Why Are Regional Distributors Succeeding?

Why Are Regional Distributors Succeeding?

Why Are Regional Distributors Succeeding?

  • How did regional distributors make a comeback in the market?.
  • Why do regional distributors appeal to lab buyers?
  • What are the major objections to doing more business with regional distributors?
  • How do regional distributors compete against the big distributors?
  • Summary

What is this blog post about?

The lab supply industry experienced a great deal of consolidation at the turn of the 21st century, until it seemed that only two mammoth distributors with a global footprint would control the market in the future. These distributors coined the term "duopoly" to describe the situation.

I participated in meetings at one of these firms when the management discussed acquisition of the few remaining regional distributors. This strategy was seen as a way to challenge the competitor, who had much deeper pockets, and who was busy buying up multi-billion dollar premier brand manufacturers.

Nearly a quarter century later, far more regional distributors exist than ever before. Several more mid-size national distributors are also in business. Amazon was once feared as the juggernaut that would replace everyone, but that has not happened. So the question is, why are regional distributors able to do so well given the enormous competitors they face?

What is the appeal of a regional distributor?

Here are some possible reasons why regional distributors are able to do well:

  • Better understanding of the needs of their local customers.
  • More personalized service than larger distributors.
  • Faster delivery times.
  • Lower prices.

Ultimately, the success of regional distributors depends on their ability to provide value to their customers in a way that larger competitors cannot or will not.

What are the reasons customers don’t do more business with regional distributors?

●    Resistance to Change

Aa unique dynamic exists between the people who perform the testing and the people who have financial responsibility for operating the lab (e.g., Lab Manager, CFO, Procurement).

For routine supplies, the end user is almost always the decision maker. Lab techs are wary of introducing variables into experiments as they may jeopardize the results. They follow the motto, "If it ain't broke, don't fix it."  Managers are reluctant to overrule them.

For capital equipment, the tech can no longer use that argument. Since this is typically a budgeted item, people with financial responsibility nearly always hold sway.

Another argument frequently used is "It will cost us 10% more just to change anything because we will have to 'revalidate' everything."  The fact that in the majority of time, the competitor is supplying the same brand item as they are currently using is left out of the discussion.

Overall, the dynamic between the two groups is complex and can be challenging to navigate. It is important to find a balance between the needs of the lab and the financial constraints of the organization.

●   Contracts

If you buy millions of dollars in lab supplies, negotiating a contract with a large distributor is essential.  Big distributors have teams of people whose only job is to write, negotiate and administer contracts.  They are backed up by a cadre of corporate attorneys.

Contracts are either hard and soft.  A “hard” contract’s intent is to lock in business and lock out competitors in exchange for price concessions and incentives.  There are carrots and sticks in the contract to ensure compliance

A “soft” contract is essentially an agreement: “We are going to give you these stated discounts. In return, we would like you to pledge to do at least XX% of your business with us.  While there is no penalty for buying products from other vendors, the company representative will always remind their customer that “they are under contract.”  At the level of the lab, this can be used as an excuse not to consider change or they may truly believe that this is a “hard” contract when in fact it is not.  Nothing has been signed by the lab, they only need to show that they have signed onto the buying group which offers the agreement as a benefit.

Sarbanes-Oxley, a law that resulted from the Enron debacle, changed big distributors' behavior dramatically.  Prior to this law, contracts were only put on the table when huge pieces of business were at stake.  It was always much better not to put anything in writing, so as to give yourself latitude to raise prices.  This practice incentivized customers to join organizations who negotiated group contracts which could be accessed by becoming a member.  Big distributors discovered buying groups were a quick way to lock down small to midsize customers without a lot of selling and support effort, all from a single written agreement.

Slowly but surely, regional distributors have begun to pierce the veil on the “soft” contract and have successfully convinced many customers that shopping is not only permitted, but it is the responsible thing to do to keep the contractor on their toes and to save a lot of money.

●   The Monster Manufacturers

Another “War of the Roses” in this industry is between manufacturers and distributors over account control.  For smaller manufacturers, which, by a wide margin outnumber the monster category, being listed on the big distributor’s website is the path to gold. For the little guy, that path is more of a very expensive obstacle course where few ever complete the course financially intact. But very large manufacturers control the rules of the game.  Here is a partial list of the manufacturers who fall into that category:

  • Corning Life Sciences (whose revenue is very near that of Avantor/VWR in 2022)
  • Agilent Technologies (whose revenue is also close to exceeding Avantor/VWR)
  • Becton-Dickinson
  • Hach (and the huge Danaher portfolio of companies with combined revenues of over $30 billion)
  • Millipore-Sigma
  • MettlerToledo
  • Life Technologies (owned by Thermo Fisher) and Qiagen

When a manufacturer gets to the size of these companies, they want to be in control, not relinquish it to the distributor.  They want:

  • Branding and messaging (use of trade names and logos)
  • Pricing (to the end user)
  • Advertised pricing (to set MSRP or list price)
  • Control over who is selling to the end user..

In an ideal world, they would simply cut out distributors altogether and sell directly to end users.

Some companies such as Corning and Becton-Dickinson manufacture bulk, low-value items that need to go out by truckload to be unloaded at a distribution hub.  Unlike companies who are selling much smaller volumes at higher prices, selling bulk products one at a time directly to end users isn’t cost effective.

This situation creates a problem.  You have a premium brand that carries a premium price on mostly commodity items, but there are a host of competitors selling similar products at a fraction of your list price (e.g., 50ml Centrifuge Tubes).

If your price is $300 per case and the distributor has a private label product selling for $100 per case, what do you do to capture or retain market share without wrecking your brand reputation?

Two possibilities emerge:1) The manufacturer rep contracts directly with the end user in partnership with their preferred national distributor or 2) The manufacturer rep contracts directly with the end user but under the umbrella of a group purchasing (“soft”) contract.  For many years, these two scenarios have been the playbook.

Option 1, manufacturer control over how their products are priced, and how they reach the end user, has been increasingly used for years, and has been the source of several legal battles over restraint of trade issues.  “Fair trade” was once a policy, but was ruled illegal.  Today, MAP policies (minimum advertised price) have been adopted by many companies.  This policy is why you see an item online at the exact same price offered by numerous vendors.

How does this negatively impact the regional distributor?

The monster manufacturers are also gatekeepers when it comes to who becomes an authorized distributor.  If you haven’t earned national or international name recognition as a distributor, your chances of becoming an authorized distributor are slim.

Further, many manufacturers, no matter what their size, have tiered pricing.  If you buy one at a time, you pay $10.  If you buy a pallet at a time, you pay $6.00 each.  If you don’t buy a certain amount per year, you may have your distributorship terminated!

Most manufacturers aren’t geared to drop ship products, and still work on a JIT (just in time) model, in which production is geared to fill existing orders.  With no on-hand inventory, the lead time for the little guy is far longer than that for the big distributor who has the item sitting on their shelf.  Also, in some cases, manufacturers charge hefty drop ship fees.  All of these factors stack the deck against the regional distributor.

With all of these headwinds, how do regional distributors compete?

…against a margin deficit

Big distributors drive a very hard bargain with their suppliers.  They have become masters at extracting cash from their vendors in ways too numerous to include in this post.  However, the breakeven point is roughly 19% gross profit margin, because mega distributors have a huge overhead.  Thousands of employees and numerous leased giant warehouses cost a lot of money.

Regional distributors don’t require anywhere near this threshold margin.  It makes sense to believe that a big distributor's “buying power” will yield the best price you can get.  If you aren’t buying by the millions each year, you will never benefit from their buying power.

…against manufacturers with tiered pricing and high fees

The Independent Laboratory Dealers Association (www.ilda.org) bands together a large segment of regional and mid-size distributors as well as manufacturers who wish to sell through regional distributors.  LPS has been a member of this association for many years.

The ILDA members recognized these problems long ago, and a few mid-sized distributors with sizable inventories have catered to this market.  Their buying power is close to that of the bigger distributors and they sell at prices that allow the regional distributors to compete against the big distributors in most cases.  Often, they have even better prices.

…Against violating the terms of an existing contract

Has your organization signed on to a group contract?  Have you or anyone in your organization actually read the document?  If it says “contract” at the top of the page, then there just may be an issue.  If it says “agreement”, as most of the group contracts do, then you are under no obligation not to look to LPS or another regional distributor for cost savings.  There is no penalty.

Some of the prices on those agreements are going to be unbeatable.  (Look for items shown on the “hot list”.)  Buy these!  They are making loads of profit on all the other items you buy.  Ask LPS or your regional distributor for quotes on anything not on the hot list.

…Against the resistance to change

A few things will motivate customers to make a change:

  • The loss of a sales representative with whom you’ve had a close working relationship..
  • The hiring of someone responsible for purchasing who has a prior relationship with a different supplier than the incumbent.
  • Unreasonably high or untimely price increases.
  • Learning that your lab has been paying significantly more for some key items than the lab down the block. (This often is discovered when a new employee comes onboard.)
  • Poor service, stock-outs, quality issues, production shutdowns due to backorders.

When any of these things happen, the backup plan for many labs is to start buying from the other big distributor.  After all, if you don’t find it at Home Depot, there’s always Lowe's.

The problem is that these big distributors are only going to roll out the red carpet if you are on their radar screen. If you haven’t been buying much from them previously, and your company name isn’t in the Fortune 100, then you will be entitled to the minimum service level with no rep, phone / web only, and no one who cares whether you are a customer...

Being left out in the cold like this can be  a jarring experience.  While you may think that you can Google your way to what you need, having someone whose career measurement is based on new customers, no matter what the size, and helping solve their problems when they arise is worth its weight in gold.  That’s what regional distributors bring to the table.

Summary

Have you ever considered doing business with a regional distributor or a procurement services company like LPS?  Many people, just like you, have a preconception that the only “safe” decision is to do all of your business with one of the big two companies.

These giant companies have huge marketing budgets to convince you that they are a one-stop shop, and top rate customer services along with rock-bottom prices.  This is true if you buy over a million dollars in lab supplies per year

Somewhere along the line, the large distributors decided it was too expensive for them to give good services to the smaller customers.  We and the many regional distributors who have stepped up to fill that need. At LPS we treat every customer the way the sales reps for these big distributors used to treat all their customers - with honesty and respect.  Everyone gets the highest level of service.  

We welcome the opportunity to serve you!  Please contact us to find out more.