Sponsored by Kula Partners—an agency committed to helping leading B2B manufacturers craft digital experiences that transform how they engage buyers, serve customers, and outpace their competition—The Kula Ring podcast features conversations about marketing, sales, and technology with top manufacturing executives from across North America.
The Kula Ring podcast is co-hosted by Kula Partners principals, Carman Pirie and Jeff W. White, both of whom are frequently sought after for their digitally-focused B2B expertise. They regularly share their insights with audiences including conferences like B2B Online and HubSpot’s INBOUND, the Gardner Manufacturing Marketer blog, and other podcasts focused on B2B marketing and technology.
D. Bruce Merrifield of the Merrifield Consulting Group and Waypoint Analytics brings over 40 years of B2B insight to this episode, in which he talks about how Amazon Business applied learnings from their overwhelming success in online consumer sales to take on legacy B2B distribution channels. Bruce says manufacturers need to radically transform their relationships with distributors—and distributors must reinvent their business models—not only to succeed, but to survive in the Age of Amazon.
D. Bruce Merrifield
D. Bruce Merrifield, Jr. started his consulting practice in January 1980, after 8 years spent working for distribution companies. Backed by a solid track record of sales growth, Bruce’s expertise in the area of high-performance distribution management is virtually unparalleled. A graduate of both Princeton and Harvard Business School, he has written countless articles for trade publications and industry blogs, has given speeches to over 100 trade organizations, and is the author of Electronic Commerce for Distribution Channels.
LISTEN TO THIS EPISODE KULA RING PODCAST WITH BRUCE MERRIFIELD
READ: Customer-Centric B2B Channel Management in the Age of Amazon Transcript.
Announcer: You’re listening to The Kula Ring, a podcast made for manufacturing marketers. Here are Carman Pirie and Jeff White.
Jeff White: Welcome to The Kula Ring. My name is Jeff White, and joining me today is Carman Pirie. Carman, what’s going on?
Carman Pirie: What’s going on is, I think a huge amount of interest in today’s guest, actually. Jeff, I’ve got to say, I know that we’ve talked a fair bit about digital disruption in Amazon specifically in the disruption of B2B. It’s come up in previous episodes, but I don’t think we’ve ever been able to dive in as deeply as we’re going to be able to do today. If you’re a manufacturing marketer listening to today’s episode-
Jeff White: Or a distributor marketer, as well.
Carman Pirie: Indeed. Yeah, buckle up, because I think we have a lot of insight here around the disruption that’s currently unfolding, primarily at the hands of Amazon. Without further ado, let’s introduce our guest.
Jeff White: Absolutely. So joining us today is Bruce Merrifield Jr., who is the president of the Merrifield Consulting Group, and a partner at Waypoint Analytics. Thanks for joining us on The Kula Ring, Bruce. Welcome to the show.
Bruce Merrifield: Thank you. Good to be here.
Carman Pirie: Fantastic to get a chance to chat with you again, Bruce. Why don’t we just start by getting a bit of background for the benefit of our listeners, help them understand who you are and where you come from?
Bruce Merrifield: I spent my entire career in independent distribution channels. There are some kind of distributors that distribute ingredients that go into a factory, and the factory takes the ingredients and makes something out of it. Those would be OEM distributors. But then, once the factory makes something, they’ve got a whole good, so they’re wholesale distributors, to delineate two different types. Those channels have historically been largely populated by small, independent, regional kinds of distributors. They’re all being rolled up by private equity people these days. I got into that space the summer between college, I went directly to business school, and the wheeler dealer I was working for was building a chain of, primarily, printing paper distributors at the time back in 1972. He said, look, I’ll pay for your entire B-school education if you come work for me at a handsome salary, and then I will burn the cost of your education off the top of your salary.
I showed up at Harvard Business School as an indentured slave. All my buddies were going to Wall Street, working for McKenzie, and I was going to go be the assistant branch manager of the Peoria Paper Company, he was based out of St. Louis. He had six locations, and he was losing money in Peoria on a company he bought a couple years earlier. So that was the beginning. I basically pioneered order size economic analytics, to basically turn a big losing company into a big winner, and then we bought more companies that I kept turning brass into gold. And I thought, wow, I’m making him rich. I should do this on my own.
I started my own consulting niche in 1980, January of ’80. Really, it was a viewing post to find my own acquisition turnarounds, which I subsequently did. I kept continuing doing a traveling guru-business-professor-guy. When forums or distributors were put together by their national trade association or their buying group, or their number one best manufacturers, or their ERP software vendors, they would hire me to tell them how to run their business better, get along better, whatever. I’ve been doing that for a long time, and then ten years ago, I got involved with Waypoint Analytics as a side thing, where we had pioneered coming up with a profit equation for every line item event that goes through a distribution company.
So if you look at the margin dollars in the line or the pick, and you come up with the cost to serve dollars, then you can come up with a profit or loss dollars in the pick. Then you can add them all up, and you get your year end P&L, but you can also add them all up and get a P&L on every stock keeping unit in your warehouse, every vendor you do business with, every sales territory, every customer, et cetera. And when you have this kind of information, it reveals huge cross subsidies amongst both customers and SKUs. The stock keeping units aren’t inherently unprofitable or profitable by themselves. It’s how customers buy them, or how you let customers buy them.
If a customer wants to buy the equivalent of one double A battery, and as a human being you want to go in your warehouse and pick one, and put in a plastic bag, and print a barcode, and put that on there, and scan the barcode to get it into the order as another one of the line items and you want to spend, you know, 15 bucks to get 50 cents in margin dollar markup, you’re going to lose on that kind of item. But they don’t know that because they’re not looking at order size and the cost to serve is a mystery, it’s not in their P&L, they don’t know what it is.
Carman Pirie: So Bruce, that’s… Yes, and this is at the crux of what we’re trying to dive into today and really help people kind of understand how this huge blind spot that they have is impacting or about to impact their ability to compete in a massive way, essentially in the age of Amazon.
Bruce Merrifield: Right.
Carman Pirie: So, connect these dots for our listeners, this notion that people do not understand profitability at the SKU or per customer level. And how the new Amazon reality plays into that.
Bruce Merrifield: Well, Amazon there, you look at their history, they started off as an online bookseller, just as a way to get into digital customer value channels creation. They went after books because there were three million books in print, and there are 12 million books that aren’t in print in the English language, which the used booksellers piled on to the marketplace. So any oddball item book you could find at Amazon, which you wouldn’t find at your local bookstore. And then their artificial intelligence, if you bought this, you’re going to like that, and all that sort of stuff that was great. But then they realized, wait a minute, we have so many eyeballs, we don’t have to run over to the distributors to get the goofy books, or the new printed ones. We can actually buy the two percent of the books or 50% of the volume, and just discount them because we don’t have the infrastructure cost of Barnes and Noble. So then they went after what’s called the fat head of the long tail.
If you Google “long tail”, you’ll see these sort of parabolic-looking kind of things where the tail is super long but it’s just tiny little bits of sale, but if you add up the entire tail it’s equal to about the fat head, the few things that are the big volume. And that pattern pretty much works for everything that we consume, as far as “stuff” and… so they went after category after category in B2C. When it came to B2B there’re so many different SKUs, and a lot of these SKUs get processed. You buy a big roll of wire and you cut 100 feet off and you ship that out to a contractor who only wants to buy so many feet of pipe, or, you know, conduit if you’re an electrical wholesaler. But there’s a little bit of value added you do within your warehouse and you have one-stop shopping. Amazon is all about spot buying, I’m looking for one particular item that is pretty sensitive, so why do people go to BestBuy and showroom only certain items? Why do people go to Amazon to check prices on big volume price sensitive kind of things?
So, Amazon Business does not say, oh, you buy 500 different maintenance repair and operating items on a statistical annual basis. Let us create an integrated sole supply, somewhat automated relationship for you. I mean, smart distributors do that, but Amazon can’t, they just are selling a spot buy of an item. So they said, well, let’s let a zillion B2B resellers curate and load up seven trillion oddball goofball part items, you name it. So every B2B buyer will buy from two sources: they’ll buy the big volume stuff from some local distributor on a big contract basis, not worry about it, it’s on automatic pilot, but all the other goofy stuff I’m going Amazon. So really every B2B buyer now goes to Amazon to use them for long tail stuff, so Amazon controls the eyeballs, they’ve got the click stream, they monetize it with advertising.
But now, a B2B buyer might say, well, wait a minute, I need to buy a 50 gallon A. O. Smith water heater, because I’m a plumber and five or 10 times a year, I’ve got to put new water heaters into homes or something. I’m going to just go check back on Amazon. So he types in A. O. Smith, number one brand, he types in the SKU number, and of course, because they’re number one, and they have the biggest best distributors, they’ve got a plan and they don’t want to upset their distributors. But there is some clone. I mean, I’ve never heard of it before, it’s a new brand name I’m looking at, but it’s half the price, and it’s got five reviews.
And I’m thinking what the heck, I’m reading the reviews and I’m looking at frequently asked questions or whatever, and this is the manufacturer a lot of U.S. manufacturers have outsourced the manufacturing of their stuff. Think Apple with their iPhone, they don’t make those phones, Cisco the internet infrastructure company, they make none of their stuff. It’s all outsourced. So, it was very fashionable to take care of cheap labor in Asia and bring it back here. Now those Chinese manufacturers with the Amazon accelerator brand program can instantly take the number one selling SKU, come up with a creative clever brand. And then tomorrow make it visible every time you type in the number one brand and/or that SKU, boom that pops up right there with its reviews, all its information, could be info, video clips, whatever. So it’s very rich because Amazon is going to help you do all that. I mean, if you want to go to Amazon and look at how well they advertise the Amazon Echo speaker, for example, that’s the capability as far as digital management, stuff you can have.
Resellers are not going to do a good job on cyberspace of your B2B presentation, how you look, and there’s infinite shelf space. So the barriers to entry of “let’s land on the west coast and see if we get distributors to stock and push our stuff”, that just evaporated, it’s gone. So what does this mean? I think first of all brands will say, wait a minute, I need to sit down and I need to type in all my different things and see what’s popping up. And I’ve got to figure out how I’m going to use Amazon’s tools, pay their advertising, to make sure when people put my brand in there, boom, my brand is there, my story is well told. I’m going to have to figure out how to discipline my channel, my distributors, because I don’t want them to be upset and get in a food fight or reverse auction on selling items.
But then there’s a bigger economic problem, which is the entire channel from the factory through the distributors has got a markup mentality, a lens they look through that doesn’t see the net profitability. And that’s why if you go into a deep discounter like Aldi or Lidl or Trader Joe’s, I mean these are U.S. locations. I hope they have them in Canada too, or you go to a Walmart or whatever, and you look at their store brands, they’re perfect clones of the fastest moving, if you think of 31 flavors of ice cream, they knock off vanilla, maybe chocolate and strawberry and that’s it. They don’t knock off the long tail, because the cost of producing and distributing those for less and less volume is higher and higher per scoop, but they charge the same price per scoop. So they have this general democratic markup model.
And you say, well, you really have to charge 50 bucks for flavor number 31, because the batch production cost is so high per pound, the cost of getting through the channel, and what you don’t sell, well, then nobody would buy it and nobody buys it, frankly, at the subsidized price either. So the manufacturers have massively overshot on their full lines, and they’re only looking at markup, they’re not looking at the margin dollars in the pick or the line item versus the cost to serve dollars, that original profit equation I talked about. That’s why you go into a big fancy store and you look at all their big fancy high definition TV things and when you zero in on what you want. You scan the barcode, you can buy it for less from Amazon, you do, that’s called showrooming. But now you have two screens and you can do webrooming all day long.
So if I go to a distributor site, and I look at that, I’ll go check at Amazon the same thing, and see that I can buy the same brand for less, manufacturers need to discipline that and there are ways you can, or you see the clone. And the way to solve the clone is most these manufacturers are going to have to truncate their lines, they’re going to get rid of about 15, 18 flavors. And then they’re going to have to stop doing the cross subsidizing markup schedule, and then as far as the total customer experience, if I’m 24/7/365 on my little phone, I want to check on something. The manufacturers have to be there, they have to have great digital content, and then if I want to buy something right away, they can’t necessarily say oh, well, here’s a list of our distributors. Find one nearest you, and then you do, and they don’t have it. You call them and they don’t know what the hell you’re… It’s not a seamless experience.
Basically, if I say, ooh, this is really cool, it’s answered all my questions, which raises new questions, I want to chat with an expert 24/7/365 with the manufacturer staff on an internet medium, as opposed to go to your local distributor nine to five, Monday to Friday. And then if they actually want to buy something, it’s a part or whatever, as long as they’re willing to pay freight and pay a retail kind of price from the factory, then why wouldn’t the factory sell that direct? So they’re disintermediating the distributor as far as information, education, and even sample whatever. But they can re-intermediate and say, hey, distributor in your area, we just shipped this particular item to this guy, at this address, and this is all the stuff he looked at and whatever, you know, follow it up to get the repeat sale on a continuous replenishment kind of contract which distributors can do on Amazon.
Carman Pirie: Bruce, there’s just so much to unpack in what you just said, and this is exactly why we wanted to have you on the show, because you’re just a wealth of knowledge about this and you have a very compelling way of delivering the information. You’ve just painted a picture where B2B buyers are… I thought it was just a very powerful, simple statement that they will be buying from two different people. They will be buying that long tail from Amazon and that’s essentially prepping them for… it basically will make them ripe for the picking for that private label, second opportunity that comes up on the head.
Jeff White: That is going to be much more profitable for Amazon and the manufacturer.
Carman Pirie: Precisely and you’ve also painted I think, a very clear picture of how the lack of understanding of profitability at the SKU level, basically it could potentially drive manufacturers to basically the wrong answers to the questions that they’re asking about how to deal with this challenge. And then you prescribe a very aggressive digital transformation agenda, where you’re saying that manufacturers need to get really busy really fast, creating these direct online channels with their customers and understand how to re-integrate distributors into that model in a way that serves the future, not in the way that serves what we used to do in the past.
Bruce Merrifield: Right.
Jeff White: And I have to wonder, too, how many of those manufacturers are going to be interested if they’re able to create their own profitable distribution channels for that fat head? Especially, how many are going to be interested in continuing to work directly with distributors if they can do the same thing themselves better, with better content and all of that? How many are going to bother?
Bruce Merrifield: Well, that’s a bit of a stretch. There will be, for example, the first truckload of printing paper products sold actually by a distributor, went through Amazon business in April. And it got a little bit of a PR thing, and I posted it with a curated sort of preamble on LinkedIn. And how long is it going to take where, let’s say I’m a number 2, 3, 4 market share brand thing and I’m making a very freight sensitive product. Most of these manufacturers who make very freight sensitive stuff, think Styrofoam cups. I mean, you’re shipping whipped cream around, okay, so it’s very poor quality freight. You can’t ship very far before freight kills you, and the guy who’s got a styrofoam cup factory, it’s a lights-out kind of place, is going to beat you.
But these manufacturers still will, out of some plan up in the Fox River Valley in Wisconsin, they’ll ship stuff to the west coast and east coast over mountain chains on full truckloads. So you wonder, when some number three or four brand says, wait a minute, as far as the apples and the apple carts, I only got two, three, four, five percent share, why don’t I blow up the apple cart if I can get 10% share? Now the guy who’s got 80% of the apples, he doesn’t want to blow up the apple cart, right? I mean, Kodak invented digital cameras, but they said we can’t sell these digital cameras the way we really should because we won’t have any film, and that’s how we make all our money, and so they blew it.
So the marginal guy would then say I’m going to hop on Amazon Business. I’m basically going to have a build your own order, in other words, as long as you can order even cases or skids, and add up to a truckload, the price of the total order of the lines, more and more cases per line, the price starts to drop. More and more skids, the price starts to drop, and you get to a truckload, they give you a little game and how to play it. But it’s FOB the factory, so it only looks compelling to distributors or big end users who are within a 100, 200, 300 mile radius of the factory. So rather than having 50% regional share, and five percent share all over the country, why don’t you have 100% share regionally and get 10% total share of the market from five percent. It will happen because why not, when you have nothing to lose and everything upside, and Amazon’s got the eyeballs, that’s going to happen. Now what do you do if you’re a factory shipping straight truckloads of stuff?
So how these channels will un-weave and re-weave is very contextually dependent upon lots of variables. So there will… an Amazon business is not going to put distribution channels out of business, they exist because they bring in big quantities of stuff that are freight sensitive, they break it down, re-assort it, and ship it out—simple hub economics. That’s why all distribution things, hub airports, et cetera. exist. Now they’re not inflation-causing middleman whatever. However, what will happen in a world where you have radical product transparency, anything you want to know, videos, you name it, with reward points, Amazon has got to get on that one. The pricing, reverse auction, it’s all going to be there. And so, in that world, you’re going to have to as manufacturers say, hey, depending on parts of my line I’m going to have to disintermediate some of the things my distributors did, but then again with information I’m able to re-intermediate them.
So there still will be a need for local distribution again to go particularly out and craft sort of one stop shop and get everything you need to you at the consumption point, to and through your business, at the lowest total procurement cost. Amazon is a spot buy sort of business model, it’s not easy to say, all right, here are the 40, 50, 60 items that I use on a regular basis all year round, enter them all in, give me a contract, and then get them here, and fulfill your needs and some special stocking items and whatever. There’s just too much tear there. But it’s a paradigm change, I mean, it’s a little bit like the world running around thinking the earth is flat, and then somebody goes west and finds a whole new country, or to think that the earth is the center of the heavens as opposed to the third rock going around a mediocre star.
There’s a lot of people that have a vested interest in the old order of things, and so when you come up with these ideas, the entrenched management has been…their value is based on what they know the last 20, 30, 40 years. They’re going to make their most money in the next five years, they don’t want to upset the apple cart, they really just want to have you exterminated. So this is not… first, people will ignore what I’m saying, and then they get angry and want to kill me. And then finally, the next generation may sort of adopt it, but it’s a big… I look at people and say, well, what’s your B2B cloud e-commerce outlook? They have no idea what I’m talking about. And they think that’s somehow, it’s 10 years out in the future. They don’t get the exponential digital that’s going on.
Jeff White: The Kula Ring is proud to be a media sponsor of the 2019 ManufacturED Summit Conference, which is being held September 16th to 18th in Chicago, Illinois. Carman and I, will be live on site recording interviews for future episodes of the Kula Ring. You can save $200 now with the discount code kulapartners200 at manufacturedsummit.com. That’s manufacturedsummit.com.
Carman Pirie: I think what they don’t understand is that it already happened once very successfully on the B2C side, and those muscles have now been honed and because of that it’s going to happen faster on the B2B side.
Jeff White: Well, the products are much more expensive on the B2B side. The upside for Amazon is significant.
Bruce Merrifield: Well, if you look at sort of a generational phenomenon, if you look at the demographics of how rapidly millennials, digital natives, are moving into B2B buying positions, it’s going to be all millennials in the next two, three years, it’s going that fast. Amazon, the app is their number one… statistically their number one most used and popular app on their phone. Amazon has close to 100 million prime memberships in the U.S. of 126 million households, so basically they own the household to have 100% of the discretionary spending. So we have been taught to get a seamless, fantastic customer buying journey experience in our personal lives. Now we want that in our business lives, and Amazon is saying great, we’ll capture your eyeballs for all the long tail stuff, and then you’re going to start to come here and just check prices on the very big ticket items.
And you’re going to go, wait a minute, there are clones here I didn’t know about. And they look as good as the number one brand vanilla, but the price is a lot less. I’m going to give my distributor last look, and what is the distributor going to say? Also, distributors, if you think of these push channels, they star factory reps. Some channels are actually three levels of factory reps to master wholesalers who’ve got their reps talking to distributors. And their reps are going to talk to you and me on a time and territory basis because it used to be 100 years ago it was fashionable to have a guy come in, and take stock, and figure what you wanted. And he’d come up and say, hey, Mom and Pop, here’s what’s low and what you need. Okay, and I’ll place the order with my distribution company like a bread man or a Frito-Lays, as they still do it in direct store kind of stuff.
And the idea was if you make a lot of calls on a regular basis, then you… medium is the message, you can be relied on, you’re trustworthy, you come from my neighborhood, you’re from my tribe, whatever relationships that’s really important. Well, each one of these guys basically gets paid all in about five percent of their respective sales. Well, when you go to an Amazon channel, it’s all in the cloud, there are no people, there’s no paperwork kind of things. The costs are a lot less because they’ve disintermediated outside inside sales people. And millennial’s don’t want to see the sales people on a regular basis with doughnuts. They’re sort of multitasking, frantic, they want to 24/7/365 on their phone, they want to do purchasing at home, why not?
Now distributors will say, well, I have lots of customers who are very loyal. Yes, my 92 year old mother still gets three printed newspapers a day, my children have never bought newspapers. So great the newspapers still got customers but they’re dying, so the loyal, non-digital buying, I need psychological maintenance, be my friend, I got small orders, I’m dying. Great, you’ve got a moribund group of loyal customers who are going to start dying and disappearing very rapidly. The new millennial’s are coming along, so how are you going to downsize your sales force, but upgrade the quality—because we need people who can answer next-level questions, not the primary questions that can be taken care of with digital education just in time online. And then I have to ask these customers, how do you want me to interact? Well, you only have to come out here when I ask you to come out here otherwise, what’s your phone number? I want to text you 24/7, can you set up a little virtual meeting?
Like we’re doing right now, you’re in Halifax, I’m in Aspen, Colorado. who needs to travel? It’s too expensive, right? So these channels have got a huge sales force reinvention, E-selling challenge, in addition to just the ongoing cross subsidization that’s built into their robust lines with their standard markups.
Carman Pirie: You paint a very interesting picture of this manufacturer-distributor relationship and how it has to shift. I’d like to just… I wonder, even if, for the purposes of illustration, do you know of any manufacturers on the B2B side that seemed to have really been, at least in some of their initial steps are tackling this appropriately or well, in terms of how they integrate with distributors at this level? And if not, can you maybe paint a picture of how they maybe think about it?
Bruce Merrifield: I think one sort of curious thing to look at is the tire channel. Now this is sort of a B2C phenomenon, but if you look at the different categories of products that Amazon sells, they do very well obviously with books, but they don’t do well with tires historically, or batteries, because they’re very big and bulky from a freight point of view. And then you ship me four tires to my house, what am I going to do with them? So they are very clever, they said, why don’t we come up with a workaround? Why don’t we go to national tire and battery people, so if Sears was first, then Monroe here in the States, and then Pep Boys, and they’ve added some more people, partners. Now when you go and you type in on Amazon “passenger tires”, you’re going to get over 4,000 hits. If you click on Prime first, you still got over 3,000 hits.
So now it’s a food fight as far as advertising to see whose tires are at the top when you start to put it all little attributes you want, get the model of the car, you want snow tires, they’re all sorts of things. And they allow you to search and zero right in, and then there’s a little button saying you can ship these to the tire installer of your choice. So when you go to check out, you put in your location, or they know your location and they show you the closest people to your house. And you can say oh, Pep Boys or whatever, and you can see the price they charge to install the tires, which is a discount they give Prime members a discount to install the tires at Pep Boys, or Monroe or Sears. And so you booked the time and you drive your car and you meet your tires there. Well, when that happens, what does that do to the independent tire and batteries installer guy?
I mean, you go to any town, and there are two or three of these people have one, two, three, four locations, and they’re buying tires from their tire wholesalers. And so the big brands are selling to the wholesalers who sell to these mom and pop or these regional chains or whatever. They’re not in the national deal with Amazon, so the two pairs of the four biggest brands merged together to create a master distribution thing. One is called Tire Hub, and that’s Bridgestone and Goodyear or something. And the first thing they did was they went to a huge roll up, I forget the name of it off the top of my head, but it was a private equity, had rolled something like a two billion dollar national tire distribution chain with two billion dollars of the debt, and they said we are no longer going to sell you. We’re going to cut you off. And we’re basically going to really work with the independent tire dealers because they like to promote our brands, and then the other tire wholesalers.
So to make a long story short, the whole channel has changed because Amazon controls the eyeballs, and they came up with this clever workaround. So you’re going to see those kinds of shifts. Now that said, I mean on a… the manufacturers that probably will be most aggressive on Amazon would be first of all the Chinese manufacturers that can now evaporate some of the various…having your own brand and being right there in digital real time dynamically, type in some generic category thing, boom, there’s the new brand. They’re going to be most aggressive, then the established manufacturers who are third, fourth place, they blow up the apple cart, I’m going to get more apples than I had before. And they’re going to start to be more aggressive as far as how they disintermediate because they don’t have any distributors to sell their stuff anyway.
And then that’s going to force number one and two to say, wait a minute, I have to be where the eyeballs are, and I’ve got to control the digital content, the info videos, et cetera. And then I have to follow that buying journey, all the… and basically orchestrate, make sure that’s taken care of. How I disintermediate some of what my distributors do, but not all of it, and how I re-intermediate them, that remains to be seen. But then we still have this 100 year old infrastructure cost business model channel starring outside and inside sales people who are going to be where they need a lot less of them, and they’re going to need to have different information, if you will, second level questions and issues or whatever. And then the cross subsidy of our products, as far as our markup structure, they’ve got to overhaul that too.
And to un-weave something like that and re-weave it, that’s going to be a big challenge. There’s going to be the quick, there’s going to be the dead. You already see it in retailers in the U.S. basically Walmart, Target, Home Depot, they’ve stepped up. They’re spending billions and billions of dollars to say, where are the eyeballs, what’s the channel experience going back, the buying journey? What new warehouses do I have to have, what new capabilities? They’re working their tail feathers off doing that, and there are other people just sort of sitting there trying to meet quarterly numbers, and they’re fading. And the bigger opportunity may not be, are we fighting… Sure we want to blunt Amazon Business’s inroads or cloned products. But the truth of the matter is if we can get our digital transformation strategy faster and better than the old competitors, we’re going to make a bigger killing there than what we lose from new digital disruptors, startups or clones.
So in many cases, the bigger fight will be between who does a better, faster digital transformation as far as you and I—the end user —is concerned, versus the legacy competitors that don’t get it, and don’t want to change.
Carman Pirie: And the picture that’s painted here is of not only the requirement to dramatically rethink the sales organization sales function, but the distributor function at the same time. And basically, for manufacturers to get into the business of understanding how to directly interact with customers, at least for a part of it is… Bruce, I think you’ve… if nothing else, you should have served to scare most of our listeners today. But I think, more hopefully, give them a lot of information to really help inform how to think about the way forward. And key to this disintermediating and re-intermediating the distribution channel, and understanding the changes that need to happen in terms of the sales function, the key to that is understanding the profitability at that SKU or per customer level.
So I hope I’ve done a decent job there, Bruce in kind of connecting some of these dots.
Bruce Merrifield: All I would say is from a distributor’s point of view, you want to go out your biggest, most net profitable customers, and say, look, talk to the millennial’s. Don’t talk to the old boys, they’ll just say everything’s fine. You talk to the millennial’s and say, going forward let’s imagine how we could interact, and what’s causing you pain. I mean, every digital disruptor, all they’re really doing is going to the end user and saying, hey, what slows you down, pisses you off, whatever? Well, there now are off-the-shelf digital tools in the Cloud that we can use to take away those pain things which used to be accepted because with human beings and paper and trade credit, whatever, the 100 year old model, that’s just the way the world works. We can’t take away that pain or speed things up, but with digital you can.
Once they own the eyeballs, so Edmunds for cars, or Zillow for houses or Airbnb for rentals, or Expedia for wherever you want to travel, once they own the eyeballs, they turn around, and they make the suppliers pay, with advertising or whatever, or kickbacks. Amazon uniquely has said we’re going to go, we’re going to build infrastructure, physical logistical infrastructure, all the way back to the producers in Asia to create a full customer value channel, not a product push wholesale channel. And we don’t want to go after every item, only what fits through our infrastructure. But we’ll continue to add bulk storage and partners to it as long as we control the eyeballs, we’ll continue to build out our new infrastructure, which is totally 100% customer centric as opposed to when you talk to the factories, they say, oh, our shareholders won’t like that, oh, our brass who have magic acts because of what they know in the last four years they’re not going to like that.
Oh, distributor, they’re not going to like… Oh, the salesforce, they’re not going to like that. It’s not about being salesforce centric, the number one driving force is you’ve got to be end customer centric, and follow that all the way back and un-weave and re-weave these channels. And they’ll still as I said, be a place, like their retail is not getting wiped out. But there’s going to be a new dynamic equilibrium that’s reached between these two competing customer value channels from you and me, and our screens and doorsteps to push backwards to the people who have traditionally pushed stuff out.
Carman Pirie: Bruce, I just think that’s a great place to end today’s episode is that really strong highlight on the fact that really, in some ways the mind shift that needs to happen here is one to shift from an organizational centric perspective, to frankly, just a more human centered approach.
Jeff White: In the end, it’s the people that matter.
Carman Pirie: Because that’s what’s driving it, and even though every marketer, and every frankly, C suite executive will love to talk about being customer focused, but what I think you’ve just illustrated in just a couple of quick seconds is how sometimes that talk doesn’t actually meet the action, when the rubber meets the road that doesn’t actually translate. And so I think that mind shift in and of itself needs to happen in order to power all the other change that needs to take place in order to survive this disruption that’s ahead.
Bruce Merrifield: Well, and just an interesting anecdote, for years Jeff Bezos at every meeting had an empty chair with “customer” on it. He said they have the loudest voice in the room, and when they would go after different categories of B2C products they would hire people in the industry, and these people would say oh, no, you can’t do that. Jeff said fire them, fire them! I’m sorry they’re so contaminated, their whole worldview has been baked into the 100 year old ancient push the product out to the market point of view. We got to get people to say, we know we’re going to break this down, we’re going to go the other way. And it’s hard to… it’s a huge-C change.
Carman Pirie: Absolutely. Thank you so much for sharing your insights today. It’s been great to chat with you and I wish you all the best. I hope to reconnect with you again soon. I think there’s lots more for us to talk about and maybe even feature you on another episode of the Kula Ring soon.
Bruce Merrifield: Okay, well and speaking of connecting, if any of your listeners want to go on LinkedIn, My full name is D as in Dudley, D. Bruce Merrifield, Jr. Just find me, and connect with me, and then follow my posts and my articles because I’m sending stuff out on a regular basis about what we talked today.
Carman Pirie: And we’ll be sure to link that up in the show when we go live and our listeners will be able to click and find you for sure. Thanks so much, Bruce.
Bruce Merrifield: Great.
Carman Pirie: All the best.
Jeff White: Thank you. Bye bye.
Bruce Merrifield: Okay. All right. Bye Bye.
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