Issues 2000: Plumbing Execs Talk About A Changing Industry
Editor's note: This is the first in a year-long series of interviews with top plumbing industry executives on what's been and what will be. Jim Harris joined the plumbing industry straight out of college, starting as a management intern for American Standard. He joined Eljer as director of marketing in 1988 and steadily moved up the ranks to become president in 1995.
Pent-up Demand For RemodelingPM: The plumbing industry certainly has seen big changes over the past decade. What changes will shape the industry over the next 10 years?
Harris: Consolidation of the industry will continue. Manufacturers, wholesalers, contractors, everybody. I would foresee the bigger players getting stronger. And the smaller guys? There are niches out there for the smaller guys who position themselves to take care of those niches.
Retail home centers have certainly had a big impact on how contractors conduct business. But there's still a big business out there for commercial work and high-end luxury plumbing product that isn't going to go through the retail channel.
PM: Besides consolidation, what other influences are changing the industry?
Harris: Remodeling is definitely one of those niches I'm talking about. The housing stock in the United States is getting older every day. The one thing the home centers have done for the industry is to make people more aware of the products, styles and color choices they have for the bathroom. Retailers are advertising our types of product in Sunday fliers every week. I think that has helped the whole industry.
Certainly as the housing stock gets older, bathrooms will be remodeled and the old Avocado Green and Harvest Gold fixtures will come out, and the new more modern styles will come in. That's good for all of us.
PM: But Home Depot and the like certainly have a strong public image. How can the trade counter that?
Harris: Probably more of a national image, but the wholesaler has a strong local following. We have many wholesalers who are very well-known in their area. And plenty of wholesalers are operating showrooms today.
PM: So having the chance to show the product is vital.
Harris: If you operate a nice setting and put it on display, people will buy it. But that goes for anyone - wholesalers or contractors.
PM: Specifically, what about contractors? Are they leaving showrooms and merchandising up to the wholesaler?
Harris: I think there's a mix of both - some use a wholesaler showroom and others build their own. To help out, about four or five years ago, we started a "Displaying Dealer Program," which is an incentive program for contractors to operate a showroom. We provide point-of-purchase materials, literature and some rebates to display product. The contractor has to display a certain amount of product and change out fixtures when new styles become available. We have well over 100 contractors in that program.
PM: Can they only show Eljer product?
Harris: They can show competing lines as long as we have a majority of presence.
PM: Does the contractor have to spend a certain amount to advertise the showroom to the public?
Harris: No. We're just trying to encourage them to put in a showroom. Our local salesmen do "certify" these showrooms every year.
PM: What else can the contractor do to capitalize on this demand for remodeling?
Harris: We all know that the contractor provides professional service - he has the expertise, he warranties his labor and his product. The contractor has to promote those selling points to the consumer. Why should a homeowner buy a toilet from a contractor? It's because the contractor comes to the house, installs it and, if there's a problem, he'll be back to fix it.
Those are the things they need to communicate - the value-added service that they provide. They can do that through advertising, by having a showroom, through personal selling - using all the tricks of the trade. But they have to market their skills to reach the consumer, as the home centers have done.
PM: Whereas they didn't have to do that before?
Harris: If the action is going to be in remodeling, they have to market to the individual consumer. Maybe 20 years ago, plenty of contractors had a great business just catering to new construction and satisfying the builder. Now, it's the consumer who's going to take a 25-year-old house, shop around and determine who's going to get the job.
Retail ForcesPM: The current market has certainly splintered in the past 10-15 years between catering to newer retail forces and relying on traditional two-step distribution. Was there a particular turning point for you in which you saw the "old way" of doing business fall by the wayside?
Harris: First, keep in mind that there's nothing "new" about retail. Before Home Depot, there was Sears. I don't know if I can think of any turning point. I think of the "old ways" now as "ever-changing new ways." But if there's anything that's dramatically different, it's the rate of change. Prior to this decade, change occurred much slower. In the 1990s, that pace accelerated.
PM: How does your company deal with home centers such as Home Depot?
Harris: We sell to home centers direct. In the case of Home Depot, for example, they buy about 12 to 15 SKUs in one, maybe two colors.
PM: How do you organize your company to serve your retail vs. trade customers?
Harris: We have different sales forces. The retail side of the business is handled by independent reps. And those are pretty much sales and service companies. They'll go into a home center, dust off the shelves, make sure there are trip levers on all the toilets, clean the displays up. Basically, they help us maintain our product at the store level.
On the wholesale side of the business, we maintain a company sales force. Their job is to service the Eljer distributor, but also to call on a plumbing contractor, builder, engineer, architect - anything to make sure that our products are specified. They'll also do a lot of bid work on large jobs such as hotels and hospitals. Plenty of pull-through activity.
PM: Do you sell a product through wholesale channels that a consumer can't buy at retail?
Harris: Through special orders, the entire Eljer product line is available to everyone - wholesale and retail. But keep in mind our product line is about 10,000 SKUs and 16 colors. There's a limited, narrow product line immediately available at retail, whereas the Eljer wholesaler will stock many, many more SKUs and many more colors.
PM: How exactly do the special orders at Home Depot work?
Harris: Let's say you're at Home Depot and you want to buy an Oxford Blue toilet. They don't stock it so they place the order with us and we fill it through our factory or through a local wholesaler.
PM: Is there a price point above which you do not sell to a home center?
Harris: Typically, what the home centers look at are certain price points. Obviously we have certain products that fit into that range. We don't limit them; we don't tell them what they can and can't buy. It's their decision. We sell mostly competitive price points and mid-ranged price points.
PM: How has this price point changed over the years you've done business with the home centers?
Harris: I would say home centers started out with the low-end, but now there is low-end to mid-ranged product. The home centers will sell anything from a low-end, import toilet all the way up to an expensive one-piece toilet. I've seen toilets advertised from $39 to $299, and a number of different models in between. They have $8.99 plastic faucets all the way up to $300 brass faucets with ceramic cartridges.
You'll see some high-end products, but it's a very limited selection. Home Depot just happens to operate a Home Depot Expo near our offices. If you walked in, you wouldn't even recognize it from other Home Depots. In terms of the plumbing, it's all high-end products. But I think they have only about eight of them around the country.
PM: Has your sales percentage shifted more toward the retail side in recent years?
Harris: It really hasn't. We maintain a solid business on both sides. Our wholesale business has grown very well over the past few years.
PM: How has the mix between retail and wholesale business changed?
Harris: You would think that retail has grown a lot more, but it hasn't. The wholesale side is very, very strong for us. Other manufacturers have turned their attention more to retail. We did too, but continue to support wholesale business, which is our backbone. In the last few years, the wholesale business has grown at a much faster rate than our retail business.
PM: How do you account for that? You'd think the action is on the retail side.
Harris: The biggest advantage Eljer has in the marketplace is on-time delivery. We deliver product - and have done so for the past seven to eight years - 99 percent complete within 10 working days regardless of the customer or geographic location. Other manufacturers haven't been able to maintain those types of fill rates. And we have captured many competitive customers because of those service levels.
That's important for wholesalers since they don't have to maintain as heavy an inventory. Plus, we also offer strong support for the commercial side of the business.
Marketing And MerchandisingPM: How have the dollars spent on advertising changed in the past 10-15 years?
Harris: Last year, the biggest thrust we had was with the trade. We do support retail and wholesale advertising; they both participate in co-op programs.
PM: Do you find that the trade makes use of the co-op funds you make available?
Harris: Definitely more and more wholesalers have taken advantage of co-op funds. Naturally, retailers are more visible since they do more purely consumer advertising, such as a flier in the Sunday paper. But wholesalers do much more local promotions, such as barbecues, billboards, truck signage. We devote an equal amount of money to both, but they spend it differently.
PM: What about your own company's advertising campaign?
Harris: From a company standpoint, we do primarily trade advertising to the builder and the plumbing contractor, with some limited consumer advertising. Eljer has always done a limited amount of what we would consider "our" own advertising to build long-term name recognition.
We emphasize supporting our customers and their advertising. That's where the sale is made. So we devote money to wholesalers and retailers and they promote our products, which generates a sale for them, and, of course, a sale for us.
PM: Is there any particular tradesman you seek to support the most?
Harris: Our most important customers are the plumbing contractor and the builder. Depending on what part of the country or what type of project it is, either the contractor or builder will have more influence over the purchase of the brand than the other. But that's pretty much our target audience. That's where Eljer has always had its strength. We've always been a very trade-oriented name as opposed to other plumbing manufacturers that are more recognized by the consumer.
Changes For AllPM: What types of pressures are manufacturers under today that they didn't concern themselves about in the past?
Harris: We're seeing much more of an increase in foreign competition. Government regulations - whether it's for water conservation or the ADA - has certainly changed the way we do business.
Another pressure seems to be shared throughout the industry: I've talked to my colleagues, wholesalers and your readers, and we all agree that there's a big problem with the availability of labor. With some of our wholesaler customers, it limits their growth. They may want to open up another branch, but many times it's the unavailability of labor that makes it impossible. The unemployment rate across the country is 2 percent. Everyone who wants to work is working. That's tough.
PM: You've mentioned consolidation. How will consolidation impact your business?
Harris: Consolidation is rampant with wholesalers. The trick on the manufacturing side is to align yourself with the right wholesaler.
PM: How do you know whom to align yourselves with?
Harris: That's really done at the local level. We try not to overdistribute in an area. We also try to make sure we have good mix of residential and commercial business. In some cases, that might be one wholesaler and in other areas that might be two or more different wholesalers.
PM: So if an Eljer distributor merges with a Kohler distributor, somebody loses out.
Harris: Well, it depends on who buys whom. I'd hate to put a percentage on it, but half the time, the customer remains an Eljer customer and the other half of the time, they don't. So it depends also on what your particular strength is in that particular local market.
PM: That's happened to Eljer where they've lost the business?
Harris: Oh sure, but it's also an opportunity to get new customers. All and all, we're probably even. And maybe a little ahead since our wholesaler business is very strong.
PM: Are wholesalers more demanding than they had been, particularly with the advent of home centers?
Harris: I think they are all running tighter ships. We've all been through good times and bad times, and pretty much the ones that are left are the good wholesalers. In general our wholesalers are more sales- and marketing-oriented than they've been in the past. Probably 20 years ago, the major function of a wholesaler was warehousing product. Now they've got to actively go out and promote our products - build showrooms, advertise. They are more demanding, but demanding in a good way since they are demanding things that help them sell our product through their place of business.
PM: You mentioned high fill rates earlier. Did you not have the fill rates before?
Harris: I would say prior to the early-1990s, no, we didn't. But we made a conscious decision that we would be the service leader in our industry and that's where we concentrated our abilities. And since we don't overdistribute our products, when the switch was made from producing 3.5-gpf toilets to 1.6-gpf toilets, we converted our plants nine months before the regulatory deadline.
We did have the opportunity to take on more customers during that transition, and made a conscious decision not to because we wanted to maintain our service levels to existing customers. It's hard to explain to a customer why we went from 10 days to 20 days to ship, and at the same time took on the other guy down the road. You can't explain that. We had a moratorium on new business that year.
PM: What other changes did you make besides fill rates to support the wholesale channel?
Harris: We have a commitment to provide a high-quality product at industry-leading lead times at a competitive price. Those are really the three important points. You do all three of those right, and you're doing all right.
The name of the game now is reducing the transaction costs between us and our customers. We have a number of customers who receive orders on EDI and we receive payments on EDI.
I've seen studies that indicate that handling a piece of paper can cost you anywhere from $50 to a couple of hundred dollars. So you have to reduce that cost and make it faster to receive orders and payment, and otherwise transmit information. That's a benefit to both.
PM: The wholesaler's role has changed in the same way then?
Harris: We each have to reduce the costs of the whole transaction from receiving a purchase order to that wholesaler delivering it or having someone pick it up at his warehouse.
PM: Now what about contractors?
Harris: I think it's the same thing as with wholesalers. The contractor has become more consumer-oriented, more service-oriented. We sponsor a number of different programs through the NAPHCC to help educate the contractors on marketing and business. I think the average contractor is a better businessman than he was 10 years ago, more aware of the customers he services and probably more attentive to the customer than he has been. And he's rewarded for it.
PM: What about contractors' attitudes? Early on there must have been some bad feelings about Eljer selling to Home Depot. What's going on now?
Harris: I think of the major plumbing manufacturers we were one of the last to sell direct. In the beginning I think there was the thought that we were an added competitor. But now, I think everyone realizes home centers are here, they're not going to go away, so I might as well prepare myself. I think the successful contractor is the one who communicates the advantages for consumers to come to him to buy product and not go to the home centers.
Internet ActivitiesPM: What is your Internet presence now?
Harris: We have a Web site. It's basically an online catalog and information on where to buy our product since we also have our distributors and retailers listed.
PM: Do you envision selling directly to consumers via your own Web sites?
Harris: Well, it's almost impossible to sell someone a toilet and ship it to his house in one piece! Although I'm sure somebody out there is doing it. Now if you're talking to a manufacturer of just faucets, then maybe there's an opportunity.
But overall, we still support our customer - whether it's the wholesaler or retailer - and we want that product to go through them. Our product is like furniture and when you're going to make that big of an expenditure for your house, I think you're going to want to see it and touch. That's hard to do on a computer screen.
PM:What are your future plans for the Internet?
Harris: I think there's plenty of use for the Internet as a way to communicate with our salesmen and customers. But I don't foresee us doing any commerce over the Internet.
Product TrendsPM: What product trends will we see in the future?
Harris: Right now, you're already seeing a return to more traditional look. Also, back in the early 1980s, everyone scrambled to come out with super-luxury products priced at the stratosphere, which appealed to one-tenth of 1 percent of the population. It looked good in a catalog and advertisements, but didn't really sell too well. We have always focused on middle America - affordable luxury. That's a trend too.
PM: What else besides style considerations?
Harris: Water conservation regulations were regulations that were good for the industry. We think advances in water conservation products are very important. Waste water treatment plants are at capacity and water generating is, too. Water is more expensive than gasoline. Go buy a bottle of Evian and it would cost $10 if you wanted a whole gallon. Here's my only commercial: We developed the 1-gpf toilet back in the 1970s, and actually sold a fair amount. We developed this for people with septic systems. So we were prepared once the 1.6-gpf law went into place. The 1.6-gpf toilets today flush better than the old 3.5-gpf toilets.
Beyond that, the homeowner will continue to be more and more instrumental in the purchase of our products. It's not just about chrome and white anymore.