A Peek Inside The Supply Business
I've been hanging out on the other side of the tracks the last couple of years, in the warehouse district. Although still involved with PM in an advisory capacity, the bulk of my time gets spent covering the wholesaler segment of the industry since being appointed editor of Supply House Times magazine in 2001.
I started my industry career with Supply House Times way back in 1977, and served on that staff until named the editor of this magazine when it was founded in 1984. Both publications were started by the greatest wordsmith ever to grace the plumbing industry, Charlie Horton. He died in 1989, and his family sold PM and Supply House Times to different companies in 1991. PM's parent, Business News Publishing Co., reacquired Supply House Times two years ago.
Dramatic changes occurred in the supply sector of the industry in the 17 years I had been away. While the contractor consolidation craze fizzled, it took hold in a big way with PHC wholesalers. Ferguson Enterprises and Hughes Supply, the biggest in the business, were southeastern regional chains in the 1980s. Through acquisitions they have become multibillion dollar companies with branches nationwide. They do battle with dozens of regional chains whose sales volume ranges well into the hundreds of millions. Due to the chains buying out independent supply houses, the American Supply Association has seen its membership shrink from around 1,100 firms at a peak to about 500 at present. Small independent PHC wholesalers still exist in most markets - always will, in my opinion - but there are far fewer than there used to be and they continue to get gobbled up by the bigger fish.
As volume has grown, profit margins have shrunk. Bottom line net for PHC wholesalers averages around 2 percent, or about half of what I was reporting back in the '70s and '80s. Back then, Supply House Times published a lot of articles about the importance of holding the line on price. Now, competition inexorably drives prices down, and wholesalers have little control over pricing. Their business today is all about cutting costs through technology and efficiencies. The difference between prosperity and the poorhouse boils down to a few pennies saved on each transaction.
The Same TeamContractors routinely complain that wholesalers never seem to have what they need. That's because wholesalers can't afford the same breadth and depth of inventory as a couple of decades ago. They rely more on master distributors and their own central distribution warehouses to supply slower moving items. This means a delay of at least a day and usually more before a needed item filters down to a branch.
Wholesalers tend to believe that filling an order within a day or two constitutes great service, but contractors don't necessarily think so. Stock-outs and back orders lead to costly labor disruptions. Service technicians may have a boiler or fixture torn open when they visit the supply house. They can't very well tell customers they'll return in a few days to finish the job. So they go to another supply house or a big box to get what they need. This leads many wholesalers to complain about the lack of contractor loyalty. Here my sympathies are with the contractor.
But wholesalers have legitimate gripes as well. Although I take the contractor's side on many issues, I never beat one of your favorite drums by urging wholesalers to limit themselves to trade sales only. It's hard for a wholesaler to do that and stay in business, and contractors have only themselves to blame.
That's because in many markets there still are one or two traditional wholesalers who sell only to trade customers. If every contractor showed his appreciation by giving the bulk of his business to these traditional supply houses, they would be the most prosperous ones in town and more wholesalers would follow their lead. Instead, with rare exceptions, trade-committed wholesalers tend to be small niche businesses. Contractors routinely desert them to buy products cheaper at other supply houses that sell to anyone, or even at the big boxes. Who can blame wholesalers for selling beyond the trade under these circumstances?
Seeing both points of view leads to a larger and most important conclusion: Despite all the squabbles and finger pointing, PHC wholesalers and contractors are part of the same team. Transactions may branch off every which way, but day in and day out, for more than a century of time, the traditional three-step distribution channel of manufacturer-wholesaler-contractor has proven itself the most reliable and efficient way of getting goods to market and serving the health and safety needs of the public.
If Shaq and Kobe can put up with each other to be winners, so can our industry's wholesalers and contractors.