Group therapy

is.group’s much heralded RDC programme sounds all very good on paper, but with a need for increased volume and participation, what does the future hold?

These are defining times for US independent dealers and is.group. What is.group thought would give it and its members a crucial edge in the eternal battle against the power channel, has still to establish itself as the way forward for dealers.

The RDCs are not running at anything near like capacity, not even break even, rising to speculation that the current HP deal might also be under threat.

One thing is certain. The coming months are likely to be crucial. CEO Mike Gentile openly admits that at next year’s annual meeting, he will in all likelihood be talking about either an RDC success story, or the reasons why they had to be closed down.

The RDCs are no overnight invention and have long been in the pipeline. While it has been widely reported that is.group’s move into distribution was largely forced by the demise of Daisytek, the group had in fact been considering the possibilities long before. We first got wind of is.group’s plans back in October 2001, when then COO Grady Taylor confirmed the rumours to OPI by admitting that is.group was "studying the feasibility of some form of distribution".

But it was another two-and-a-half years before the plans were shown to the world and the distribution system began to take concrete shape with the announcement of the three RDCs in Indiana, California and Pennsylvania.

Proudly bestowing its virtues, is.group said the benefits of the new system would include lower costs, improved breadth of direct product access, faster delivery times and increased working capital. It was viewed as a revolutionary step to bolster a sector that had steadily been losing share to the power channel. And it is a model that has worked well in other industries for years. Howie Jung is a member of the Ace Hardware group and has little doubt of the advanatges of RDCs. He says: "It gives you a much wider range of quickly accessible products, better inventory control, and a significant pricing advantage. Ace buys in the largest quantities to get the biggest price breaks which it passes to us. It basically allows you to compete with anyone on price."

So why is it yet to take off? "I think the wholesalers are doing a very good job to negate the advantages," says Jung. "They’ve been fairly aggressive selling against is.group and I think they’ve created enough doubt in the minds of some.

"But I truly believe the RDCs are key to their ability to compete with the big boxes. And just look at other industries that have co-operatives – they all have distribution because it gives them a competitive advantage. OP is about the last one that doesn’t."

Hindsight is clearly a wonderful thing and looking back, Gentile concedes some mistakes were made. is.group’s board has never wavered in its belief that the RDC system is a winning proposition and perhaps, in part, this has been the problem. Just because the benefits might be crystal clear to one doesn’t necessarily mean they are crystal clear to another.

Gentile appreciates this fact – now so more than ever. And looking back he admits that is.group did not do enough of a selling job to its members. "I think we overestimated the ability of the dealer to understand the benefits," he concedes. "We thought we could force-feed the benefits. It’s like when you go from bottle-feeding your baby to spoon-feeding. We skipped the bottle and went straight for spoon-feeding. Heck, we probably even skipped the spoon and went right for the steak! We underestimated that and probably should have taken more time in the prep work.

"You can always say that we should have communicated more effectively."

The RDC model was never going to suit everyone, and some of the larger dealers in particular voted with their feet and departed the group.

Says Getitquick CEO Claude Pope, a former is.group chairman: "There’s more value added to a particular segment than to others, for example the small to medium-sized dealers would probably receive more value than the large dealer.

"It depends how the dealership is structured," he says. "A larger dealer with multiple locations would see more benefit in RDCs than a large dealer with a single location. But the value is there on a whole."

In all, departing members have taken some 10 per cent of volume with them. This has obviously had its impact on the RDCs, but there is still more than enough potential volume from existing members to make them viable, but to date it has not been forthcoming.

During is.group’s recent annual meeting in San Antonio, the overwhelming consensus from members during the dealer session was that the programme must work, and will work. But it was a case of preaching to the converted, with the majority of those in the auditorium already keenly participating.

Jim Preston, CEO of global dealer group consortium BPGI, sees merit in the system but also has sympathy for the waverers and naysayers. He says: "No one programme is perfect for every dealer in the country. Some dealers may have held back from participating because they were stockless. Others may have had concerns regarding the loss of a direct relationship with major vendors while some may have held back until the system was ‘debugged’.

"But we should remember that if you look at the RDC programme, it does require a significant change in the way a dealer manages his or her organisation in order to take full advantage of the proven value of the programme.

"It requires a dealer to change the order cycle, the quantities ordered (MOQ), the value of inventories held by the dealer, the number of SKUs held in stock etc. Change is always difficult, especially when a dealer doesn’t have all of the analytical tools to see what the full impact will be on your dealership. Those that are participating are true believers and the word is spreading and the volumes are growing."

Pope points out that it is not always simply a fact that some dealers are not sophisticated enough in their business acumen to fully embrace the benefits of the RDC system; they may just not have the resources. "There are many sophisticated small dealers in the organisation," he says. "But if they only have a workforce of ten employees and you take one or two of them out for a meeting, that’s 10 per cent of your workforce out. It takes resources to fully embrace and implement initially."

Once past this obstacle, however, Pope says it becomes a different story. "Once implemented, I would argue that the RDCs actually free up resources to be redirected. For example, if you don’t have to stock so many items, you should be able to free up some cash for one thing."

Preston adds: "The RDC programme is very new and it is quite different from any existing model in place. There have always been doubters with significant changes. Sometimes they are right, but often they are wrong. I remember the same comments when Costco, Price Club and Sam’s were launched. Guess what – they made it. The same held true when Tom Stemberg launched Staples. Look at what a superb company it is today.

"These companies changed the traditional supply chain as well as go-to-market models. Vendors that were excluded complained and probably hoped it would never work. Those that were included took a lot of pressure from other customers. Competitors were concerned as to the impact if it did work. The reaction does not surprise me. It is new. It has risks. It has benefits. These are all the elements for all of us to proffer opinions but, as Mike says, very few of us have the full knowledge to make truly educated and unbiased comments."

Shock

Many dealers received something of a shock at the annual meeting in San Antonio this year when they learned the initial start-up costs for the RDCs ballooned from the projected $2 million investment to $7 million. And consequently, this has had a significant effect on their rebates.

This, too, could probably have been communicated better. "I think all the members were caught a little off guard as to the size of the investment," recalls Pope.

But is.group was clearly worried about the possibility of another mass exodus if only half the story got through – rebates slashed – as opposed to be able to fully explain the flip side – bottom line growth.

Gentile insists some dealers are too fixated on rebates and fail to see the benefits that appear on the bottom line. "They’re annoyed because they didn’t get rebates," says Gentile. "But when I say ‘look at what you achieved operationally? Your margins are better because now we have HP and you can buy more product direct from the RDC, so your margins should be better’, they answer that they still want their rebates!

"I say, ‘gentlemen, you can’t implement something like this without an investment.’ They respond ‘take out the costs’, but that is not the answer. Volume is the answer which is why I’ve consistently said that this independent channel needs to come together."

But the loss of rebates and increased investment is clearly a highly sensitive point that is not going to be soothed overnight. While not being a member of is.group, Mark Leazer, director of sales technology at FSI Office and president of the AOPD board of directors, has picked up on grassroot feelings and reports: "From dealers I have spoken to, cost is always an issue. Dealers expecting rebates then instead get an invoice – that can be a crippling financial blow to a dealer’s bottom line."

Strained

One instant solution to is.group’s volume problem would be a merger with TriMega. There has been much speculation about the possibility and Gentile appears positively enthusiastic over the notion, although it is a subject that his opposite number Charlie Cleary, to the press at any rate, refuses to discuss.

Much has been written about the strained relationship between is.group and TriMega. Just a few short months ago, the then CEO John Kreidel admitted that relationships were "declining" between the two. Kreidel has now gone, however, and Gentile insists that things are "improving" and it is probably fair to say that it is more likely now, with Gentile in the is.group hotseat, than when John held the reigns. "I’ve known Charlie Clearly for 17 years," says Gentile. "I used to work with him at Boise. We’ve been scheduling time to meet and talk about the ways we should work together."

It is clear, however, that fundamental differences still exist between the two. Says Gentile: "I had someone from TriMega say to me ‘it’s the wrong idea at the wrong time’. And I said ‘you’re half right. It’s the right idea at the wrong time’. And they look at me as if I’m crazy, but if this had been done five years ago, the times would be a lot different for the independent dealer."

But merging would appear to be a cause Gentile is intent on championing. He adds: "I’ve said to Charlie and Lyle [Dabbert] that our two groups should seriously consider merging. There’s no reason why we shouldn’t be together. That’s not to say one model is better than the other. You could still have the RDC programme and TriMega’s larger dealer programme. We could meet the needs of a wide array of constituencies."

Gentile admits there are a lot of "culture clashes and history" to get through, but to say the least, he is passionate in his belief that it is the right way forward. While Cleary remains silent on the subject, in public at least, Gentile continues to bang the drum. "I can’t see why we can’t do a merger of buying groups in this channel. I think that day has come and I will be relentless in making it happen."

Preston, too, believes it to be a possibility. He adds: "The differences revolve around the most appropriate supply chain efficiencies and the level of services provided by the central group. Why can’t the groups have different models in these areas and yet work together in the areas of common needs? The common elements should be leveraged. If this means a merger or shared services I will let more knowledgeable people than me make these decisions."

Pope also says that a merger between the two groups will happen – one day. "I think it has to happen," he says. "It may not happen in this administration. I’ve always maintained that you should merge from a standpoint of strength and I’m not sure if the industry perceives is.group to be in position of strength or not, and I think that works against the group in a merger environment."

Making sense

"But on the other hand, if all those sitting on the sidelines are waiting for the RDCs to crumble or to get legs or whatever, once they do get legs, maybe then the other side will say they should have merged two years ago. There is certainly a lot to be gained by merging the two groups together."

When discussing mergers, believes Pope, it is important to look at who will be the winners and losers. The dealers would be the undoubted winners, he says, but then it could get more complicated to navigate the obstacles. "There might be some losers at staff level," he points out, "and even some at board level who might lose control or influence."

Gentile does not think this need be an obstacle, however, and appears selfless in his desire for a merger. He says: "Someone has yet to tell me why it doesn’t make sense. I’m not personalising this. If there’s no room for me then fine, I can do something else. But for the long-term health of the independent dealers, the channels have to come together. We’re splitting ourselves up and it doesn’t make sense."

When discussing whether the RDC model as a concept is flawed or not, Leazer says it is important to consider the "political and relational ramifications". He remarks: "Conceptually, for small dealers wanting to buy direct, it may have merit. It may have merit for warehousing and distribution for private label, for importing, and ‘special’ large quantity buys.

"For larger dealers I view the RDC as another point of handling, which is another layer of cost that has to be paid for by someone. Which brings us to the political and relational issues. Is the RDC model a different form of wholesaling and is it competitive to SP Richards, United and other regional wholesalers? Many seem to think so."

Indeed, there is evidence that the wholesalers may seem to think so, too. With the RDCs offering lower HP pricing by about 2 per cent, wholesalers have been cutting their prices too. Not surprisingly, Gentile is keen to dismiss the notion of competition saying that the two are mutually beneficial.

He says: "When we launched, the first thing the wholesalers did was lower their HP prices and lower their carton costs. They have carton source programmes to compete against us. I don’t hold that against them, that’s their business, they’re public companies and that’s what they have to do."

But he urges them to support the is.group initiative rather then compete against it. "I’ve met with Wayne Beacham and Dick Gochnauer," adds Gentile, "and I’ve said ‘gentlemen, the independents are your strategic customers, the big boxes aren’t. What you’re doing is eating your young’. I said to them: ‘Your profits are up, but at what expense?’ I have a low-cost operating model, we’re running these warehouses at a third of what it costs them to run their warehouses because we’re not doing a lot of bells and whistles.

"I’ve asked them to support us in that endeavour, because dealers have told me that, as their direct buy increases, so does their wholesaling business. Why can’t we all coexist for the same benefit of helping the independent dealer-

The future

So what does the future hold? Proponents of the RDC system insist that it is directly linked to the future prosperity of the independent dealer channel in its battle against the big boxes.

There is a fear that should it fail, manufacturers’ interest in the independent channel will wane, further playing into the big boxes’ hands.

"If the independent dealer can be successful," says Pope, "then everybody in the industry benefits – wholesaler, manufacturer or buying group. There are probably a lot of people who would love to see this model fail, but I think that is very shortsighted."

But while is.group insists that the RDC concept is vital to the future success of the independent sector, Leazer is not so sure. He says: "Is this something that dealers think they really need to be successful? Is the RDC concept what independent dealers have been clamouring for as the answer to competition from the big boxes? I haven’t heard that ground swell.

"Dealers that embrace a ‘visionary’ concept like this have to be able to see the competitive benefits, even if these benefits may be somewhere in the future. Dealers either aren’t seeing far enough into the future for these benefits or maybe they just don’t think the benefits are there."

In an attempt to ramp up volume, is.group members have agreed to throw the doors of the RDCs open to non-members. We’ll have to wait and see what the take-up will be, but Leazer is one non-member that won’t be joining in. "I can’t speak for the interest of other groups," he says, "but as for FSI or DPCG, our model does not fit with the RDC model. Actually, our model of a smaller group of larger, direct dealers makes DPCG somewhat the antithesis of the RDC model."

But whatever side of the independent spectrum you sit on, one thing is clear – independent dealers need all the help they can get.

"I’m not saying that Armageddon is around the corner," warns Gentile, "but it was not long ago when dealer share was 18 per cent – now it’s 13 per cent."

To halt further decline, OPI believes dealers must vigorously embrace any proposals that reduce cost and improve overall competitiveness and show a willingness to commit to their group’s programmes. While time will be the judge as to whether the is.group distribution model can reverse the steady erosion of US dealer marketshare, is.group should at least be applauded for not freezing in the headlights of the power channel juggernaut and be commended for its dogged efforts.