Why Do Buyers Change Distribution Lanes?
For Todd Broyard, price is always an issue when it comes to buying products. His business, Black Lab Alarm in Woburn, Mass., is small but growing, especially in the commercial video market.
Broyard says his office space is rather small, but, luckily for him, he has three distributors nearby when he needs to pick up products.
Broyard is one of many dealers who rely on distributors large and small, independent and national, for their product needs. However, in Broyard’s case, he is also beginning to buy direct from manufacturers on certain product lines.
From contacts and battery supplies to CCD cameras and DVRs, the distribution network is now, more than ever, the average dealer’s extended warehouse, and the link between dealer and manufacturer.
Although this network has expanded extensively, there is growing competition, not just with other distributors but with manufacturers that are selling direct to larger dealers and system integrators. This is largely due to an increase of sales in the digital CCTV market. That heightened competition, along with industry consolidation, is changing the face of wholesale distribution.
Finding Purchasing Niches With Distributors
For most dealers, buying products in bulk from a distributor usually means 10 battery packs or 10 motion detectors. They buy low-end products that will always be needed for any type of installation or project.
When buying products such as cameras, small- and medium-sized dealers usually buy on a project-by-project basis from distributors. Still, there are other dealers who do not do the high-end projects but can afford to buy certain products in bulk. Wherever dealers go for products, first and foremost, they want good pricing.
For most dealers, distributors provide good pricing, product knowledge and training, and reliable sales staffs, among other one-stop shopping incentives. For distributors, similar to the general core philosophy of dealer programs, they deem their relationship with dealers as a partnership. However, there are those dealers who say, in the industry’s era of consolidation, some distributors are really looking at the bottom line and are getting rid of their more experienced staff in order to compete.
Yet, to maintain healthy competition, distributors say they are providing personal attention, guidance and help to their customers. Their concerns with the competition deal with the practice of manufacturers selling directly to dealers.
Digital CCTV Sales Prompts Selling Direct
Within the past couple of years, digital CCTV products and equipment—especially digital video recorders (DVRs)—have become a profitable market for dealers, as well as manufacturers. Also, smaller independent distributors have entered the industry and have become strong players. As a result, pressure has been placed on prices.
“There seems to be a lot more competition for the same amount of dollars,” says Brian James, vice president of Northern Video Systems of Rocklin, Calif. He says, in his case, the amount for CCTV equipment sold has increased because customers use the equipment for more than just security purposes. “Where we used to sell one or two DVRs per month, now we sell one or two per day.”
Many manufacturers selling direct are in the CCTV market. According to security market research firm J.P. Freeman and Co. of Newtown, Conn., for the entire CCTV category, approximately 28 percent of manufacturers of CCTV systems say they sell to distributors. Nineteen percent say they sell direct to dealers, and another 12 percent sell direct to end users.
Statistics also show that about 8 percent to 10 percent of dealers buy direct from manufacturers.
Interestingly, the systems integration business now accounts for about one-third of the product sales volume across the industry, says Joseph Freeman, president and CEO of J.P. Freeman and Co. Manufacturers have tapped into this area for higher profit margins by selling to integrators with larger in-house staffs, bigger projects and greater buying power.
Distributors have concerns about where they fit into a scenario where manufacturers sell direct to dealers and system integrators. But whether they like it or not, distributors also realize that this situation is the current reality. As a result, they know they must maintain their standards for personalized service.
Are Manufacturers Stepping on Distributors’ Toes?
With manufacturers selling direct to dealers, “It certainly has affected us because it is basically cutting out the middleman,” says James. Does he see that as bad? “Not necessarily because it creates competition.”
Darren Nicholson, marketing director for Kalatel of Corvallis, Ore., one manufacturer that sells direct to large dealers and system integrators, says “distributors provide a valuable service by supporting the customers that we can’t support independently.”
Several manufacturers and distributors contacted by Security Sales & Integration did not respond to phone calls or refused to comment on this issue.
For manufacturers, the target for gross profit margins used to be 40 percent to 45 percent. Within the past couple of years, CCTV manufacturers have seen their margins dip into the 33 percent to 35 percent level, says Freeman. “In these situations, manufacturers take a look at their distribution strategy carefully to see if they can reduce their end-user price and help margins by avoiding distributors in certain cases and selling to dealers and integrators directly,” he says.
The variety among product lines and their features also contributes to the overall competition within distribution. Although distributors say there are higher profit margins for some products, they try to advise dealers on the products with the lowest failure rate to avoid product returns.
As manufacturers begin to create another buying channel for their customers other than distributors, some are now going through distributors for more aggressive brand awareness and profit.
Independents Heavily Invest in Personal Service
In any type of business, only the strong survive. In distribution, the smaller, independent distributors are gaining strength.
Eastern Distributing, for example, is one of a number of distributors that now carries products from wireless systems maker ITI. Reed Grothe, vice president of sales for ITI, says limiting the product availability is difficult when its competitors rely on distribution to make their equipment widely available.
Scarane adds that, Eastern has invested thousands of dollars into a product showroom and an education center, where dealers can be trained on products and can test them out. The company also holds weekly training seminars held in the afternoons by vendors. The company’s staff also attends local and state association meetings where they can interact with customers in a more relaxed atmosphere. This type of personalized service is the niche for these distributors.
What Will Be the Future of Wholesale Distribution?
With the growing practice of manufacturers selling directly to large dealers and system integrators, along with overall industry consolidation, many wonder how distribution will be affected in the near future.
There are some lingering concerns with some of the national distributors owned by conglomerates. What if a national distributor starts to push products from its sister or parent company? Or, what if some distributors get bought and are now part of a conglomerate’s umbrella? “We can expect—but have not seen yet—challenges to the national distributors,” says David Price, president of Cobalt Marketing Communications of Aurora, Ontario, Canada.
Distributors do not want to hinder their relationships with manufacturers that are selling direct, but they are also concerned about their own businesses.
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