Distributors: You Need to Get Your Moats Back.

Every successful distributor needs a wide, deep moat. No, I’m not advising you to encircle your warehouses with water- and crocodile-filled ditches.

What I’m writing about is a term Warren Buffett popularized in 1999 when he summed up his investment strategy: "The key to investing is … determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Buffett was saying (and he should know) that successful businesses have in place what economists call “barriers to market entry.” These “barriers” consist of advantages that ward off competition, protect margins and market share, and allow those businesses to drive more sales at higher, sustainable margins.

So what’s keeping YOUR competition at bay? What’s YOUR moat?

You don’t have to be big to have a big moat.

Years ago, I had a client that produced crushed basalt for roadside slopes and railway ballast. Nothing complicated about the business: As their controller once explained to me, “We take big rocks and smash them into little rocks.”

The business did, however, have a very wide protective moat, comprising two major barriers to competition. First, no one wants a quarry in their backyard, so the likelihood of a competitor getting a permit to open one down the street was nearly zero. Secondly, the weight of crushed stone makes transportation costs high. Therefore, there’s little chance some distant competitor would be trucking it into their area.

The company was small but demand for their product was steady and reliable and so were their substantial profits. (To be fair, there was no real opportunity for growth, since the same barriers that worked to their advantage also prevented them from expanding.) This business could cruise along on autopilot with little fear of disruption.

What happened to the moats?

Years ago, many of the distributors we serve also had substantial moats (even if they weren’t as impenetrable as those of my rock quarry). Their customers had limited access to information (making the moats deep) and limited channels for sourcing and obtaining products (making the moats wide). All that started to change in the 1990’s as big box retailers began to draw a growing share of their customers from tradesmen who used to source exclusively from middlemen.

Then about 15 years ago, eCommerce entered the picture. Customers now had additional sourcing options, and the geographical barriers protecting regional distributors were gone. The Internet greatly improved the customer’s access to information, so price shopping became far easier and much more efficient. The result was a long period of painful market disruption that is now culminating with the ever-growing omnipotence of Amazon.

Download the exclusive "Innovation in Distribution 2018" survey report 

Here’s how to get YOUR moat back.

Can distributors survive? If so, how? There’s no single answer, and no simple answer. However, we see many distributors finding success with these ideas:

• Expand the services you provide. Like most New Englanders, the Mostellos heat our home with oil. We choose to buy from a full-service supplier who charges more per gallon, even though we could price-shop online (oil is oil) and save money. We choose to pay more because heat is essential during the winter months. Our dealer provides high-priority service to his delivery customers should our heating system ever break down or need service. Service can be a key part of rebuilding your moat and defending your margins.

• Increase your value-add. Your customers often don’t have the time to devote to replenishing their stock of your products. If your salespeople visit these customers regularly, offer to manage the inventory for them. This service is known as vendor managed inventory (VMI). Generally, you and the customer agree on some basic reordering rules, usually based on min/max. When your representative arrives, he inventories the product you offer and builds an order. 
  
  It’s a win-win: You get timely, complete orders and your customer wins because he saves time and doesn’t run short of your product. You’re adding value by understanding what your customer needs and positioning your company as being uniquely capable of keeping properly stocked.

Manage VMI with OrderPoint 3.0—Learn more.

• Leverage your expertise. Quality service is hard to scale up. Use this to your advantage. The big box retailers and large eCommerce providers will never match your ability to provide deep product expertise. So if you sell parts, then know the products that require those parts. If there are substitutes, then always be ready to provide that information.

• Exploit other advantages that don’t scale easily. An important competitive advantage we enjoy as a software reseller is the ability to provide a better experience for our clients over the large, multi-billion dollar software vendors. Distributors can also provide a better customer experience. Remember all the other things you can do that the Goliaths can’t. You can nurture closer relationships that make you to go-to for advice as well as products. And you can respond more quickly when your customers need you.

• Modernize your systems. Modern IT systems keep you competitive by accelerating workflow through your company, improving productivity, and by providing a better service experience to your customer.

Read the article: Are You Still Distributing Like It’s 1999?

• Organize buying groups and co-ops to gain scale. One recent, unmistakable trend is that more and more distributors have organized themselves into buying groups and co-ops. Why? It gives them advantages of scale with important vendors and other trading partners. In some cases, they can also control access to those vendors’ products.
  
  These relationships can evolve into a stronger supply chain when distributors become trading partners with each other. Additionally, co-ops and buying groups provide other services like education and conferences where distributors can learn from their colleagues.

Even with the deepest, widest moat, you MUST play to win.

Moats are for defense—remember, they’re “barriers to market entry” by your competitors. If you intend on staying in business—and growing—you need to keep thinking about where you want to go. And you need to plan to get there.

Often distributors choose to reduce inventory without any real plan and end up increasing stock-outs and irritating their customers. More commonly, though, businesses that are stressed fail to invest in technology that would allow them to remain viable. Such investments not only make a moat more impassable, but also provide a springboard for growth.

Market disruption is inevitable, but it doesn’t have to spell doom. What it usually means is that weak players get culled out and the smart operators—who are visualizing success and planning to win—survive and grow.

How are YOU innovating to grow your business? 

In late 2017 we conducted our first "Innovation in Distribution" survey. If you haven't yet seen the survey's findings, you can download the report here. Questions about what you see? Feel free to reach out to me anytime.