Profit Pressure

Fewer distributors expect profits to increase over the next year. But why?

Every time Robert Weese goes to an event at his local Chamber of Commerce, he hears the same concerns from promo products distributors: Their profits aren’t what they used to be.

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The numbers seem to support what Weese, a managing partner at consultancy B2B Sales Connections, is hearing. About 45% of distributors reported an increase in their 2016 profits – that’s the lowest figure since the days of Great Recession. Also, about 14% of distributors saw a decrease in profits last year – the highest figure since 2013.

The profit pressure isn’t coming from traditional places, though. According to Jeff Becker, president at Kotis Design (asi/244898), business costs haven’t really increased enough to account for the decline. The internet has allowed distributors to do and streamline almost everything that used to be outsourced, like recruiting, building websites and accounting. Health insurance costs have risen across the board, Becker says, but not by a margin outside what was expected. And spending money on product compliance doesn’t cut into profits, either, as most distributors generally still leave that up to the suppliers.

What is it then?

“There are so many more players from outside our industry,” Becker says. “An increase in players drives down the price and forces distributors who aren’t making the product and aren’t doing something to differentiate themselves to lower their price as it’s the only lever they feel they can pull.”

Still, in order to compete in this age of ultra-competition, distributors can’t simply drop the price tag on everything. They have to diversify their offerings, which typically pushes up costs and cuts into profits. Think about it: adding warehouse space or a graphic designer to the payroll is an upfront cost most distributors didn’t have to factor in a few years ago.

What can distributors do to drive profits back up? Becker suggests upselling orders through these added offferings – leveraging special services at higher margins to eventually make up the initial cost. He stresses: “It can’t be about product price.” He says distributors shouldn’t worry about who has the lowest price, because firms can’t consistently undercut online sites and survive. The goal, instead, should now be to focus on how products can creatively solve customer problems.

Weese agrees – and notes that out of the hundreds of promotional products he’s received, he most appreciates a practical emergency flashlight that he uses frequently.

“Your sales team needs to stop focusing on the products they sell and instead communicate how the products they represent will help their customers reach their goals and solve their problems,” Weese says.

So, as an example, instead of selling 200 branded flashlights, salespeople need “to communicate how they’re providing a product that will help their customers by keeping them safe in case of a breakdown on the side of a road or make their children feel safe and secure when a power failure happens,” Weese says.

By communicating value, distributors can transition into more of an agency and become more important to end-buyers. Indeed, success today is about having a sales team that knows how to create a value-added organization. Reps need to be trained to use their time effectively and create personal relationships with every account – and those accounts need to be contacted at least once a month automatically and at least twice a month by the salesperson directly, consultants say.

“Each engagement must be a value-added contact, not the tired old ‘I’m just touching base to see if you have any needs at this time.’ Top salespeople know the importance of staying in the peripheral vision zone of your target buyer,” Weese says.

Of course, for those distributors who insist they have to compete on price, Weese puts it bluntly: These firms have no choice but to set up a robust and automated online experience, just like the sites that are competing with traditional distributors. “Use a backend host, create an online store and sell at lower margins,” Weese says. But don’t forget: “Sales departments can’t have it both ways. If you are going to compete on price, you can’t protect your sales staff or their commissions.”