The New Dealer Channel

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The New Dealer Channel

by Robert L. Fitzpatrick
NAGASA Strategic Advisor

The term "New Dealer Channel" was selected for this report because it communicates a fundamental, yet easily missed, reality. It is that the dealer channel of the next 10 years is changing so fundamentally from the channel of the last 10 years that it must be seen as completely different entity.

Even though, in many cases, the owners or managers of the dealerships are the same, and even though the logos of the manufacturers look just like they always have, the channel is indeed new.

The change is cultural more so than structural, and it is based on new market realities rather than changes enacted by either dealers or manufacturers. The shift has taken shape so rapidly that many in the industry have not yet taken notice. Their lack of awareness causes virtually every action they take, policy they formulate and statement they issue to have the unmistakable air of obsolescence and irrelevance.

The single most important aspect of this change is that the power in the supply chain has shifted from manufacturer to dealer. Those entering the imaging market now have no problem working with this reality. The traditional suppliers, however, are having a tremendous difficulty coming to grips with it. Like it or not, deal with it or not, it is a fact. Dealers are in the driver's seat. The new world order of graphic arts distribution has arrived.

How did this occur and what does it mean? To understand how the change came about requires a brief look back at the development of the channel over the last few years.

In 1991, I presented a special report to the members of National Graphic Arts Dealers Association, called "The Future and Small and Midsize Graphic Arts Dealers." The report summarized the market conditions in which the dealer channel operated as follows:

• Highly competitive pricing
• Over capacity among manufacturers
• Continued influx of offshore suppliers
• Market share wars among supply and equipment manufacturers
• Continued growth of electronic imaging and decline of duplicator printing, and photographic pre-press processes
• Continued emphasis on automated equipment to reduce labor costs
• Increased need of customers for "service and knowledge" support

At that time, nearly everyone in the industry had their eyes upon the impending new electronic imaging technology and not on the consequences on the distribution channel. Only three years earlier, an industry study of distribution had cast serious question on the value of the channel. The new electronic imaging technology was still considered beyond the expertise and sophistication of the graphic arts dealers. Dealers were being viewed as obsolete industry commodities, their value reduced to warehousing and financing.

Supplier policies in 1991 were identified as:

• · Bundling products (in both pre-press consumable supplies and finishing equipment)
• Replacement of duplicator presses with larger, more expensive, more sophisticated, multi-color presses
• Limiting distribution (terminations and offering of new products to fewer dealers)
• Pressuring dealers for "Alignments"
• Designing policies around needs of larger dealers who dominate market
• Seeking dealers to carry more inventory (buy more and buy less often)
• Preparing for and investing in electronic imaging which will ultimately eliminate many photographic consumables materials
• Searching for means to secure greater dealer commitment

Looking back, the seeds of the current industry environment are evident. Manufacturers were indeed seeking greater involvement of dealers and they were attempting to "rationalize" the channel that they had come to see as hopelessly unmanageable. However, much of the emphasis was on maximizing the dealers' limited role, that of warehousing and financing inventory.

Manufacturers were preparing for the electronic age by acquiring electronic imaging companies. Very little, other than from AGFA, had been offered to the channel. The maturity of the analog market was apparent and manufacturers were trying to adjust to its realities. The need for dealers to take on more costs was needed, but few new ideas were being advanced on how to get the dealers to assume these additional costs. The old tools of pressure were employed. As one dealer put it, "The manufacturers are still trying to ram product down our throats."

In this industry environment, my message to the channel was indeed unusual. I said that the dealers themselves must take the initiative in demonstrating their value to the manufacturers. They must become the protagonists of a new relationship. I also suggested that dealers not forget that power, in the current environment, speaks more loudly than partnership. The disadvantage of the midsize dealer in a market in which the manufacturer tended to view the dealer as a commodity broker had to be faced. I suggested that mid-size dealers either merge, consolidate, or enhance their technical capability to a point that they could demonstrate special value to the manufacturers. Options included:

• Sell company to large or mega-dealers
• Merge with or acquire another mid-size company and become a large dealer
• Limit lines (create value to suppliers by establishing strong and valuable focus on one or two suppliers)
• Invest in knowledge, marketing capability to distribute electronic imaging products
• Take the initiative on the issue of choices of suppliers
• Become a vocal protagonist for "partnership policies" (Train the manufacturers)
• Establish a vision; communicate that vision to suppliers.

Discover if they are aligned with it.

For small and mini-size dealers I suggested:

• Strengthen service capability
• Become a specialist. Focus totally on a market niche.
• Carefully review position with major supply manufacturers.Examine whether there is a long term fit with major suppliers. Small dealers are the 75% of the dealer community who sell 25% of the products.
• Consider options of "second tier" manufacturers and distributors, some of which are designing marketing strategies built upon smaller dealers.
• Seek a buying network to support profitability
• Invest in technical expertise with larger, multi-color presses
• Seek exclusives or protected territories in equipment marketing, and support manufacturers that offer them. Avoid the others.
• Avoid any commodity environments.
• If pre-press oriented, become a Desk Top Publishing Expert

The channel was being urged to lead the manufacturers in a direction that the dealers clearly could see the industry already moving. The dealers could see that in a mature market only a dealer can effectively bundle and integrate the product offering. Furthermore, the electronics market was broadening rapidly and direct sales in this field would quickly become uneconomical. I said that the dealers should prepare for this even though most of the manufacturers were still locked in a direct sales mentality.

This is in sharp contrast to the "way it is supposed to be." Normally, manufacturing companies are looking out over the horizon and studying the future. Dealers are supposed to be the farmers whose eyes are on the ground tilling the fields. They look to the manufacturer for new trends and new technologies. In 1991, graphic arts dealers were recognizing that the manufacturers were internally focused, management was in disarray, and they had little understanding of the dynamics of distribution in a mature market. Here was a channel whose importance was growing every day in a maturing market, yet most of the major suppliers did not see this basic reality. Consequently the channel was effectively unmanaged. The loss of faith and confidence of the dealers in the manufacturers from that time has not yet been regained.

A legacy of this era that I characterized as "unmanaged" is that the channel learned how to fend for itself. Without leadership and coordination coming from the manufacturers, the larger dealers took the only direction available. This was to play to all options. They mastered the art of "portfolio management."

In their hands they held cards from each of the major supply houses.

A hand could be played out where two Kodaks beat one DuPont, and in the next hand, two DuPonts were better than one Kodak. AGFA was a card that previously was valuable but not essential. Now it was becoming an ace. The 3M card had unknown value, so was kept in the hand only as a precaution. Fuji was a wild card that most dealers avoided, not knowing how to play it. Those that held it kept their poker faces so as not to betray its formidable power.

The players in the game were the dealers and the manufacturers. Kodak dealers (or DuPont, 3M, AGFA, etc.) were not part of a team. They were in a free-for-all with each other. The manufacturers were sometimes team players with dealers, sometimes their opponents.

Not sitting at the table at all was the end user. The fundamental needs of the customers were not considered in this game. It was a power struggle, the result of no-management and no leadership from the top. Some called it chaotic, contradictory, and unfathomable. It was a system destined to fall apart.

It was falling apart. Printing and publishing supply manufacturers whose coffers had been always been full with yearly and predictable earnings were suddenly hemorrhaging money. CEO's came and went. Managers vanished. Sales reps were quitting and going to work for dealers.

The dealer channel was confused and directionless regarding where to place investments. Some pursued the value added course in which they hired pre-press experts, opened demo facilities, and developed press-room expertise. Some focused on specific lines such as Fuji and grew their business with profitable sales. Others limited expenditures in expertise and new technology and focused on volume sales. They leveraged the resources of the manufacturers rather than their own. They utilized drop shipments, will-calls and the technical knowledge of manufacturer sales reps to the fullest. Their sales ballooned but their organizations were shallow and vulnerable.

Profits in either sector, the value added dealer's camp, or the broker/ distributor segment, were minimal. Even those companies whose sales were focused on more profitable lines found their accounts priced competitors. Many end users were buying film at prices, after rebates, considerably lower than dealers could buy them. This was a system in breakdown, and many in the industry saw that a new model would emerge.

The conditions in the market that were forcing a new model to emerge in graphic arts distribution are the same as those influencing many other fields of business. They are common in all "mature industries." They add up to one simple reality. Only a distributor channel can deliver products to the market in a profitable, efficient manner. The direct sales approach, or a direct sales driven approach (in which sales are controlled by the manufacturer) become far too costly. These conditions include:

• Less Growth
• Lower Margins
• More Market Competition
• Consolidation
• New Technology Replacing Obsolete Products and Technologies
• Diminished Brand Name Identification
• Increased Bundling/Systems Integration
• Growing Importance of Distribution
• More Need for Dealer - Manufacturer Cooperation
• More Competition to Traditional Channels

Said in the bluntest way, "You can't sell Kodak film any more." You can sell Kodak (or DuPont, 3M, AGFA, etc.) film with plates, or with an imagesetter lease, or with other creative financing, or if you can provide ongoing technical support in digital imaging, or if you consign the inventory, or....

The list of "ifs" is long. Ultimately they can only be managed by a dealer. The power over the sale is shifting more and more to the dealer. Product differentiation holds little sway over the customer. This was first demonstrated in 1987 when dealers all over the country were terminated by two of the major manufacturers. Much of the business was subsequently lost by those manufacturers to the terminated dealers who successfully switched the customers over to competitive brands.

For a time, the manufacturers compensated for loss of product differentiation in film, and to lesser degrees in plates and other products, by massive discounting to end users. This approach was used at a time when the market was clearly indicating that sales and distribution costs must be shifted over to the dealers. Instead, manufacturers attempted to maintain sales control and hold the customer base by, in some cases, paying them to buy the products.

The channel was skipped over, still viewed as a "necessary evil," and certainly not a partner to entrust hundreds of millions of dollars of sales to. Larger customers were now buying the film for less than the dealer. The differential was a mathematical equivalent of the value attributed to dealers. As an even further mathematical reduction in perceived dealer value, the manufacturers paid these rebates directly to the end user, and in some cases to end users who owed hundreds of thousands of dollars to the dealers! Customers were being paid rebates by manufacturers on products they had received and used, but never paid for! The dealers were waiting for their money while the manufacturers were blithely rewarding these bad debt accounts. This pattern was probably the starkest example of how far behind some of the manufacturers were in recognizing the forces of change that were reshaping the market.

Yet in the midst of this unmanaged and contradictory channel, new ideas and a vision for a better way were being developed among dealers and manufacturers. Success models were emerging.

• The success of Fuji Photo with a limited channel focused on product quality and dealer profitability was undeniable
• AGFA's extraordinary market growth was achieved by shifting sales of electronic imaging products to dealers and concentrating on a photo/digital bundling approach
• The technical competency of some pressroom supply manufacturers enabled them to sell effectively in this market and at healthy margins
• Even the seemingly contradictory patterns sales revealed some bases on which to build a better system. It was seen that the "national" dealers did not sell consistently branch to branch. Some were much stronger than others. Some promoted one line of product while other locations were focused on different lines, all under the same banner of one company.

Locally managed and focused distribution appeared necessary.

These experiences and the growing realization that cooperation would be beneficial to both parties have resulted in a future model being crystallized. It includes:

• Selected dealers are provided with significant additional profit opportunities in exchange for assuming greater sales and service functions. Value added services are financially rewarded
• Marketing is geographic based in which dealers focus on specific areas and have protection from additional competition in their areas. Channel is vigilantly managed to minimize unproductive pirating.
• Dealers are more differentiated by product.
• Manufacturer is in close communication with dealers regarding dealers' financial needs. Manufacturers protect local dealers against sudden losses due to bad credit.
• There is significantly more collaborative marketing and sharing of market information.
• Sales efforts are coordinated to reduce duplication of effort by manufacturer and dealer sales forces. Manufacturer is able to significantly reduce sales costs and can rely on dealer to perform functions currently performed by both dealer and manufacturer.
• Longer term written agreement exists between parties with financial incentives to continuously build business together and to address contingencies such as mergers or acquisitions.

Dealers have long recognized that within current profit margins there is insufficient money to actually "sell" one product over another. Costs of "switching business outweigh the current profit potential. Product selling is only successful where the product can be differentiated by quality or new technical advantage, or where the dealer has protection from pirating, thereby offering greater profit potential.

Manufacturers fully recognize the need for dealers to "sell" their products. Many acknowledge the need to reduce their own sales forces and shift sales responsibility to the dealer.

What is still not clear to the manufacturers, however, are the costs associated with this shift. One dealer compared the difference in costs of growing "new" business for a manufacturer to that of making a product by hand, as opposed to modern assembly line production.

Dealers will sell products only if it is financially feasible and advantageous. With so many products on the market, in truth, no dealer needs to align. Before the channel goes out of business, some of the major manufacturers will fall first. The financial pressures for making a change in the system are on the manufacturers, but the old direct selling and "control" mentality still predominates.

This thinking blinds the manufacturers from seeing economic facts about the costs to dealers of selling their products over other lines. Until this reality is fully understood, the channel will still divide between value added dealers and distributor/brokers, and the policies of the manufacturers will remain diluted and confused.

With end user rebates, manufacturers have invested millions to hold business. In the next five years, the investment will need to be in the channel if a manufacturer expects to gain greater commitment of dealer resources, finances, and personnel. Sales incentives ("We pay you more when you sell more.") are insufficient and are easily matched by the competition. Pressures and leveraging of dealers ("We represent a large portion of your business. Either get in line, or suffer the consequences.") are unworkable.

What will win the dealer commitment is solid business investment in the channel. Without it some manufacturers will find themselves in a box in which their only effective access to the market will require acquiring a channel or selling their operations to a competitor. The costs of these options are surely much higher than investing now in the channel's infrastructure and addressing the profitability needs of the dealers.

The barriers to manufacturer investment in the channel are not just financial. The largest barrier is the old, outmoded paradigm of thinking and policy making. One pervasive feature of this paradigm is profound mistrust of the dealer channel. When products were significantly differentiated in the mind of the customer and profit margins were large, mistrust was a luxury the supply chain could afford. Today, it must be replaced by frank and open communications and the building of a business relationship that views both parties as equals.

Based on market realities and end user needs and preferences, some future trends can be identified. Contrasting with realities defined in 1991when "The Future of Small and Midsize Dealers" was investigated they form a picture of a new channel.