Fear Of Disintermediation

By Harry Stern

Harry Stern is president of Stern Associates Ltd.

"Disintermediation" is a hot, relatively recent, at least $10 term that is currently used to describe a not so recent series of occurrences that traditional dealers usually translate as "being cut out of the loop." This practice of excluding dealers from certain E&S sales has existed in several forms over the years, creating a series of concerns that I'll review in historical sequence.

In addition, I would also like to provide some personal reflections relative to the mind-set of traditional dealers. While I am not officially qualified to perform a psychoanalysis, I feel my 40-plus years of experience, most of which has been spent as a dealer or dealer buying group head, qualifies me for the analytic function and certainly enables me to empathize with dealers' positions.

For most dealers, the fear of disintermediation has been a real one and, in my opinion, warranted over the E&S industry's course of development. Threats to dealers' existence, other than the usual competitive pressures, have been a constant. Looking backward to examine the origins of dealer disintermediation, the oldest form - manufacturers selling direct to end-users thereby bypassing their dealers - has been around arguably since the peddlers of the late 19th Century evolved into early traditional dealers. Articles in the inaugural issues of Restaurant Equipment Dealer magazine, the industry's first publication and forerunner of today's Foodservice Equipment & Supplies, confirm that this was a dealer concern in the late 1940s.

The root cause of direct supplier-to-user sales (and still true today) is overcapacity, that is, essentially, too much supply chasing too little demand. While dealers may be hard-pressed to identify a supplier that sells exclusively through the traditional distribution channel, their main concern is: How far down in the strata of end-users are manufacturers willing to sell direct? First-tier manufacturers, with a strong rep network and solid support from their dealers, may limit their direct sales to major chains, a practice that while disdained has become accepted, albeit grudgingly, by dealers over the years. The reality is that, unless dealers can add identifiable value to these chain transactions (and some certainly do), they can have no justifiable argument against the practice. While direct selling has been a reality of the marketplace for decades, the common view of typical dealers is ... "I don't like it, but how does it impact me personally?" More often than not, the NIMBY (Not in My Backyard) rule rules.

For many years, some suppliers have chosen to sell direct to operators other than the major multi-unit concepts, offering products on a direct basis to any entity bold enough to call itself a chain. Further, in the handling of major accounts or larger volume transactions, if they feel that a customer's dealer of preference is specifying a competitor's products, certain suppliers may sell direct or, after setting the terms, place their business through a cooperating dealer on a brokerage basis.

Unless dealers add identifiable value to chain transactions (and some certainly do), they can have no justifiable argument against the practice.

Manufacturers with little or no dealer support in a territory sometimes feel compelled to take the direct route to find a market for their products. More often than not, these are second- or third-tier, market-following suppliers, generally producers of less than top quality products, who are forced to do business in a survival mode. Over the years, such short-term, desperation thinking has forced many such entities out of the industry.

Another threat has emerged in the form of full-line distributors (a.k.a. broadliners) that entered the E&S distribution scene 40-plus years ago, driven by a desire to sell more products to existing customers. While the primary advantages broadliners have had over traditional dealers - more frequent sales calls and deliveries, lower cost of distribution, ability to work at lower margins and the opportunity to add E&S to food orders - are old-hat by now, their shortcomings have also become apparent.

Since their inception into the equipment and supplies arena, broadliners have been resented by traditional dealers for taking sales of easily identifiable, high-volume items away from them, especially in view of their narrow E&S inventories and a lack of product knowledge. Having had first-hand experience in managing the E&S department of the then-leading broadliner 15 years ago, I can attest that my biggest challenge was attempting to make our sales force of 400-plus DSRs comfortable with E&S products. While they virtually "owned" their customers, most wanted little or no part of selling non-consumable, non-disposable, non-food items, especially anything with a cord and plug or gas orifice.

Stocking reps (whose role is debated in the "Point-CounterPoint" article) are, in my opinion, an ongoing thorn in the side of legitimate, full-service dealers and one more instance of supplier-caused disintermediation. However, they are not an existence-threatening force for dealers, who typically feel manufacturers should not use reps as an avenue of distribution, even to marginal dealers, and should be kept in that perspective. The more influential (read: power-wielding) dealers can effectively contain abuses such as this with the suppliers they support; they are relatively ineffective, however, with those suppliers over whom they hold little clout.

Perhaps the latest evidence of dealers' historic concern that they will be disintermediated by new developments in the distribution channel occurred earlier this year. At that time, an exploratory alliance between this publication and the leading internet auction services provider evoked an immediate negative response from several dealers that resulted in the magazine, correctly in my view, recognizing the perceptions of its primary constituency and rethinking its arrangement.

Why was there a negative dealer reaction to the proposed centralized online sale of used E&S? While historically consistent, I believe that today's constricted market conditions have placed dealers in a heightened asset preservation mode, in which they are battling to maintain margins, as well as market share. These exacerbating circumstances result in dealers metaphorically circling the wagons with guns blazing to fend off any outside threat to their livelihood, particularly one from one of the internet's most powerful sales presences.

So, what can dealers do to get over this (sometimes inordinate) fear of disintermediation? The key is to "add value." While this is a huge topic, and one which I plan to address specifically in an upcoming column, those dealers who have less-than-qualified people in the field, who are little more than order takers, lacking in essential product and usage knowledge, have good reason for their fears. Looking over their shoulders to see who's gaining on them is an all-too-frequent posture. Enlightened, well-focused dealers, on the other hand, will survive and prosper, especially if they make the necessary adjustments to changes in the industry, as well as new competitors and new forms of competition.