Is a catalog the right investment for your company?

Are you suffering from catalog envy? Many distributors pour marketing dollars into catalog development, hoping to look more like Grainger and McMaster-Car. For some companies, however, it might not be a wise investment.

by Chuck Moyer

Since the 1970s, the catalog sector has been one of the fastest growing segments in distribution, growing much faster than the market overall. As a result, catalog companies have taken at least a little bit out of just about every distributor’s hide. The result is that many distributors have developed “catalog envy” and either adopted or would like to adopt a catalog as part of their growth strategy. For most distributors, this may not be the best way to invest scarce resources.

To understand why, it’s important to know the role of distributors and distributor catalogs in the supply chain and how they are likely to evolve.

MRO or indirect purchases through distributors easily exceed $300 billion a year, with an equal amount of direct or OEM business going through distributors that focus on the manufacturing sector. About 85 percent of this business is transacted with more than 100,000 local and regional independent distributors, with about 15 percent of the business going to the top 250 distributors.

Less than 5 percent goes to the players we think of as catalog distributors, W.W. Grainger, McMaster-Carr, MSC Industrial Direct, Newark Electronics, etc. Catalog distributors seem larger than they are because their catalogs represent an amazing amount of advertising or brand building. These players are universally visible and — because they’ve taken a little out of every distributor’s hide — most distributors are sensitive to them.

What many people don’t realize is that the vast majority of purchases have already been sourced. In other words, in most cases, what buyers are going to buy and who they’ll buy it from has already been decided, at least down to a short list of suppliers on a bid list. This is true of most stores or crib purchases, direct material purchases and even the majority of spot buys.

Once the source is determined, it is difficult to make a change. The most compelling evidence of this is that despite considerable pressure, distribution has not consolidated to any appreciable degree. There are no $20 billion-plus distributors in our sector. Even major buyers adopting e-procurement have run into formidable barriers when they have attempted to switch large numbers of purchases away from local suppliers.

It’s the fringe business — a subset of spot buys — where catalogs bring a real advantage. But this represents less than 10 percent of the total market.

There are two general types of catalogs: master catalogs, or “big books,” and direct-mail catalogs. A catalog can cover a wide variety of products, like McMaster-Carr, or specialize, like Newark Electronics or Lab Safety Supply. The function of a master catalog is to scoop up demand once a customer knows what he or she wants or what problem needs to be solved. These catalogs make up the majority of industrial catalog sales.

Smaller direct-mail catalogs create demand and function very much like the end-cap displays you see in retail. These catalogs are great for introducing unique new products or getting a customer to try a new supplier. As a rule, the most successful industrial catalogers offer a broad, deep selection of products from stock with fast delivery. For example, MSC Industrial Direct provides better than a 99 percent fill rate on more than half-a-million items across 60 commodity areas, with standard next-day delivery to more than 80 percent of the United States.

To be a successful cataloger requires the distribution, logistics and customer service infrastructure and inventory to compete as well as a catalog company. If you look carefully, you’ll see that the operating costs of most catalog distributors are 25 percent of sales or more. This represents a tremendous investment for a new entrant.

Conclusion: The decision to launch a catalog is a decision to make a major investment to compete for the smallest and most hotly contested ground in the industrial distribution arena. This is not a segment where a small distributor with limited means will likely succeed.

What you should do now
You might ask, “OK, if not catalogs, then how do I grow my business?” Instead of looking with envy at the growth of catalog houses, look instead at what’s special about your company.

In a nutshell, focus on what you do best. Determine the things your company does best that provide real demonstrable value to your customers, accentuate it and build on it. You can almost always grow sales while reducing expenses because most companies fall in love with activities that the customer doesn’t value.

• Listen to customer calls. Which calls go smoothly? Which don’t quite fit? Where are customers trying to give you business and where are you dropping the ball? Is this an opportunity or a waste of resources?

• Spend time with your best customers (the ones that generate the most profit dollars). Why are they your best customers? What do they value from you? What keeps them from going to your competition? What problem do you solve better than the other guys?

• What customers are the least profitable? Why?

• Do your best customers fit a pattern? Are they all large, heavy manufacturers? Hospitals? Apartment buildings? Who values what you do best and why? What problems are you solving? Are there more companies like this that could be customers? Where are they?

• Put into a brief statement the value proposition you provide your most profitable customers. Does it sing? Deep down inside, do you believe it provides real value? Run it by your customers. Have you captured the essence? If so, talk to prospective customers you suspect have the same needs. Does it pique their interest?

• Who else does the same thing? Are you better? Why or why not?

• Is this thing or group of things you do best likely to continue to provide value as the supply chain evolves? (E-commerce isn’t going away.)

You have the makings of a strategy if:

• The thing you do to provide value to your most profitable customers is transferable to a sufficiently large population of similar customers.

• There aren’t huge competitive barriers.

• You honestly feel you can continue to provide genuine value as the supply chain evolves.

What remains is to slowly change your business to execute the strategy. To do this, take a careful financial look at your business. What services provide the least value but have the greatest cost? Begin to slowly phase these out while investing in expanding your strategy.

If you choose the right course and keep focused, your business will run more smoothly, grow more quickly and be much more profitable.

Chuck Moyer has more than 20 years experience growing industrial distribution companies and is one of a small number of executives intimate both with the industrial supply chain and e-commerce. In the last 10 years, teams Chuck has either led or helped lead have grown an average of more than $100 million in profitable sales a year. Currently a freelance strategy consultant, he can be reached via e-mail at .

This article originally appeared in the May/June 2001 issue of Progressive Distributor magazine. Copyright 2001.

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