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Answers To Your Questions & Complaints About PHC Wholesalers

By Jim Olsztynski
October 4, 2001
Like every other sector of the industry, the plumbing-heating supply business has been wracked with change over the past couple of decades. Tension and misunderstanding between wholesalers and contractors is probably at an all-time high as a result.

As editorial director of this magazine and editor of Supply House Times, I see the flak fly in both directions. Here I'd like to take advantage of this unique position and respond to the questions and brickbats I frequently hear around the industry. My intent is neither to defend nor castigate wholesalers, but to analyze what's become of their business and how it impacts contractors.

Stock-outs and back orders are driving me nuts. Why don't wholesalers want to carry inventory anymore?

Wholesalers' inventory investment has remained pretty constant as a percentage of revenues over the years. However, the last few decades have seen a proliferation of product options, and it's not feasible for the average wholesaler to stock every line in depth. Instead, there has arisen another tier of distribution in the form of central warehousing and master distribution.

Big chains will stock only the fastest movers at branch locations and draw from massive regional warehouses to fill the rest of the orders. Smaller chains and single-location wholesalers may not have a central distribution facility, but they can draw from so-called master distributors.

These are wholesale supply houses serving the entire country or a region with deep and wide inventory from a limited number of product lines. Most sell only to other wholesalers, although some will sell direct to contractors as well.

For 90 percent of the work you do, this system is sufficient to get materials to the jobsite when needed. Overnight deliveries are available -- at extra shipping costs -- from most central and master distribution facilities, which will take care of most emergencies. However, there's no getting around the fact that when you absolutely, positively need something right now, you may have to call multiple supply houses around town trying to find it.

Are the big supply house chains going to end up buying everyone around?

I don't think so. Although consolidation has had a major impact on the PHCP wholesale supply industry, single-location wholesalers and smaller regional chains are still proving vibrant competitors.

Don't take my word for it. Ask yourself, who do you like to buy from? Most contractors buy from a half-dozen or more wholesalers in their local market, and more often than not small independent firms are at the top of the list because of longstanding relationships and superior service.

Usually these companies are limited in their product offerings and maybe charge a little more, so you end up patronizing the big supply houses more than you'd care to. But I think a lot of contractors would be sorry to see the small independents go away.

Buying groups enable these small companies to stay reasonably competitive even with the billion-dollar wholesale chains on many products. There are five buying groups operating in the PHCP supply business today. In addition to collective purchasing, most function as marketing and best practices affinity groups.

According to a landmark study of the industry released a year ago by Pembroke Consulting (www.pembrokeconsulting.com), consolidation of PHCP wholesaling will be limited by the characteristics of its main customer group, meaning you contractors.

About 80 percent of PHC contractors have 10 or fewer employees. As long as the trade sector of the industry remains so fragmented -- and we all have seen contractor consolidation efforts hit a wall -- a need will exist for small independent supply houses to fill specialized niches and offer personalized service at the local level.

It's analogous to the role played by convenience stores. Most of us do the bulk of our grocery shopping at large supermarkets, but when we need just milk and bread, we're apt to skip the long lines and crammed parking lots to patronize the convenience store, even if we have to pay a few cents more.

Pembroke broke down the PHCP wholesale supply market into six segments:

1. About a dozen large wholesale chains doing upwards of $500 million in annual sales and capturing about 19 percent of the total market.

2. Some 150 smaller national chains and regional chains doing between $50 million and $500 million in sales, which own about the same amount of market share collectively.

3. Approximately 500 local or regional wholesalers with annual sales of between $10 million and $50 million, which collectively capture about 29 percent of market share.

4. More than 3,000 small wholesalers, doing under $10 million a year, which cumulatively have about 16 percent of market share.

5. Seven big box retailers and hardware cooperatives that own about 16 percent of the PHCP market.

6. A smattering of manufacturers that sell direct to contractors, accounting for no more than one percent of total sales.

In some industries, notably pharmaceuticals, office supplies and groceries, virtually the entire national market is serviced by no more than six or eight wholesale distribution giants. However, this came about as a result of extreme consolidation of the customer base as well. If the PHC industry ever reduces to just a few hundred contracting firms, look for the number of wholesalers to drastically shrink as well. But there's no sign of that happening anywhere on the horizon, so don't expect small wholesalers to disappear.

When I do call, I can't find anyone who seems to know what I'm talking about. Can't wholesalers find anyone to work the counters and phones who know a little about our industry and its products?

Contractors are not the only ones complaining about a tough labor market. Virtually every industry finds talented people in short supply.

I had lunch with a wholesaler the other day when this subject came up. He remarked that the "old timers" who know products can virtually name their own price in today's wholesale supply business. They are hard to retain and frequently switch jobs or get promoted, because of their value.

Few youngsters are following in their footsteps, for the same reason most young people turn their backs on trade careers. Most supply house jobs are semi-skilled at best and offer modest pay. Nobody grows up yearning to work in that business. Finding qualified people, or young ones able and willing to learn, is a big problem in that sector of the industry, just as it is in yours.

Some of the bigger chains are investing significant amounts of money and effort into training programs, but that's not true of the industry across the board.

When wholesalers do find talented people, they often gravitate to better paying jobs with manufacturers or rep firms. The president of Ferguson Enterprises caused a furor last year with a letter that got leaked throughout the industry warning suppliers and reps not to "steal" Ferguson employees, and threatening to stop doing business with firms that hired Ferguson people away. It was a dumb thing to do, but serves to illustrate the desperation wholesalers feel about hanging on to good people.

Does this mean traditional PHCP supply houses are doomed?

They are if they think the industry owes them a livelihood out of habit and tradition. Any business that doesn't add value to a transaction is doomed to be squeezed out of the action.

In other words, if Home Depot can better serve your needs than the supply house down the street, then Homey will and ought to prosper at that wholesaler's expense. However, I don't think this means the traditional PHCP wholesaler will disappear.

Wholesaling is a very different business than retailing. Home Depot realizes this, and I think they're smart to purchase a wholesaler rather than simply adapt their retailing expertise to trade sales. But I can't see them or any other retailer totally usurping the market for wholesale PHCP supplies.

Wholesaling is, or at least should be, about more than buying and selling materials. For a wholesaler to earn his keep, he needs to fulfill other functions, such as training, marketing, credit and troubleshooting. If a wholesaler focuses on these functions as a way of earning his keep, and does it better than the big boxes, he will still have a role to play in the modern marketplace. But if a wholesaler thinks his customers should patronize him solely out of "loyalty" for real or imagined services in the past, then he will be doomed.

Wholesalers still retain quite a bit of ability to influence whose products get used on jobsites around the country. That's because contractors need flexibility to accommodate tight schedules and product availability. And, because this is still a business where relationships count.

An executive with one of the large PHC consolidators told me last year that he had been looking into cutting deals with one of the national supply house chains, but pulled back after getting feedback from his field managers.

"What we found out is their branch may be fine in one area and lousy in another. Some of our managers couldn't stand the company's salesmen in their market. So we might get a 5 percent break by cutting a deal with the national office, but we'd lose 10 percent in availability problems and hassles," said the contractor executive.

That's the kind of thinking that governs business relationships, and I for one think it will keep traditional PHCP wholesalers in the game for as far ahead as the eye can see.

It's not enough to be a middleman. Wholesalers must earn their keep by providing inventory, training, marketing or other services to customers that they can't get anywhere else, or at least not as effectively. Successful wholesalers understand this and are adapting to a changing market by making themselves as valuable as they can be in every way possible.

Then there are those who are simply order takers. You hear them grumbling and cussing out manufacturers, reps, contractors and everyone else in the chain for their lack of loyalty.

Aren't Home Depot and Lowe's taking business away from traditional PHCP wholesalers?

Yes, and this is one of the major concerns of traditional PHCP supply houses. The big boxes are aggressively looking to increase trade sales in order to compensate for a declining DIY market as our population ages. (The Wall Street Journal recently reported an increase of 25 percent in the number of people hiring professionals to do home improvement work since 1995, and the big boxes are right on top of this trend.) You may have noticed ads from Home Depot and Lowe's in this and other trade publications as part of their strategy.

Yet, I'm convinced there's less to this than meets the eye. You can see a bunch of plumbing trucks in the parking lots of Home Depot and Lowe's stores at any given time, but this is of little consequence. When a plumber runs out of a part and Home Depot is a few blocks away, that's where he'll buy it rather than drive across town to a plumbing supply house. This is only common sense, but I've yet to meet a contractor of significant size that admits to buying more than a smattering of goods from a warehouse home center. Nor do I expect to.

"Loyalty" to traditional distributors has little to do with it. Fact of the matter is that most traditional plumbing wholesalers stock a much deeper plumbing and heating inventory than the big boxes can afford to, catering to all trades as they do. And except for some heavily advertised specials, big box trade prices tend to be on the high side compared with PHC supply houses.

This is probably one of the reasons why Home Depot went so far as to purchase a PHCP supply house, the Atlanta-based regional chain Apex Supply. Rumors abound of Big Orange being on the prowl to buy other wholesalers, including some big boys that would make for blockbuster industry news if and when it happens.

Such deals seem to make sense for Home Depot. Although all of the home centers are trying to increase trade sales, they are limited in their ability to stock the breadth and depth of inventory needed to adequately service the needs of every trade.

If you think traditional PHCP supply houses have too many stock-outs and back orders, think of how hard it would be for a home center trying to supply not only PHC, but electrical, drywall, carpenters and every other trade segment. Buying up specialty supply houses may be the way to go, and Home Depot has the deep pockets to afford it.

Hah! They're getting what they deserve, after the way so many of them have turned their back on the trade.

Grow up. Everyone yaps about "loyalty," but in the real world businesses do not operate on the basis of sentiment. Throughout the chain, companies make their buying decisions with hard-nosed self-interest in mind.

We need to get beyond all the finger-pointing over who sells what to whom and look at trade relationships from a mature businesslike standpoint. This is America. If a wholesaler can better prosper by selling to retailers and/or the public than by servicing the trade alone, that wholesaler has every right to conduct his business as he sees fit.

Likewise, manufacturers have freedom to choose how they want to go to market, whether that be through distributors, direct to retailers, mail order or any other means, or any combination of these.

Accordingly, contractors have every right to buy their materials from whomever they want, be it traditional wholesalers, the big boxes, direct from manufacturers or master distributors, or from anyone else with access to the goods and willing to sell to them. Your decisions will be made on the basis of price, service, availability and whatever other factors you consider important - maybe even loyalty, to the extent it is reciprocated.

Loyalty is a two-way street, however. Many markets have at least one supply house in town that continues to abide by an old-fashioned trade-sales only policy. Yet, they are seldom the biggest supply house in town, which they would be if every contractor made it a point to give them the bulk of his business. Instead, contractors are like anyone else in seeking out the best bargains and greatest convenience. I'm not criticizing this, just pointing out a fact of life.

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Jim Olsztynski is the former editorial director of Plumbing & Mechanical.

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