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
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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
WWW.IRCG.COM INDIAN RIVER CONSULTING GROUP
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
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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.
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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.
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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
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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
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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
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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
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9
1900 2015 Weapons of Mass Disruption
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10
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?
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11 Changing Distribution Models
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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
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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
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14
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%
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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)
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16 Agenda
Industry Structure & Trends
The PPE Market & Channels
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.
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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
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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
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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
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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
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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
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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
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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
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24 Agenda
Industry Structure & Trends
The PPE Market & Channels
Q & A Session
Take a break and when you come back don’t sit with stupid people, coworkers from your own company, or competitors
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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
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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