At a recent wholesale buying market, Ace Hardware President and CEO Dave Hodnik told Ace retailers, “If we could increase warehouse purchases from an average of 70 percent to 80 percent, it would mean an additional $429 million in wholesale sales each year.”
It goes without saying that as a home improvement retailer, you can’t always get what you need from your primary wholesaler. In a Do-It-Yourself Retailing study conducted several years ago, retailers reported purchasing an average of 77 percent through their primary wholesaler’s warehouse. So where are retailers sourcing the remaining products they stock?
These figures signal that distribution within the hardlines industry is more fragmented than ever. Home improvement retailers are sourcing more products from more different suppliers than ever before.
While the traditional two-step distribution model of independent retailers concentrating purchases through a primary wholesaler is still the most viable and used method of sourcing product in the industry, the fragmentation of the various distribution sources being used by retailers has largely been the result of increased demand from consumers who want more retail choices than ever before.
As consumers become more time-pressed, they want a one-stop shopping environment where they can get everything they need in a single shopping trip. This is why retailers like All American Home Center in Downey, Calif., stock nearly 90,000 SKUs and why McGuckin’s Hardware in Boulder, Colo., stocks more than 200,000 products, including many unique and specialty assortments. Both retailers have positioned their businesses as one-stop shopping sources to customers, and both have SKU counts that far exceed the average offering from primary wholesalers in the industry, which on average offer between 60,000 and 70,000 SKUs.
From the wholesaler’s perspective, to operate more efficiently, they have had to consolidate their offerings (to some extent) to be able to better manage their inventories. This has also been a factor of the consolidation that has taken place among industry manufacturers. But this is in spite of the fact that retail customers are demanding more choices than ever before. And retailers, who are caught in the middle, often lean toward wanting to fulfill their customers’ increasing demands for more choices.
Expanding the Core
It comes as no surprise that the factors that have spurred this fragmentation of sourcing within the industry are strongly linked to the strategies many independent retailers have taken to compete effectively in today’s retail environment.
For example, many retailers note the importance of having both a broad and deep assortment in one, if not multiple, core departments and categories in their stores. This helps them differentiate their assortment from their competition and draw different customer types into their stores more frequently, including professionals, do-it-yourselfers and commercial/industrial clientele. This has been an extremely popular strategy in the face of growing big-box competition.
There are countless instances of retailers that have become “destinations” in core categories such as hardware and fasteners and lawn and garden and live goods, to name just a few. And in next month’s issue of Do-It-Yourself Retailing we will examine this phenomenon in greater detail, profiling six different retailers who have become destinations in their individual markets in the core categories they stock by creating dominant assortments that are both deep and wide in scope.
To offer both a broad and deep assortment in a particular category often requires going outside of traditional distribution sourcing methods to fill out an assortment. Many retailers have turned to specialty distributors, as well as regional full-line distributors, to source these “additional” SKUs they need for dominant core departments.
In the aforementioned study conducted by Do-It-Yourself Retailing, when asked why retailers weren’t dedicating more purchases through their primary wholesaler, retailers responded by saying their wholesaler either doesn’t carry some items they need, or they need faster turnaround time on delivery. On average, retailers in that study reported using four secondary suppliers, including specialty distributors, to fill out both their core and niche assortments.
Niching Out Against the Competition
Niche assortments are another way retailers have differentiated their assortments in order to address the growing big-box competitive threat. In the April edition of Do-It-Yourself Retailing we investigated some of the top niches being implemented at retail. Like retailers who are expanding their core assortments, these non-traditional niche categories often fall outside the offerings of a retailer’s primary two-step distribution partner and have to be sourced from secondary and specialty distributors that focus on that a particular category or niche.
As home improvement retailers continue to expand their offerings in order to satisfy customers’ needs in their particular markets, either by offering more dominant core department or niche categories, they will continue to rely on both secondary full-line distributors and specialty distributors to source these products.
Where the Product is Coming From: A Retail Case Study
According to a recent study from the Farnsworth Group, a home improvement industry research firm based in Indianapolis, in 2002 manufacturer shipments to hardware wholesalers totaled $19 billion, while manufacturer shipments to lumber and building material (LBM) distributors totaled approximately $55 billion. However, what’s interesting to note is that total manufacturer shipments to specialty distributors nearly equaled that of LBM distributors, totaling $54 billion.
This, according to the research, signifies not only fragmentation that exists within distribution in the hardlines industry as a whole, but also the importance and the viability of various two-step distributors serving the industry as a means to move product to end-users.
To illustrate this fragmentation of distribution in more detail, let’s look at how one particular Midwestern retailer affiliated with a major industry wholesaler is using both his primary distributor, as well as secondary sources, to round out his assortment strategy. (Since this retailer shared proprietary information, we will keep his identity and that of his wholesaler affiliation anonymous.)
This retailer operates a multi-store operation with annual sales of more than $3 million, and is a strong supporter of his wholesaler’s program offering. In fact, he has implemented his wholesaler’s decor program as well as its category management program in six of the seven core departments throughout his stores, including:
- Lawn and Garden.
“They make it so easy. Why wouldn’t I let (my distributor) help me do my assortment planning,” he says.
To break this down even further, our case study retailer stocks 30,000 SKUs in his store but says his wholesaler’s cat3egory management process offers 20,000 items available through the warehouse and an additional 3,500 items available through drop ship, bringing the total offering available through the category management program to 23,500 items.
Since our case study retailer is only involved in six of the seven category management departments, his total available SKU count through his wholesaler’s category management program is roughly 20,000 items. What’s more, our case-study retailer only uses 90 percent (on average) of his wholesaler’s category management items, which further reduces his total SKU count down to 18,000 items available through the program. This leaves 12,000 other items that the retailer is either sourcing elsewhere or buying direct from manufacturers and billing through his wholesaler.
What are some of the reasons our case-study retailer doesn’t fully implement his wholesaler’s recommended assortment and only stocks 90 percent of what is available through the program? He says in order to tailor his assortment to his local market, he won’t swap out well-established strong sellers for his wholesaler’s recommended items. He also notes that they don’t always provide a complete, broad assortment that he requires to create a destination department for his customers.
To create dominant assortments, our case-study retailer uses specialty distributors as well as direct shipments from manufacturers, especially in lawn and garden, which he considers one of his primary niches.
He notes, however, that his wholesaler’s warehouse assortment was limited in other areas as well–areas where he is addressing the need of the local market to create niche assortments. Some of these assortments including garage organizers and closet organizers, to name a few.
In total, our case-study retailer purchases 50 percent of his inventory through his primary wholesaler’s warehouse, while another 40 percent are direct purchases from other specialty distributors and manufacturer purchases billed through his primary wholesaler in order to round out his assortment. The remaining 10 percent are billed direct to manufacturers.