitely holds true in ecommerce. Trends change. Tactics change. As such, analytics are a major priority for successful online businesses in every sector and the differentiating factor between low and high performance. The good news for the SMB who have been ignoring the analytics is that, with a little attention, they can learn what will “move the needle” on their site’s performance.

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Key findings and takeaways4. Many SMBs don’t provide new visitors the opportunity to make a purchase on their sites. Almost 60% of survey participants did not offer new visitors the ability to make immediate purchases. However, half say they are planning to do so in the future, while a quarter are unsure and the remaining 20% say no.

Many SMBs believe that most new site visitors are only comparison price-shopping and would not add meaningful revenue. However, it’s clear that industry leaders take the opposite view.

5. Most SMBs are concerned about the national players and have lost business to them.

According to over half the respondents, Staples Advantage and Amazon Supply are competitors to worry about. There was less concern for Grainger at 17%, and 13% chose “other” as their biggest concern.

The remaining respondents felt none of these industry leaders was a threat, leading us to believe the respondents were in a segment in which the leaders didn’t participate. For many of the SMB’s large national competitors, it’s well documented that ecommerce has become their fastest growing channel and represents revenue well above the industry average. They are investing heavily to strengthen their position as the buyers continue to increase their online purchases. SMBs would be wise to mirror the success of the national leaders and ensure that ecommerce becomes a top strategy.

3

MethodologyWorking with a number of industry affiliate associations, we invited more than 500 suppliers across the United States and Canada to participate in our research. Eighty-seven submitted completed surveys and a small random group participated in individual telephone inter-views.

There was a proportionally greater representation from those serving janitorial supply, food service, safety, and packaging needs. Industrial/MRO and paper/printing distributors were also included.

Sixty-three percent of respondents were company owners, with the balance representing operations (18%), sales (15%), and marketing (4%).

In terms of size, the majority (62%) of respondents reported annual revenues between $10M and $50M. Thirteen percent had less than $10M in sales, while 15% reported between $50M and $100M. Ten percent exceeded $100M, with one respondent topping $500M in annual revenues.

The SMB revenue-growth leaders: What are they doing differently?We wanted to identify the growth leaders and see what they were doing differently. We asked respondents to describe their annual growth rate over the past three years. Here’s what we found:

Sixty-three percent reported revenue growth under 6% per year, with half of those between 3% and 6%. Ten percentreportedflatordeclining sales. By the same token, 37% of respondents saw revenues grow by more than 6% per year, with 15% of the total survey population reporting 10%+ annual growth.

Examining the other survey responses through this fast/slow lens, we wanted to know what differentiated the faster-growing (6%+) distributors from their peers.

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What would you say has been youraverage annual revenue growth over the

past three years?

Less than 3%

3% - 6%

6% - 10%

10% - 15%

More than 15%

Flat or declining

Revenue sourcesEcommerce represents a larger share of fast growers’ business.

About 40% of the fast-growers reported that ecommerce revenue drove 15% or more of their total revenue.

In contrast, only 16% of the slow-growers reached the 15% threshold.

Overall, more than half (53%) of respondents report that less than 5% of their revenues derive from ecommerce—far below the 22% average of the B2B wholesale supply group. This should be cause for alarm for this group’s long-term competitiveness.

Competitive threatsFast-growers are more concerned about Amazon and Grainger than Staples.

No national competitor gathered a majority of votes from respondents, but fast growers ap-peared more worried about Amazon Supply and Grainger than both the slow growers and the typical respondent, who both express more concern about Staples Advantage.

All respondents Fast-growers Slow-growers

More than 50%

25% - 50%

15% - 25%

5% - 15%

Less than 5%

100%

What would you estimate is theecommerce share of your total reveunue?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

5

Competitor inroadsFast-growers have lost less share to national competitors.

Three-quarters of the faster growing distributors have lost less than 5% of sales over the past three years to the large nationals, while 38% of slow-growers have lost more than 5%. This would suggest that these lost sales are depressing revenue growth.

All respondents Fast-growers Slow-growers

None of these

Grainger

Amazon Supply

Staples Advantage

100%

Which national competitor conerns you the most?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

All respondents Fast-growers Slow-growers

More than 20%

10% - 20%

5% - 10%

Less than 5%

None

100%

What percentage of revenue do you estimate you have lost to the nationalcompetitors over the past three years?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

6

Credit card purchasingHigher performers are more likely to accept credit cards transactions from new visitors.

Only 41% of all respondents provide the ability for new online visitors to make an immediate credit card purchase.

Half of those growing faster than 6% annually are set up to allow new visitors to purchase via credit cards. Thirty-six percent of slow-growers accepted new visitors’ cards.

Among all those who do not accept credit cards today, fast-growers said they were more likely to do so in the future. Overall, 54% plan to change their policy in the future, but more than a quarter are still unsure.

As mentioned previously, the ability for new visitors to make credit card purchases is a must-have capability among the national competitors. The SMBs lacking that capability should consider if they are missing revenue opportunities.

Website investment Fast growers continue to spend more on their online initiatives.

Although total spending for current websites was similar overall, fast growers were more than twice as likely to have spent between $50,000 and $100,000 on their online presence.

All respondents Fast-growers Slow-growers

No

Yes

100%

Can new visitors order productsimmediately from your website with a

credit card?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

7

Monthly spending to maintain and update company websites varies widely, although the correlation is not direct at all levels.

46% of fast growers spend more than $2,500 per month, compared with 25% of slow growers. Both groups had approximately the same split between internally-staffed maintenance (67%–70%) and external/outsourced (30%–33%).

All respondents Fast-growers Slow-growers

$50K - $100K

$25K - $50K

$10K - $25K

$5K - $10K

Less than $5K

100%

Approximately what did you spend tobuild your current website?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

$50K - $100K

All respondents Fast-growers Slow-growers

More $5K

$2.5K - $5K

$1K - $2.5K

$500 - $1K

Less than $500

100%

Including salaries, approximately whatdo you spend on a monthly basis tomaintain and update your website?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

8

Website analytics SMB distributors ignore their online visitors’ behavior.

Most distributors fail to analyze their web traffic. Whether fast or slow growers, less than a third of respondents responded positively to questions about traffic analysis. Similar answers were recorded for questions about intra-site navigation and visitor-to-order conversion rates.

Internal perspectivesDespite success, fast growers see room for improvement.

To gauge distributors’ opinions about a range of topics, we offered a series of statements with which respondents could Agree/Agree Strongly, Disagree/Disagree Strongly, or remain Neutral. The chart below combines the two Agree sentiments to capture all topics where re-spondents register a positive sentiment. Neutral and Disagree opinions represent the balance of responses.

Whilefastgrowersaremoreconfidentaboutthefutureandmorepositiveabouttheir ecommerce initiatives—as would be expected—they nevertheless express concern about their online presence: Only 14% are comfortable with where they are today. While it’s not surprising that every group felt that they could match or surpass the national competitors’ service level, a slight majority (53%) said the same thing about pricing, where the chains would appear to have a pricing advantage.

All respondents Fast-growers Slow-growers

No

Yes

100%

Do you analyze who visits and howoften?

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

9

ConclusionHow well are small and midsize independents competing online against the national behemoths? Our findings reveal a consistently wide gap between the market leaders and far too many of the SMBs.

For those finding themselves behind the curve—regardless of the reasons why—an ecommerce strategy based on performance improvement is critical. Every day the business world moves further online, and the B2B buyer and his company are no exception. The market leaders are well positioned today to capitalize on this trend.

The SMB that focuses on—and continues to invest in—its online strategy will deliver a positive customer experience and will be able to compete successfully against its online competitors.

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Do you agree or strongly agree with these statements?

All respondents Fast-growers Slow-growers agree agree agreeI’m optimistic about the future 78% 90% 70%My customers have been loyal to me 76% 86% 70%My customers will remain loyal to me 53% 62% 50%I’m comfortable with my online marketing presence 18% 14% 18%I regularly use email to promote products and specials 27% 48% 18%Social media drives business for me 9% 10% 9%I’m able to match or surpass the national chains in terms of service 76% 81% 70%I’m able to match or surpass the national chains in terms of pricing 53% 62% 45%My customers are satisfied with my online presence 26% 29% 25%My website looks and works great on mobile devices 28% 43% 23%Manufacturers support me as well as they do the national chains 48% 43% 27%For my customers, personal service is more important than having the lowest online price 55% 71% 45%

AcknowledgementsPersonal perspectives and field experience bring research data to life. This report would not have been possible without the contributions of many individuals In the SMB distributor marketplace. Market Corral would like to thank all the survey participants as well as the member group participants for their time and insights.

In addition, thanks go out to the team at Media Frenzy Global, particularly Sarah Tourville, CEO; Jessica Newland, Project Management and Design; and Dan O’Brien, Research and Content Director.

– Ward Johnson, CEO, Market Corral LLC

Researched and written by Media Frenzy Global, December 201411