In the third and final part of the Builders’ Merchants News Round Table Debate, sponsored by Acheson & Glover, leading independent merchants examine changes to the sector’s business models, the real role of the internet and how to build and maintain proactive and effective supplier partnerships.
Lisa Arcangeli: Many indepdendents had been reviewing their business models, but the financial crises have expedited this. Some companies are in need of a serious revamp and, with more competitors out in the market and more issues being thrown at merchants than ever before, what should you be doing?
Howard Grant: A lot of merchants say they are not good at managing stock, but stockholding by most independent merchants has reduced quite significantly – by as much as 25%.
Mark Mallinder: If you cut down on your depth of stock it can look like a closing down sale if you’re not careful. Choice is key. That is why you have to make some kind of rationalisation and wear your accountant’s hat rather than your sales one.
Stuart Cook: What can a merchant do to review their business model? Is it a question of reviewing processes and systems?
Nick Sims: Our problem is not about less stock, it’s about accurate stock. Internal processes and procedures need to be more efficient.
Mark Mallinder: We’ve implemented efficiency measures and have been successful in being far more exact about the stock that we have and how it comes in and goes out. It’s a balancing act. We went all-out for efficiency because we had to. Did we go too far? We’re certainly putting things back in now.
Tim Rowbottom: We’ve been though a similar process. It wasn’t about reducing stock, but about managing it and making sure we have the right amount. That message gets lost and all people hear is ‘reduce’. Then you end up with not having enough stock and losing sales.
Peter Buttle: You’ve got the stock that didn’t sell and the stuff that did sell hasn’t been re-ordered. Your levels have gone down!
Tim Rowbottom: We are now expanding and our stockholding is higher now than it was two or three years ago mainly because we have added a lot of different stock. Perhaps we had to go through the pain of going too low in order to realise that we had to stock back up again.
Stuart Cook: The question is, why do you need to change the model if you have one that works? I think the reason some models need to be changed is because the environment around you and your customers is changing.
Howard Grant: The routes to market are evolving. Ten or 15 years ago, a merchant could cosy up to a buyer in a local council or government office and guarantee the business. They could make a better margin on that deal than with any other business they would do. EU legislation, in terms of framework agreements and competitive tendering, is changing all that. Now, every deal that involves major spend through a government-funded body has to demonstrate that it is buying efficiently. All the relationships have changed and merchants have to understand where the doors can be opened or where they have been closed permanently to them because the relationship is being fed by a national merchant and independents cannot compete. There are ways and means for getting in, but it’s hard work because you need to deal with several decisionmakers. But, if you win, it can be very lucrative. Once upon a time you would deal with the local contracting office and do a deal with them Now, it’s the ‘national central buying team’. You are not dealing at branch level anymore; you have to convince the buyers at the centre. It’s the same with housebuilders and contractors. The whole shift in terms of decisionmaking is more centralised and it’s a much more challenging environment because they are much more professional. They are buying more efficiently, so those generous margins that were around at one time have gone and are still getting squeezed. Merchants who are just waiting for the customer to walk into the branch and place their order on a daily basis are going to go backwards because that market is shrinking.
Stuart Cook: One of the biggest influencers in this area is the internet. Most customers are far better informed, not just about price, but about competing products, the environment and sustainability. You might think you are trading with the builder, but behind him is the enduser or the customer who is saying ‘I want this and I want that with the environmental credentials that go with it’. The internet has created a lot of information in order to get more knowledge- based selling. Merchants have to be able to keep up with that.
Mark Mallinder: Customers demand it. We have spent time and energy over the last five years undertaking supply chain agreements. It has been very good for us and provided us with a very useful income. However, it hasn’t been without its difficulties – the amount of hoops we have had to jump through, the boxes we have had to tick and some of the low margins we had go through. But, as an extra revenue stream, it has helped us incredibly over the last five years.
Mike Rigby: I’ve noticed that when people talk to each other – without leaving the conversation – they bring out a mobile to check a part of that conversation, that they may also be checking the information you are talking about. It’s a fundamentally different approach. This conversation doesn’t stop when the branch shuts. People keep on looking for information and they are buying…
Peter Buttle: That is a change in the business model. We can’t avoid the fact that all of our customers, even the ones who don’t make the decisions, have all got that tool in their hands.
Howard Grant: My sons are in their twenties and they hardly ever go into a shop. The only time they go to a store is for food shopping. A different generation is emerging. The nature of the customer is changing. Responding to people online and the speed of information is another challenge for the average merchant.
Mike Rigby: One of my fastest-growing most profitable customers sells composite doors and receives over 90% of their business over the internet. This growth in business comes to them outside office hours. The company is a manufacturer and a distributor. It takes the customer less than a minute to order. You can pick up the phone, but it will cost you more. It is cheaper to buy online. It can be delivered anywhere you want. The product is made and delivered within three days.
Shanker Patel: There is a distinction between a manufacturer and a distributor trying to sell a manufacturer’s products on the internet. It’s still an unproven area for builders’ merchants. The internet is very profitable for manufacturers. If you don’t own a brand and are only selling other people’s, all you are doing is destroying what you traditionally sell and charge for. You are giving it all away – including delivering direct to their doorstep and not having the privilege of being able to charge for it. I appreciate that the internet is upon us, but as merchants we are still a long way away from figuring out the best way to leverage it profitably.
Howard Grant: One-third of Unimer’s membership still does not have any sort of web presence…
Shanker Patel: Your website – if that will be the change in your business model – should be designed to enhance the value of your brand and reaffirm all the things you do very well. It’s a marketing tool and a communication tool. As a selling tool, you’ll be destroying your margin. Yes, you’ll get the sales, but for less.
Howard Grant: Do you all agree that every merchant should have a website, even if it’s not a trading one?
Nick Sims: I feel it places us too far away from our customer base, most of which is small to medium-size contractors. Most are not on email.
Tim Rowbottom: The internet offers existing customers a better service by allowing them to place orders when they want to and allowing them to see their accounts.
Nick Sims: It’s a shop window.
Mark Mallinder: Adding value to existing customers is an area we want to get into from an internet point of view. Customers can see their account details, their price and invoice queries. It frees up their time – and ours. I’m split over the internet. I can see huge opportunities, but there are also a number of threats. Caution is needed. You cannot get too carried away with it because merchanting is about people and the one thing you take out of the equation with the internet is people. You lose a sales opportunity…
Nick Sims: ...and the ability to talk about the technicalities of the product. Customers often don’t know one product from another.
Stuart Cook: If the internet is good for three things – researching and gathering information on products, doing transactions online and buying online – what do you do with those people who have set up in their back bedroom who have bought a load of blocks and put it on the internet with zero overheads, undercutting everyone else...
Peter Buttle: Where will they be able to buy and stock with no overheads?
Shanker Patel: They’ll wait until a manufacturer goes bust.
Tim Rowbottom: We’d give the supplier grief. We’d ask why they are supplying them when we have committed to stock their products.
Shanker Patel: We had one disruptive vendor on the internet who kept on slashing prices. We have internal margin management which I don’t like to drop, but that company would drop its prices by a few per cent. I recently checked its accounts and it has done a ‘phoenix’; it was trading under one name, now it’s trading as another. The former firm has gone into liquidation. That is what happens with the internet. I tell my team that these traders cannot keep the stock and try to sustain it. They don’t have a shop presence but still have the cost of paying Google and the cost of getting the goods to the customer. Those two areas alone cost more than 20%, so if you can’t earn 20% margin, give it up.
Howard Grant: A lot of that is due to the discipline of the manufacturers and main distributors who feed these customers. They have to understand what the full impact on their margins and business will be. The manufacturers have to speak out.
Shanker Patel:With some of mark-ups coming through on select DIY products, the manufacturers are saying there will be no more discounting from anybody. We control this with the understanding that suppliers will be dropped if they are disruptive in the marketplace.
Howard Grant: One of Unimer’s questions to prospective suppliers is ‘what is your online trading policy’? We ask them to explain who they are using and how they are distributing. We also ask whether they are taking orders direct.
Peter Buttle: Is that information available to us as merchants?
Howard Grant: No. Unimer makes the decision on your behalf. You should be confident that the suppliers in our Guide are the right sort.
Peter Buttle: Those are the kinds of questions we should be asking within our buying groups as part of our decision-making process.
Howard Grant: If you gathered your resources, you could start to place performance measures on your suppliers, which you aren’t doing at the moment. Suppliers to B&Q face a whole range of performance measures they must achieve. That’s a big difference compared to some of the decisions the buying groups have made. They have informal, subjective systems as to who will be supplier of the year. This is common across the buying groups and there is some level of consistency, but ultimately, is it affecting your decisionmaking. But with B&Q, if you don’t commit to these 10 measures or act on those 97% or 98% of performance levels, you will either be financially penalised or you will be de-listed. None of the buying groups from the independent merchant sector are doing this. An independent merchant, unless they are of the size of a Ridgeons or an EH Smith, wouldn’t have the resources to do this.
Peter Buttle: The internet is one of the biggest potential disrupters of our business model.
Nick Sims: There’s not much innovation in this industry. Renewables is an opportunity for us to make much higher margins. But, manufacturers of renewables go to the nationals and to the utilities companies and now there’s no margin in it. There is a way of making more money. Independents do it through communication, relationships and knowledge.
Mark Mallinder: Merchants have to be out there, looking for innovations and opportunities, talking to those suppliers, spotting the gaps and forming alliances with them early on. EH Smith did a lot of work with Wienerberger with its Porotherm product early on. We knew we would have a head start and that there would be a bubble, but we could see the value in it. We took a gamble and it is paying off.
Howard Grant: That ticks all the boxes for me because you are differentiating in a specialist product and you are becoming an expert in that product.
Nick Sims: Any time a supplier comes to see me about a new product I ask if a national’s got it. If they say ‘yes’, I’m not interested. It’s going to be a price war, so what’s the point?
Lisa Arcangeli: Does anyone see the value of social media as a way of communicating with your customers? Our research has shown that more of your customers use this medium than was previously thought.
Mark Mallinder: It’s a generational thing. I was looking at some statistics recently which said that around 39% of students buy more online than they do in person. Over one-third of that generation is so used to buying online, that for them, it is the norm.
Tim Rowbottom: It also means 61% don’t buy online. That’s a big number.
Mark Mallinder: Social media will come to merchanting, but I don’t understand how. We have not yet seen a full fit yet to go down that route.
Shanker Patel: Social media’s main benefit at the moment is to brand owners. If you are launching a Hermés handbag and you want to get cheap advertising instead of spending huge amounts of money in glossy magazines, you can easily network a million people of the right consumer class at a fraction of the cost by using Facebook. If you have a big enough email database and you want to co-market with the brand, then you potentially have an opportunity. The brand must be seen to be desirable by that marketing database.
Mark Mallinder: One area where we have got involved with Facebook is on the specialist services side. We have sustainable product champions who are exceptionally knowledgeable and have something interesting to say. They will blog about it and put their information online. This regularly generates comments. It’s about having a good mix in feeding the Google monster. When people are searching, Google will put preference on social media, and this will help to lift your rankings and your visibility. We have also done a lot of work on search engine optimisation with great results. With SEO, if you type in ‘builders’ merchants’ in Google, EH Smith will come in at the top-half of the page. That is done by being in the right place at the right time with the right messages. The smartphone era has unleashed huge opportunities for builders’ merchants. We want to target small to medium- sized traders who, for most of the day, are onsite. Many companies are producing ‘m-sites’ or mobile sites. These are cutdown versions of their main websites. They tell the user who you are, where you are how the customer can get in contact. Locality is very important for small to medium-sized builders. Time is money, so where do they usually go? We are putting a very simple application on our m-site because the GPS on your phone already tells people where we are, gives them the directions and a phone number to talk to a person who can put them through to the specialist departments. It’s about making a link, something that is tangible to deal with. It’s about making it easy for your customer. That’s where smartphones come into their own.
Shanker Patel: We can go one step further. We can give our drivers PDAs with our product files on it. So every time they make a delivery they can ask the customer ‘would you like to order something for tomorrow or the day after?’ The driver will know most of your products and a lot of the time the sites we visit are restricted for space. Wouldn’t it be wonderful if you drivers became your salesmen? There is the technology to allow us to do all this and, from a customer’s point of view, it’s a fantastic service.
Peter Buttle: Could we learn from those internet providers for whom there is always an extra charge for delivery?
Shanker Patel: In certain industries being charged for delivery is standard.
Peter Buttle: It should be automatic. It’s bad management on our part. You want it next day? Yes? Tick that box, but it will be dearer.
Mark Mallinder: We had a big push to incentivise staff to make sure we added a delivery charge to certain orders. We got to the stage where we told our staff that they must get £10 from each order. That is pure profit. It has been very successful and most tradesmen are happy with it if you’re delivering a truck-load of materials. They’re used to paying for deliveries in other areas of their lives. A tenner is good value.
Nick Sims: If the nationals did it, we would do it. We need them to take the lead on this.
Lisa Arcangeli: Looking ahead, how can merchants meet their customers’ aspirations and make it easier for the customer to buy, bearing in mind that this might mean blurring the boundaries between trade and retail.
Howard Grant: Anyone who wants to become a Green Deal provider will have to face up to this because you are going to have to organise the whole supply chain and take responsibility and be accountable for it. You might sub-contract out the installation and the assessment. So, if a merchant wants to get their mind around the Green Deal, they must be prepared to change their thinking about what they are prepared to be responsible for and what risks they are prepared to carry. This is just another element of the way channels to market are changing. Nobody is going to get 100% of their business as a Green Deal provider; they will have other aspects to their business. You’ll still have your core business. If you want to get your head around the Green Deal, it has to involve your business model.
Peter Buttle: That is not being a merchant. It’s being a shop.
Howard Grant: It’s tied to consumers, rather than the jobbing contractor.
Peter Buttle: It involves products and technology that a lot of merchants are not comfortable with as well as new suppliers and new customers.
Howard Grant: You have to make your mind up whether you’re in it or not. You don’t decide about the Green Deal. You decide whether you are in the ‘sustainability product sector’ or not. If you are, you have to put a resource into it and you have to add your expertise and knowledge and target that sector. A lot of the bigger independents are doing this.
Mark Mallinder: That creates USPs and gives you value-added services which give you the option to lift margins, sell associated products and clusters of products. If we’re selling products A and B, they naturally fit with C and D. Let’s stock them and show them together to create more opportunities for sales.
Mike Rigby: It is also about using the knowledge to help your customers sell. A lot of them are behind the curve at present and know less than anybody else.
Howard Grant: That’s why there is such a great need for the role of the merchant as a centre of expertise and knowledge. Independents do that better than the nationals, but you have to keep building on that. It’s a real driver in your business.
Mark Mallinder: With the growth of the ‘faceless’ internet, and as more of a segment of the industry goes down this route, it becomes more polarised and less service-orientated, so there is more of a need for someone who can provide a more personal service.
Nick Sims: We will set up the whole sustainable structure, sharing knowledge both internally and externally with our customers, helping them to get on board to understand changes in legislation and how they can get more points from the Codes...
Mike Rigby: Knowledge is power. If you’ve spent the money on obtaining information, you don’t want to share it too widely.
Stuart Cook: What is emerging from this debate is that merchants are segmenting their market with specialisms, knowledge and information in different areas. You are building very complex businesses with very different aspects to it.
This article first appeared in the July/August edition of Builders' Merchants News.
