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Why Distributors Are More Important Than Ever

...KMC Music, Davitt & Hanser distribution, and U.S. Music Corporation. Terry’s portfolio of companies derives most of its revenue serving as middlemen between manufacturers and retailers, so it’s not surprising that he champions the role of distributors. Yet, he makes a compelling case that a distributor with a broad product offering is uniquely positioned to make a substantial contribution to the top and bottom of lines of companies from every corner of the industry: large and small retailers as well as niche manufacturers and premium brands. From helping retailers efficiently secure obscure items to streamlining the purchasing process, he says, “a good distributor really does add value.” In the following Q&A, he makes the case.

In theory at least, the internet has made it easier for producers and retailers to link up directly without a middleman. Shouldn’t we be seeing an effort to eliminate steps in the distribution channel?

I think the opposite is the case and that the internet has made retailers even more dependent on a distributor. When it comes to accessories, the role of the dealer has changed dramatically. It used to be for a musician, everything you knew about the industry, products, and availability, you learned at your local store. If your dealer had ten straps on display, as far as you were concerned, that was the world of guitar straps. What happens now is that the musician first goes online where he can see thousands of guitar straps. Then he walks into a store with a much bigger expectation of the range of products available. The dealer may say, ‘I have these ten straps for you to pick from,’ but the customer says, ‘I saw this different one online and that’s what I want.’ This is where a relationship with a large distributor comes in. Retailers can’t have infinite inventory, but they can supply that obscure strap or accessory with a single call to the distributor. With our companies, they can place an order and check availability online 24/7 and even turn the monitor around on the counter and ask the customer ‘is this the one you want?’

So the inventory depth of a distributor allows even a smaller retailer to be more competitive?

Absolutely. Without having to stock 10,000 SKUs, a small retailer can tap their distributor’s inventory and say to the customer, ‘Whatever you want, I can have it for you the day after tomorrow.’ Easy ordering is also critical. If you have to get on the phone with four or five manufacturers and a few distributors to track down an obscure $5 widget, you’ve lost money on the sale. In addition to inventory availability, the distributor offers terms that help the retailer’s cash flow. It’s a tremendous value.

What about a larger retailer that stocks a broad selection. What does a distributor have to offer them?

Larger retailers are learning that trimming the number of vendors they deal with can deliver real cost savings. If you have the ability to issue one purchase order to a distributor for, say, 500 items, it’s way more efficient than issuing purchase orders to ten different vendors for the same selection. One purchase order, one payable, one line of credit, one point of contact if you have to return something makes it easier for a purchasing department to manage. Distribution is more viable today for both large and small retailers, driven to a large degree by the fact that consumers want a broader selection.

In recent years, a number of manufacturers have stepped up their efforts to sell directly to retailers and some have even talked about going direct to consumers. Does that indicate a diminished role for distributors?

I don’t think so. Distributors offer a unique value that’s not easily replicated. For the small specialized manufacturer who offers only a few items, they have no choice but to turn to a distributor. We can present their products to 6,500 dealers in the United States. Even with the best team of independent reps, there’s no way they could get in front of that many customers. We also offer a huge benefit to their balance sheet. We hold their inventory, we pay in 30 days, and we eliminate their having to manage receivables. But the exposure is the big thing.

Many large manufacturers have accessories or a range of small-value products that they’d like to sell in a broader way. They don’t want to sell their flagship products to every dealer in the country, and most of them have a model where they sell these to 500 dealers directly. But that leaves 6,000 dealers in America who could effectively sell their accessories or entry-level products. That’s where a distributor adds value. They can get products out in a way the large manufacturer simply can’t. The overhead structure of a large manufacturer makes it impossible to service smaller retailers.

Think of it as four quadrants in the industry: large retailers, small retailers, large manufacturers, small manufacturers. In accessories in particular, a distributor offers services to each quadrant that are more in play today than ever.

Is the value of distribution unique to the music industry?

In just about every industry, there are vibrant distributors. There may be fewer of them today, but whether it’s sporting goods or music accessories, they serve an important function.

What accounts for the importance of accessories? They generate a big part of your company’s revenue and they make an outsized contribution to retail profits. Your thoughts?

Some of the accessory products are necessity items—stuff that wears out like strings, sticks, or drumheads. That’s about half the business. The other half consists of discretionary products. Items that appeal to a player. Our end-users are primarily hobbyists, and these discretionary accessories are a way for them to stay engaged with their hobby. They can’t buy a new guitar every day, but they get a kick out a new strap or a better case. It’s fun for them.

We’re going through a period that’s described as “disruptive.” Anything on the horizon that you see displacing a distributor?

Accessory manufacturers are continually expanding their lines, putting their brand on products in other categories. If a company has been successful in one area, it’s a given that they’ll try to leverage the visibility of their brand and enter another product category. At the same time, Asian contract manufacturing has made it easier than ever to get small plastic or electronics devices produced. This means that the number of available products will continue to increase, which only strengthens the importance of a distributor.

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