Wholesale Tile Distribution: A Closer Look
Rumors about the demise of the middleman in U.S. commerce have been greatly exaggerated. As a matter of fact, the pertinent data shows the complete opposite to be true. Economic statistics show that the wholesale distributor is a strong, growing and vital component of the U.S. economy.
Some pretty spectacular facts emerged in a recent report distributed by the National Association of Wholesalers (NAW). I’ll reference facts contained in the report throughout this article, and use it as a basis of tying in wholesale tile distribution with the distribution business as a whole.
There are more that 300,000 wholesale distributors in the United States. These distributors account for annual revenues in excess of $2.5 trillion. This represents approximately 16% of total Gross Domestic Product (GDP). Furthermore, wholesale distribution is growing — not shrinking. Sales through distribution channels have been expanding annually at about 1.4 times the rate of overall GDP growth. This means that, as an industry, wholesale distribution is huge and growing.
On an individual basis, most distribution channels consist of highly fragmented, small, privately held companies. Only 2,000 distributors (in all industries) have annual revenues greater than $100 million. And very few industries have consolidated.
So what about wholesale tile distribution? Well, it seems to be following the overall national trends. The average tile distributor is small. Surveys by the Ceramic Tile Distributors Association (CTDA) and National Floor Trends indicate that 75% of all distributors do less than $10 million annually. This would indicate that, just like most other industries, we have a small, fragmented distribution channel.
More than 80% of all tile distributors have been in business for 11 years or longer. They sell more imported (52%) than domestic (48%) tile. Their warehouses, which average 23,000 square feet, are getting smaller (the average warehouse size in 1980 was 28,000 square feet).
However, their showrooms are growing, and now average approximately 3,200 square feet in size. Showrooms of 1,000 square feet or more have shown the greatest growth — from 64% in 1986 to 91% in 1998. And based on the surveys, it appears that the typical CTDA distributor is bullish on the future, forecasting an average sales growth rate of 20%.
All of this trivia is interesting, but what does it mean to the tile distributor? I think it’s safe to say that the independent tile distributor is going to be around for a long, long time.
However, four trends detailed in the NAW report bear consideration by those of us in the tile industry. Because, even if distribution is going to be a significant part of the future, we’re already seeing signs that the distributor of the new millennium is going to be a different breed from today’s typical distributor.
The four major forces currently transforming wholesale distribution are consolidation, inventory transparency, Internet retailing, and the commoditization of logistics/physical delivery. I’ll discuss each of these forces in detail.
ConsolidationLet’s consider for example the pharmaceutical industry — one that’s undergone massive consolidation over recent years. Just 25 years ago, more than 200 small distributors and two large distributors served that industry. Today, there are fewer than 50 distributors, and the four largest control more than 80% of the pharmaceutical market. So, is this indicative of the tile industry’s future?
The carpet industry has undergone mass consolidation, both at the manufacturer and retail levels. However, this change came about largely due to a decision by the dominant player at the manufacturer level.
So what does the future hold for our segment of the floor covering industry? The main difference between the tile industry and many others is the sheer number of manufacturers and the ever-changing distribution channels from manufacturer to end-user.
I anticipate some consolidation in the tile and floor covering industry (for instance, my company, Tile West, was recently consolidated into National Tile and Stone). However, I think most of this consolidation will occur at the national and regional levels, and the small independent distributor will continue to play an important role in the distribution process.
Inventory TransparencyThe next wave of change will come about in terms of inventory transparency. More manufacturers will be opening up their inventory to their distributor customers. Several U.S.-based manufacturers are already doing it and some technologically savvy foreign manufacturers, who understand the value this adds to their products, have begun to offer this service.
The tile industry has been slow to accept information systems technology and innovations like bar coding and electronic data interfacing (EDI). Although such innovations have been instituted internally by some domestic tile manufacturers, they are seldom seen at the distributor level.
The pharmaceutical industry has used universal bar codes since the early 1970s. We also need a bar-code standard in the tile business, but who will lead the way? As an industry, we need to embrace electronic commerce and forge ahead to create our future.
What are the benefits of being able to “see” the inventory at the point of manufacture? For one, it allows information technology linkages — the distributor and manufacturer become strategic partners.
Allowing inventory to be “seen” by supply chain partners means that the factory inventory becomes the distributor’s inventory. The efficiency-enhancing difference is that the distributor does not have to overstock, and the availability of inventory outside of his facility is a known entity.
Furthermore, the distributor also could open up his inventory to his customer. This would transform the manufacturer/distributor/customer relationship as we know it because such a system allows for automatic and continuous replenishment.
Internet RetailingThe growth of the Internet was supposed to bring about the elimination of the wholesale distribution middleman. In reality, however, the Internet has brought about massive growth in wholesale distribution.
How does the growth of Internet retailing (IR) affect wholesale distribution? IR thrives in areas of highly consolidated distribution. For evidence, just look at the Internet businesses that sell books, magazines and videos. Those companies (until recently) haven’t stocked anything. The Internet drop-ship model relies on dependable distribution to stock/pick/pack/ship.
So how does this affect the tile industry? Big-box stores recently announced plans to sell over the Internet. Many local retail floor covering dealers also are using IR to some degree. The question is: Who is going to work with the Internet sellers and tap into this market? National companies? Big-box retailers? Large distributors? Local distributors?
Logistics and Physical DeliveryI believe logistics and delivery are at the heart of the distribution issue, and will dictate the future of the segment. This is where the market leaders are going to look for the opportunity to leap frog ahead of their competition — while others just sit there blithely like a frog in a pot of slowly heating water.
Since I entered the tile business in 1980, I’ve seen an incredible change in the way that tile is bought and sold. The company I worked for in 1980 had two outside sales reps. When those reps quit, they weren’t replaced immediately because management was unsure whether they were really necessary.
Today, most of my competitors have anywhere from five to 10 reps. Why? Because customer expectations have risen in tandem with their increased purchases.
Today’s customers simply expect higher service levels than they have in the past — and that means more than simply picking, packing and shipping orders. As a matter of fact, in some industries, the distributors have farmed out the pick/pack/ship processes to third parties so they can better concentrate on adding value. The pick/pack/ship service is now simply a commodity.
So what strategies are independent tile distributors adopting in response to the four forces in wholesale distribution today?
Consolidation. The wholesale tile distribution business is growing. Some consolidators will arise on the regional and national scale but, due to the over-capacity that tile manufacturers are now experiencing, it appears that for the foreseeable future there will be plenty of room for a quality local distributor who adds value to the process.
Inventory transparency. Savvy distributors are exploiting information technology whenever practical. They strive for improved communication with every stakeholder up and down the lines of distribution.
Internet retailing. The distributors most likely to be around for the long term aren’t afraid of the Internet. Opportunities await those who embrace this technological marvel. There are many ways to integrate this vehicle into your operation.
Logistics and delivery. Forward-looking distributors add value. On-time delivery is now an expectation and really does not add value in the minds of most customers. How will you add value? Through more integrated services? By offering product training? By training your own people? Examine your internal processes and be sure that you are consistently meeting your customers’ minimum expectations.
In the final analysis, the future of tile distribution is unknown. I don’t have a crystal ball and my predictions may turn out to be wrong. But if the trends continue, the future looks bright for the independent distributor — provided that distributor continues to change with the market and add value to his products.