1 The maturing of the middleman: Achieving high performance in wholesale distribution
A new role Traditionally, wholesalers have mediated the interaction between manufacturers and customers, buying in bulk and selling in smaller sized lots for distribution to the customer. Thanks to technological and other innovations in distribution, however, both manufacturers and customers are increasingly able to bypass the middleman and deal directly with each other. Confronted with the threat of disintermediation, all wholesale distributors are striving to operate at very low cost and with exceptionally efficient supply chains. But getting these basics right is just an entry ticket, the price of survival in an increasingly commoditized business. High performance in wholesale distribution requires a good deal more starting with the kind of strategic approach that has not come naturally to middlemen. This approach will vary, of course, depending on the sector at issue and the flexibility of the individual wholesaler s business model. Market structure is plainly key: a wholesale distributor of construction materials to a multitude of small builders can dominate the value chain a lot more easily, for example, than a wholesale distributor in electronics, where both suppliers and customers tend to be large and powerful entities. Product complexity also makes a big difference. In sectors like construction the sheer number and diversity of products, large and small, greatly complicates pricing and promotion decisions. Market maturity is a stronger driver still. Like every other industry Accenture has studied, wholesale distribution is becoming part of the fast-evolving geography of a multi-polar world characterized by the burgeoning strength of emerging economies, closer cross-border economic integration and unparalleled advances in information technology (IT). Indeed, Accenture s experience shows that much of the wholesale distribution business is poised to repeat the experience of retail. And in order to satisfy the requirements of ever larger and more global customers, wholesale distributors will begin building capabilities that can capture customer, pricing, productivity and process synergies on a global scale. They start out, moreover, with a significant advantage. Wholesale distributors still possess an asset that mass-market retailers lost long ago and most now struggle to replicate the entrepreneurial instincts and resultant wealth of customer knowledge of a host of local branch managers or sales forces. The wholesale distributors challenge will be to retain that asset the key to delivering exceptional customer service while becoming more operationally efficient, and to leverage both to achieve a new, more value-driven depth of customer relationship management. 2
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The strategic options 1. Scale: It is not just the economics of a multipolar world that are driving scale. As they grow in size and often become more global in scope, more and more customers demand it as well. In order to continue to serve globalizing customers who seek to keep costs low and avoid the complexity of dealing with a large number of wholesalers, the wholesale distributor has to scale up. But the right scale will mean different things to different wholesalers. Thanks to their closeness to the customer base, (very) small niche wholesalers sole traders with a delivery van have created significant barriers to entry. Because they can pass costs on to relatively price-insensitive customers and because their asset utilization is very high, these wholesale distributors have created a successful model. Very large wholesale distributors can be successful as well. By aggregating demand, and leveraging purchase scale and distribution economies, they can create low cost, high asset utilization businesses. Middle-sized businesses, by contrast, suffer from diseconomies of scale relative to the sole trader and lack the purchasing leverage of the scale player. Building a business one warehouse or one truck at a time is inefficient; asset utilisation drops off with each new warehouse or truck. So to achieve the right scale many wholesale distributors have become serial acquirers and integrators of existing businesses with high asset utilisation. Since 1990, for example, the top five UK construction supply players have acquired many independent builders merchants. Indeed, acquisitions have become one of the main routes to scale for wholesale distributors in most sectors. Merging and acquiring on a global scale is challenging, however. The trick is not only to be better than the competition at identifying acquisition targets and swift to purchase those targets for a lower price, but also to be better able to achieve more integration synergies more quickly. A lean operating model with little central overhead at the country level and above, and no common product database or processes makes post-merger integration and management a particular challenge. 2. Scope: If you can dominate the value chain, do it. But if margins in the wholesale function are small it may be desirable for the wholesale distributor to integrate forward into the customer base or backward into the supplier base. In the food sector, for instance, many wholesale distributors run their own convenience stores: The margins are 4
more attractive, and forward integration boosts knowledge about the needs of the customer, improving service to other convenience stores. In Japan, Mitsubishi Corp. has acquired a 20 percent interest in the Lawson Convenience store chain and increased its investment in Life Corporation, a major, Osaka-based supermarket chain; Mitsui & Co., similarly, has formed an alliance with convenience store operator, Ito-Yokado, and its holding company, Seven & I Holdings. UK food wholesale distributors, meanwhile, have formed the Symbol Groups of independently owned convenience stores that trade under the same fascia and buy from a central wholesale distributor, which also provides additional services such as marketing, ranging recommendations and even IT systems and support. The arrangement is similar to a franchise or a buying group. The wholesale distributor may own and run several convenience stores, benefiting from a locked-in customer base and better access to insight about the end consumer. In the construction sector, Grafton Group is not only the biggest supplier of dry mortar in the UK it also makes the stuff. And Wolseley s subsidiary, Stock Building Supply, is a lumber business that also makes cabinets, decking, doors, flooring and other lumber-based items. Wholesale distributors in electronics are buying in the components to make computers and servers and assembling the final product with all the software already loaded. In pharmaceuticals wholesale distributors are integrating downstream by buying pharmacy chains or upstream by buying manufacturers. Alliance Boots is a particularly interesting case. Boots, a UK-based hybrid pharmacy/ health & beauty retailer and manufacturer, has merged with Alliance Unichem, a wholesaler and operator of neighbourhood pharmacies, to combine the strengths of both businesses across a wide geography. The Alliance Boots business includes some very significant own-label toiletry products, And fully half of wholesale distributors in construction also offer private label products; while the private label products that UK food wholesalers provide to their Symbol Group members offer better margins than the national brands. They also give the retailer exclusive product that cannot be bought at the supermarket. 3. Service: Providing customers with value-added services will boost margins, especially if they are low in the core wholesale function. In the electronics sector, for example, wholesale distributors offer customers computer maintenance, IT help desk, IT upgrades and warranty repairs, as well as rebates and returns handling services to Value Add Resellers. In construction, likewise, wholesale distributors offer design, estimating, quoting, installation and financial services to small builders. Similar value-added services could be offered elsewhere. In pharmaceuticals, where manufacturers tend to be better at research and development than at running their own back offices, wholesale distributors could offer these services and include all product tracking and product recall handling. For suppliers, indeed, the wholesale distributor can smooth production by acting as a buffer stock though this requires excellent pricing skills. Wholesale distributors could also leverage their branch-manager network to become a valuable conduit of information about the consumer and the market for manufacturers. Such information is particularly important in emerging markets and Procter & Gamble is one manufacturer actively seeking ways to persuade wholesalers to take on the role. 5
The operational levers 1. People: Accenture s High Performance Business research shows that customer insight sustains successful customer relationship management especially of the most profitable customers and helps build high performance in retail (See: High Performance in Grocery Retailing). We believe the same is true for wholesale distribution. In a low margin environment where price looms large in determining which wholesale distributor a customer will use, having better insight than your competitors into the needs of that customer is key to keeping their business. A deep understanding of customers business needs also allows wholesale distributors to develop solutions to customer challenges value-added solutions that can drive differentiation. But although many wholesalers already possess plenty of customer data at the branch or individual sales force level, the processes and analytics that could aggregate that data and deliver benefits from it across the company often elude them. And without that capability they cannot develop the appropriate valueadded services that power profitability. As employees, meanwhile, people are a wholesale distributor s biggest cost, which is why it s essential to challenge the business processes that drive these costs. The wholesale head office, for example, has to be very clear about the value it adds to the business. Traditionally, it has operated as a sort of financial holding company. But as wholesale distribution globalizes, the head office will have to add a new role, capturing global synergies of all kinds but without alienating the local branch managers and sales forces whose willingness to go the extra mile to serve the customer may always be a wholesale distributor s most valuable asset. 2. Pricing: If improved customer insight leads to better demand management and allows a wholesale distributor to buy lower and sell higher than its competitors, real competitive advantage will accrue. But much of pricing is guesswork especially in those sectors, like construction supply, where a branch manager can set the price of a special but simply doesn t have sufficient information to determine the profitability of the sale; or pharmaceuticals, where regulation precludes discounting. The sort of direct product profitability that retailers enjoy full knowledge of all the costs involved in handling a particular product remains elusive in wholesale distribution. 6
In Summary To be sure, the specific route to high performance for wholesale distributors will always vary from sector to sector. For a wholesale distributor in construction, for example, price may be the most important operational lever; in fashion, achieving product differentiation could be the principal challenge. For any wholesale distributor, however, the keys to high performance are the same: customer insight into what sustains the loyalty of their most profitable customers and an obsessive attention to detail at the level of the process efficiencies and performance metrics that optimize cost control. By combining these capabilities, harnessing technology to simplify complexities, wholesales distributors can drive development of the value-added products and services that set high-performance businesses apart from their peers. The primacy of process All wholesale distributors must keep their core supply chain functions low cost and efficient and any additional services have to be delivered in a similar fashion. But these capabilities are no longer differentiators. Differentiated performance across people and pricing, scale, scope and service derives from building capabilities that are sustained by common, standardized and harmonized processes. It would be hard to exaggerate the importance of these process efficiencies in setting the stage for high performance in wholesale distribution. Common processes can help achieve the post-merger integration synergies associated with scale, as well as the value chain integration associated with scope. They can also facilitate the provision of value-added services. And when it comes to people and pricing, they can enable both the analytics that drive true customer insight and the full product cost knowledge that could help turn wholesale pricing into a science. Common, standardized and harmonized processes are also indispensable tools in the constant struggle to control costs. Wholesale distributors are adopting them in response to a host of different business challenges and stand to realize significant cost savings as a result. Take the case of a North American wholesale distributor of pharmaceutical products. The company has grown rapidly through a series of acquisitions, but until recently had paid scant attention to leveraging synergies between business lines. Its IT portfolio contained nearly 3,000 instances of applications all compartmentalized, so the company as a whole could not migrate to an integrated operating model. Accenture helped this client identify potential cost savings of US$1.5-US$2 billion over seven years by transforming its IT portfolio with an integrated SAP solution. And it s a similar story for our clients in a wide range of other wholesale distribution sectors, from food to industrial materials. 7
Copyright 2008 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. Printed on 100% recycling paper using mineral oil-free ink. About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high performance businesses and governments. With more than 180,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com. For further information please contact: Stephen Zatland, Accenture Global Wholesale Distribution lead Stephen.Zatland@accenture.com