Distributors On The Defensive

In the wake of declining margins, increased government regulation and rapid industry consolidation, some distributors are facing an uncertain future. Will the small to medium sized distributors currently serving the pest control industry suffer a knockout blow in the coming decade or will they get off the canvas and reassert their position in the marketplace? Only time will tell.

 

Recent acquisitions by Van Waters & Rogers (VW&R), San Jose, Calif., have put that company in the position of being pest control’s first truly national distributor. Bevan Cates, senior vice president of VW&R’s parent company, Univar Corp. says that these mergers were made for solid business reasons, such as VW&R’s decision to create a country-wide distribution network, and that the majority of industry consolidations are the result of the current regulatory and insurance climate. This, he says, demands the largest possible umbrella against the downpour of nuisance suits and government regulation being imposed on distributors. But others are not so sure. They point out that the VW&R buyouts were primarily engendered by short-sighted business practices, notably price cutting and too-low margins, that plague the industry.

Some industry consolidation can indeed be attributed to today’s regulatory and insurance climate, say many distributors. Industry veteran Bob Pouria, vice-president of P.C.O. Supply, Staten Island, N.Y., notes, "It does help to have a bigger organization with a bigger umbrella." But all businesses, he says, face this challenge, and face it in proportion to their size. "You are damned if you do and damned if you don’t. We try to be as careful as we can, but even in larger firms tat are on top of it all, accidents can happen. And it’s all relative; the larger companies just get sued for more."

Roland Rhodes, president of Rhodes Chemical Co., Kansas City, Kn., agrees that regulation and insurance pressures are prompting consolidation at all levels of the industry, including manufacturing. It costs upwards of $30 million to develop and market a new insecticide for the structural pest control industry, and billions of dollars to compete internationally, he notes, "and that’s why we see the consolidation in manufacturing," he says.

A controversial issue. But these are not the only reasons for the trend to consolidation, Rhodes notes. He, along with the majority of distributors contacted by PCT, view these acquisitions as unwise ones that reflect a basic problem in current pest control industry distribution: price cutting. Many distributors believe that the two companies VW&R acquired, Southern Mill Creek Products and the pest control arm of Harcros Chemicals Inc., were not particularly bargains, s they were unprofitable ventures.

One western distributor, for instance, points out that VW&R’s acquisitions were both "corporate divisions, not independents," who were notorious price-cutters. "But they learned it doesn’t matter how large you are - you have to make a profit."

Bill Kenney, vice-president of Pest Control Supplies, Kansas City, Mo., agrees: "VW&R bought some of the biggest distributors in the industry. Certain distributors were not making money because of their pricing and were bought out. You can say all you want to about insurance and regulatory, but if you aren’t making any money, you will not survive."

Maintaining margins. Maintaining margins is an ongoing problem in the pest control distribution business. One midwestern distributor called his biggest problem being nickeled and dimed by his customers, but later added that distributors have only themselves to blame. Too often, he says, distributors allow their customers to "dictate" the price of their products.

When chlordane, a commodity item, was taken off the market by Velsicol Chemical corp. several years ago, he explains, distributors should have asked for the manufacturer’s recommended prices on the brand-name replacements instead of dropping their margins to match those of the commodity. "It was absolutely ridiculous," he notes. "But I’ve almost done it myself, just to stay in the marketplace."

One of the biggest problems, he adds, is that the PCOs themselves are not charging enough for their services. But when they look at cutting the cost of doing business, they don’t look at gas or insurance, they look at chemicals, which are only a small portion of their overhead, from five to seven percent.

Getting back to a valid price structure, says Al Gregart, manager of Bio-Serv Corp., Troy, Mich., depends on the distributor. "There are manufacturer programs in place that will allow us to do that, if we don’t continue cutting each other’s throats."

Head-to-head competition. With the pricing issue still up in the air, perhaps a more important question is: What does the creation of a national distributorship mean for the pest control industry? Varying things, according to the regionals. Says a southern distributor, "The consolidation of a national distributor will be rough on us littler guys. When they get through, they’ll be able to dictate policy and dictate prices and dictate how the programs will run. They will be the leaders, and we will have to bow to whatever they do."

Also hesitant is Tom Evans, vice-president of Southern Mill Creek Products of Cleveland, Ohio. He is apprehensive about consolidation, he says, because it gives the bigger companies market strength, resulting in market erosion. "Although the industry may thrive and be better served, it will be at higher prices, because competition is severely limited. So the horse both drives the market and feeds at its trough."

Rhodes is just as vehement, but sees consolidation as driving prices further down rather than up: Nationwide distribution will destroy the profitability of the market, he believes: "It will create pricing competition rather than marketing competition. Market stewardship - offering full-service, support, training, credit and so on - can’t be done when price is such a factor."

The history of the industry, he explains, is for is distributors to have established geographic territories. But following the recession of the early ‘80s, these territories began to expand and overlap, and thus distributors began to compete. This was aided by the widespread use of the 800 number, of WATS line, which enabled PCOs to "Call from all over the U.S. with a grocery list," says Rhodes, further increasing competition among distributors.

Service is the key. All the regionals agree that, in the face of national competition, service is the key to holding on to their business. As a result of consolidation, Evans says, fewer distributors will be doing business at more locations, putting some areas under increasingly intense market pressure. So the distributor will have to maintain his flexibility and his ability to react.

"Our strength is being there one-on-one, being able to respond and move more rapidly," he says, adding that Southern Mill creek Products of Ohio recently strengthened its market position by offering enhanced service and training capabilities, with a greater physical presence in the marketplace. The company recently began offering on-site training in a classroom setting, a move becoming increasingly popular with other distributors. "(We’re) passing our knowledge to our customers<" Evans says, "both the technical and business aspects, with our vendors helping us."

Other regional distributors apparently agree with this philosophy and are investing in a variety of distributor services including technical and management training, association support and consumer education programs.

But, says Rhodes, manufacturers are also consolidating, perhaps making the merchandising of service an outmoded concept. A few manufacturers control 90-95 percent of he market, he says, and "they don’t really need distributors if they have a sales force and if the distributors continue to degrade themselves by marketing price and abandoning service. What’s left for the distributor, if the current trend continues, will be cash-and-carry warehousing, with services provided by the manufacturer. But this is all blue-sky, crystal ball gazing. No one knows the answers about consolidation."

But there are plenty of guesses. According to a western distributor, all the mergers at the supplier level, and the resulting infighting between basic manufacturers, have left distributors with a lot of questions about who’s supplying what and the different programs involved. This has helped to create more of the old devil, price competition, and eroded the strength of regional distributors.

Kenney explains: It all starts when manufacturers increase the yearly distributor minimum (of product purchases). To counter this some distributors sell surplus products to distributors in other market areas. "But by dumping product in another area, usually at cost, the distributor is doing nothing but hurting himself in the long run," he says. "The key manufacturers are now limiting areas where their products may be sold by each distributor."

With so-called "Load-up" programs, says Rhodes, it may soon come to the distributors picking and choosing the suppliers they want to represent - an interesting twist on the traditional distributor/manufacturer relationship. If distributors are forced to commit to quotas, he says, "something will have to give. The pie is only so big, so if they can’t increase their sales, they will have to pick and choose whom to sell. So fewer and fewer suppliers will be full line, and fewer will be full service."

A flat market. Such intense competition is the result of a market that some view as stagnant at the distributor level. Others go even farther. "I see our entire market as shrinking," says Gregart. First, he notes, it is a small industry to state with, a $178 million dollar market. Next, he says, the large pest control companies that buy products directly from the manufacturer are making acquisitions "all the time," decreasing the independent distributor’s customer base. And then, he says, "you consider VW&R, who will be a national threat, even though they aren’t bothering me directly right now. You take all these prices out and it doesn’t leave a lot of market."

Regulation has also decreased some of the business that the industry has to vie for, at every level, adds Evans. "We used to sell termite prevention, just like flu sots, but due to regulatory and consumer pressures we backed away from that."

But, he notes, that regulatory atmosphere can create new distributor opportunities, "We will learn to aggressively use them to encourage and further improve our work-force and create higher awareness in them."

One distributor contacted by Pest Control Technology points out that some regulations have already had a favorable impact on distributors. For instance, PCOs are beginning to request more warehousing services from distributors to reduce their own on-site responsibilities, another by-product of increased regulation.

Add-on sales offer another possible opportunity for industry growth. "Look at the PRISMs (S.C. Johnson’s commercial cleaning/pest control operation) and people like that," says Pouria. "They get their foot in the door and expand into cleaning services and other allied services. Other big markets now in the Northeast are radon testing and asbestos removal."

Industry growth is essential, agrees Gregart. "If you don’t grow, you die." He is looking to other areas he hasn’t yet tapped outside the pest control industry (farmers, cattlemen, nurserymen, etc.) "I’m sitting here with (prospect) lists and I’m quite serious about it," he says.

Evans believes that one big problem preventing distributors from growing is the lack of growth on the part of their customers, PCOs who too often depend on outmoded merchandising strategies. "We rely on our customers, and they rely on the Yellow Pages and word-of-mouth," he says. "So our growth has to come from our competitors rather than from our customers. Therefore, the same pie is being cut into smaller pieces."

Allied to this factor is the decline in the overall number of PCOs., putting the squeeze on distributors in the form of fewer customers. Right now, for instance, points out a southern distributor, three particular pest control companies account for the bulk of the termiticide business. And as PCOs keep getting bought out, the PCO market and thus the distributor market, is getting smaller.

Power to the customer. One major result of the consolidation of PCO companies is the increased market power it gives them. A southern distributor notes that the largest distributors serving the industry, is going after the PCO companies, will have to close up their margins to attract this much-coveted business. But that jut ties back into the same old problem, he says - you can’t stay alive on low profits.

"I think there’ll be some real problems with the three largest national PCOs scoring over a quarter of all product use," says Rhodes. The bigger PCOs could use their power to pit one distributor against another, a problem he see occurring already, especially in the warmer climates with longer seasons. And the long range result of that, he says, harking back to topic as popular with distributors as low margins, will be loss of services. Because of this, he goes on, "the basic manufacturers may have to go to more direct sales."

According to rumor, at last year’s National Pest Control Association convention, the emerging giant WMI/Urban Services approached some suppliers to arrange for direct sales to its various branches, but the suppliers did not want to become involved with so many accounts. At the same time, it is said, WMI doesn’t want to get involved in distribution.

Dave Quarterson, vice-president and regional manager for WMI, confirms that the pest control company has no plans to become "a classic distributor which fields salespeople and sells to other PCOs." But it will, he says, buy some product direct that it uses in large supply. "We probably buy more than most distributors do now."

However, Quarterson adds, it would be wrong to think WMI plans to do without distributors. "We expect to by at least half of our supplies through distributors," he notes, "the products we buy in low volume that it doesn’t make sense to buy direct."

Other distributors are fearful that this plan may change. "Just wait until Waste Management grows into a distributorship," Pouria says. "It’s the only way they can grow. And every manufacturer will give them their distribution. Look at Orkin and Dettlebach. When you get to that size, it really doesn’t hurt you to compete with our customers."

Conclusion. Right now, no one knows what lies down the road. The overall direction taken by regional pest control distributors may just depend on the steps each one takes individually to compete with the national forces at play. There is no map available for this new territory they will need to conquer, and the compass needle is still in motion.

___ Cindy Grahl

The author is managing editor of Pest Control Technology magazine.