the ppe channel in 2020 - mdm ppe channel in 2020: ... • getting the sales force to go after new...

WWW.IRCG.COM INDIAN RIVER CONSULTING GROUP

1

The PPE Channel In 2020: Perspectives From Two Outsider Observers

May 4, 2015 8:00 AM to 10:00 AM

www.ircg.com www.mdm.com

Download handouts (PDF) : www.mdm.com/iseaslides

http://www.ircg.com/

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http://www.mdm.com/iseaslides


2 About IRCG Midsize consulting firm founded in 1987 that provides advisory services for manufacturers, distributors, private equity and other ownership groups. Our expertise is in market access, which measures how well resources are aligned with growth opportunities. • Strategy development and execution • Channel design & management • Sales effectiveness and compensation

Well-recognized for our industry depth, experience and practical approach • Senior Research Fellow for the NAW Institute • Multiple permanent instructors at Purdue’s UID • Multiple NDAs with members of this association

and this industry, both predators and prey

http://www.naw.org/publications/pubs_item_view.php?pubs_itemid=156


3 About MDM Market research and publishing firm for wholesale distribution/industrial product markets. Publisher of Modern Distribution Management and www.mdm.com, the resource since 1967 for distributors. MDM Analytics is the leading market analytics firm in North America for industrial and construction product markets.

http://www.mdm.com


4 Agenda

Industry Structure & Trends

The PPE Market & Channels

Q & A Session

The multiple forces shaping the industry today have not been kind to the safety passionate manufacturer or distributor who leveraged specialized knowledge to build businesses with high service and

selling costs. We are no longer seen as a growth industry.


5 Top Pain Points

• Distributor private label

• Distributor mind share

• Currency

• Most larger distributors are order takers and not value sellers

• Focus on price has resulted in a "race to the bottom" for both distributor and manufacturers margins

• Distributors not wanting to stock product but expecting fast delivery

• Competitive low-cost, non-certified, Chinese imports

• Getting the Sales Force to go after New Channels

• Finding long term young people to pass the torch to

From the ISEA Member Survey


6 Dumb Things Industry is Doing

• Distributors are focused on price and not feature value selling that helps their own bottom line and reduces their customer's costs too

• Many are not partnering with a supplier/customer but instead just chasing every dollar and trying to be everything to everyone

• Commoditizing safety equipment

• Loss leader pricing

• Fighting against smart safety regulation and pretending that voluntary compliance is enough to continuously improve worker health and safety

• Selling direct to end users and bypassing distribution

• Letting distribution become the safety advisor over the manufacturers

From the ISEA Member Survey


7 Industry Re-Fragmentation

Structural changes are accelerating

• E-Commerce is maturing: B2B>B2C>B2BC

• Emerging hybrid models

• Polarization • By size • By specialty vs. broadline

• Integrated Supply still carves its share of market

Three critical differentiators: Technology, talent, analytics


8 Today’s Core Distributor Challenges 1. The accelerating trend away from

relationship buying to advantaged players & rabbits*

2. The internet buffet of choice and transparent race to the bottom

3. The erosion of selling service as a differentiator in the market

4. Increasing customer sophistication

5. Aging of old school sales reps and a limited pipeline of replacements

6. Markets are aligning by size where larges buy from larges

What got you here won’t get you there

The punch line is that the old model is not a best practice for the future.

Success will be about doing new things, not doing the same things

better.

*http://blogs.hbr.org/cs/2012/07/the_game_buyers_play_with_vend.html?utm_source=feedburner&utm_medium=feed&utm_

campaign=Feed%3A+harvardbusiness+%28HBR.org%29


9

1900 2015 Weapons of Mass Disruption


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Multi-channel − Branch

− Catalog

− Relationships

− Call centers

− Digital platforms

• Changing customer buying behaviors • Integrated functions: Market, sell, service, order • Serving highly fragmented markets

Changing Distribution Models

How does the old school distributor with only a self directed sales force compete with these new and better alternatives. What if the issue isn’t margin erosion but rather chronic low labor productivity

that needs margin to prop it up?


11 Changing Distribution Models


12 U.S. Industrial MRO Markets

Annual survey of largest 40 distributors in U.S.

• Total market size = $210 billion

• Safety PPE = $5.4 billion (2.6%)

• Respiratory/Test = $2.1 billion

Source: MDM Analytics, Economic Census, mdm.com


13 U.S. Industrial Distribution Markets

1. Wolseley Industrial Group: $11.6B (Ferguson)

2. W.W. Grainger: $10B

3. HD Supply: $8.9B

4. MRC Global Corp.: $5.9B

5. Airgas: $5.1B

6. Motion Industries: $4.8B

7. DistributionNOW (NOW Inc.): $4.1B

8. The Fastenal Company: $3.7B

9. MSC Industrial Supply: $2.8B

10. Applied Industrial Technologies: $2.5B

Market share

2014 U.S. revenues

Source: MDM Analytics, mdm.com

http://www.mdm.com/articles/32581-wolseley-sales-up-22-in-fy2014


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Protective Clothing 38%

Gloves & Footware 30%

Eye & Face Protection 16%

Head Protection 10%

Hearing Protection 3%

Fall/Misc. 3%

U.S. Industrial MRO Markets

Safety PPE = $5.4B Respiratory/Test = $2.1B

Source: MDM Analytics, Economic Census, mdm.com

Respiratory Eqpt 73%

Test Eqpt 27% 38%

30%

16%

10%


15 U.S. Industrial Distribution Markets Key safety channels in U.S.: Large & Specialty

Source: MDM Analytics, mdm.com

Arbill Mallory Safety & Supply Northern Safety & Industrial Orr Safety Safety Today Stauffer Glove & Safety Wise Safety & Environmental

W.W. Grainger………………..$1.7 billion (safety & security) Airgas…………………………$675 million (safety) The Fastenal Company……..$400 million (safety) DXP Enterprises……………..$200 million (safety) VWR International Sonepar/Hagemeyer/Vallen WESCO (Conney Safety Products)


16 Agenda



Q & A Session

An adequate product with strong market access channels will always achieve market dominance over the better product with weaker access. Channel design has become the single most critical

competitive differentiator in the new century.


17 What Is A Marketing Channel?

The wiener is the product; the bun and condiments are the channel; and all the customer wants is a good lunch

A channel is an interdependent group of firms who are involved in how a product is used or consumed Marketing channels connect end customers with suppliers by providing demand creation, logistics, financing and support services • They can provide lower cost coverage with their gross

margin basket, they can pull through sales by winning ties when the customer is indifferent, and they can lower transaction costs independent of order size

Members include distributors, buying groups, agents, reps and brokers • They survive if they perform activities more cost effectively than those they buy

from (suppliers) and sell to (customers) Gross margin (channel compensation) pays them for their value added Channel players can be eliminated but channel functions cannot

PPE is a channel led business, buyers choose the supplier before the brand


18 Product Position Considerations Acting as a primary when you are tertiary creates poor market access

Distributor objectives Manufacturer strategies

Primary Products

• Drive volume • Premier brands and door openers • High turns support lower margins

• Leverage market power • Corporate incentives, often volume based • End customer brand building

Secondary Products

• Fill product gaps and expand wallet share

• Recognized brands • Medium turns and margins

• Be “easy to do business with” (ETDBW) • Functional pricing with loyalty rebates • Direct demand creation

Tertiary Products

• Drive profit • Safe brands • High margins support lower turns

• Be extremely ETDBW, with simple pricing • Direct incentives to sales reps • Wide and multiple channel availability

Manufacturers can be very successful selling at any of these levels

All the rest

#6 - #20

#1 - #5

~60%

Product Lines Portion of Revenue

~30%

~10%

Primary

Secondary

Tertiary

This is why some primary PPE is direct


19 Bought Versus Sold A product is sold when a customer chooses it from competitive alternatives for the first time

• A sales rep is often, but not always, involved

• Sometimes there is a thoughtful evaluation of price/performance criteria

• With channel led business the customer doesn’t care or their choice is independent of price/performance criteria (they choose the distributor first)

If the product is satisfactory it will be purchased again (bought) when the customer’s requirement reoccurs- generally independent of sales efforts or

investments (interruptions are often irritating)

When the product is repurchased it is bought, not sold, as the market has been made

• The size of the long tail repurchase rate measures brand power and customer switching costs

>90% of distributor sales is to customers who purchased the same product before


20 “Safety Passionate” Customers

Plant Safety Engineers have passion that stems from • Pride and professionalism (“This is what I do, it’s my degree, it’s my job”) • Emotional commitment (“I want all 500 to leave the plant in the same shape as they

entered it”) • Business risk (many stories about huge fines, painful OSHA audits, etc.)

The face frequent internal battles, which they want help in fighting • With purchasing: “this is my realm” • With production: “sometimes I am seen as the enemy of productivity” • With staff: “they don’t want to look dorky or be uncomfortable all day”

Much of what they value most from distributors has nothing to do with safety expertise • More flexible in delivery, sourcing and replenishment (mass customization) • More responsive with faster call backs and heroic recoveries (market power) • Proactive advice on cost savings and supply disruptions (“With IDG I have to call

them”) • Information and support that saves time (“We’ll never hire a second safety engineer”)

This buyer represents a small and shrinking portion of the industry spend


21 “Safety Passionate” Customers

“Ring fencing” products offers a partial escape from the ghetto

• Everyone knows most items do not require application support (at least after initial purchase) and can be sourced from many places

• Safety engineers and specialty suppliers engage in a subtle dance over what share is required to get the extra services

• Safety engineers negotiate with purchasing over what must stay in the safety basket (“it’s covered by regulations”)

The growth in safety services and consulting is larger than the margin decline in the products space What do you do when the service provider specifies “good enough

or equivalent” brands to purchasing?

This buyer represents a small and shrinking portion of the industry spend

Your internal champions often feel like they’re standing alone


22 Private Label Is A Catch All Term

In a channel led business driving private label is a smart move for distributors- strong brands are their door openers and they will not stop

There are branded products provided by a manufacturer

There are generic products provided by a manufacturer

These same products can be provided by a distributor or a retailer under their name

It is not about the products, it is about the brand promise

This is a primary shareholder value play for the large distributors


23 Where Is The Bulk Of PPE On This Curve? Introduction Growth Maturity Decline

Typical Customer Early adopter, high cost and risk tolerance, critical need

Early majority, value driven, seeking competitive advantage

Late majority, cost driven, risk averse

Laggard, risk averse

Marketing Strategies

Awareness Differentiation Loyalty Harvesting

Competition No direct competitor Growing Extreme Extreme or declining

Product Few and often customized

Increasing breadth to cover niches

Full product line Trim back to high volume, high profit

Price Skimming or penetration

Gain share and deal Defend share and profit Focus on profit

Promotion Inform and educate Stress competitive differentiation

Brand value Minimize

Channels Exclusive with high partner investment

Restricted with focus on value add

Open to maximize coverage

Migration to lowest cost channels

0 +

Industry revenue Industry profit

-

Product lifecycle chart adapted from Geoffrey

Moore, Dr. Diane Badame, USC

Marshall School and IRCG

Ignore this at your peril as it costs lots of money with little return


24 Agenda



Q & A Session

Take a break and when you come back don’t sit with stupid people, coworkers from your own company, or competitors


25 Anti Trust Disclaimer Plan on being deposed in the next 24 months about this meeting • It is important to be able to enthusiastically tell the whole truth • If you aren’t deposed- then you can be happy either way

We are NOT going to discuss any specific customers or any specific products or any specific prices or any specific geographical markets, or any specific distributors, or any specific manufacturers, however IN GENERAL* • We can speak freely industry trends and forces of change as long as they

are not linked in any way to the specifics described above. • We can speak freely about trading practice alternatives and channel

economics

We are not going to make any agreements, either explicit or implied, with any other participant with respect to our future trading practice plans or intentions • Every firm must make their own commercial decisions unencumbered by

any other participant in this room


26 Group Discussion

Discuss the questions and statements below in your group.

1. Without divulging any of your future commercial plans, what was you biggest take away from the presentation so far? (everyone shares)

2. Does your group have any questions for Tom or Mike on anything discussed so far?

Select the group member with the longest tenure in the PPE industry as a spokesperson to share your questions with Tom

& Mike

the ppe channel in 2020 - mdm ppe channel in 2020: ... • getting the sales force to go after new...

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