Distribution Divides: State of the Irrigation Industry

Some irrigation distributors are realigning their company focus and modifying business practices to cater to the evolving industry.

The irrigation distribution channel is narrowing, leaving a tighter margin for wholesale distributors in the market. While all industry segments – manufacturers, distributors and contractors – drive the flow of the supply chain, a burgeoning pressure for efficiency, price adjustments, economies of scale and value-added services leaves companies the choice to change with the tide or get swept away in the consolidation current.

Ironically, growth is condensing irrigation distribution, with national and regional wholesale conglomerates acquiring local distributorships and small operations realigning their service focus to preserve their industry presence. Distributors are in a position to change and grow or stagnate and sell.

Not one sector of the distribution network is immune from the changes a maturing industry initiates, and no single player in the spectrum will thrive without a strategy to adapt to industry developments. "There have been pretty radical changes and they are actually happening in a very compressed time frame," stressed Rick Fields, director of sales and marketing, Wilkins – a division of Zurn Industries, Paso Robles, Calif.

Irrigation Industry
   Structural Changes

    Structural changes in the irrigation industry prompt issues distributors must address to maintain a competitive and successful position in the supply chain. According to a 1998 study conducted by the Farnsworth Group for Weathermatic, Dallas, Texas, all members of the distribution channel – manufacturers, distributors and contractors – must reassess their company views and the markets they serve. Distributors should:

    • Determine what they want to be – smaller niche players or large, full-service volume players.
    • Identify changes in operating and expense structures to create a new "profit formula" for the company.
    • Identify specific target segments and focus on meeting the segments' needs.
    • Choose channel partners whose goals and programs best match their strategic direction in the industry.

PUSHING THE CURRENT. The time is right for distributors considering growth. A healthy economy and maturing industry combined with increasing customer demand for landscape services is driving change and spearheading consolidation efforts in the irrigation distribution chain.

"A lot of money is available now," noted Rex Dixon, vice president of marketing, Weathermatic, Dallas, Texas. "Many of the distributors are opportunistic and taking advantage of the fact that there is capital available, they are looking for new markets and they are seeing the irrigation market. You put that all together and you get consolidation."

Similar to electrical and plumbing trades, the irrigation industry is aging and following the natural progression of a "maturing industry," noted Dirk Lenie, marketing manager, Irrigation Division, The Toro Co., Riverside Calif. Merging distributors results in increased economy of scale, which can disperse administrative costs and skim business expenses to buffer a company’s bottom line, he explained.

"Contractors and distributors are looking for more means of income," Lenie explained. "If you can leverage more sales over the same asset schedule, you’ll be more profitable. Take cost out of the chain, which benefits everyone, and there is more pressure on margins coming down because of more competition based on price."

Consolidation benefits distributors pass on to contractors include a wider availability of tools, common administration, networking advantages and access to multiple markets. Also, manufacturers who work with larger distributors might offer incentives for high-volume purchases. For manufacturers and contractors alike, the benefit of a changing industry is the multitude of options.

"Customers ultimately have more choices – choices in price and value, and the product offering that is available to them," observed Brodie Bruner, vice president of sales, Weathermatic. "For distribution, now more than ever, distributors have to decide who they are. They have to understand their business model."

Distribution business owners and industry veterans with irrigation experience and financial and technological assets to propel their companies to a more profitable level are positioning themselves to climb the business ladder, Fields added.

"They are at the apex of their careers, and they have a tremendous amount of business knowledge behind them," he explained. "Because there’s a good availability of capital, the people that are visionaries can drive this growth agenda. The money is there and they have the business background to succeed."

Jeff Carowitz, vice president of marketing, Hunter Industries, San Marcos, Calif., suggested that a desire to exit the industry is sparking many consolidation efforts. He painted a picture of three seasoned irrigation executives, where two of them are ready to retire and the third is ready to grow. Here, consolidation represents a type of retirement plan.

In addition, business operation costs have increased and companies must consider profit-earning options to soak up added expenses, noted Mark Agnew, CEO, United Green Mark, Novato, Calif. "The size of the investment has gone up in terms of breadth and depth and the customers’ expectations of sell rates," he said. "We’re on the front of more ‘B to B’ business being done in some way, shape or form aided by computers, and the cost of that is going to be more difficult to absorb for smaller wholesalers."

And for wholesalers to remain competitive, they must strive to meet a growing customer and contractor demand for one-stop shopping – the need to find parts, service, and information from a single source. More distributors are offering value-added services by targeting a larger market through expansion, or focusing on a tighter market by firming relationships with local contractors.

CRUNCHING THE MARKET. Gradually, consolidation is restructuring irrigation distribution, and wholesalers who will survive industry acquisitions are those who view changes as opportunities instead of setbacks, Carowitz noted. Large companies that highlight efficiency and small companies that niche-market and build personal relationships with their contractors will flourish.

"The loser is the company that doesn’t change, becomes complacent and takes the customer for granted," Carowitz described. "There’s a niche for the ones that redefine their business and decide to really focus on relationships with their customers. But they can’t simply sit back and say, ‘I’m going to sit here and do nothing, and I’m going to expect things to happen the way they did before.’ Change is there and we all have to adjust."

Some distributors adapt by packing more than products in their warehouses. Like customers, contractors also place high priority on convenience and value ancillary products distributors offer, such as hardware, water features or lighting components. Outstanding customer attention and supplemental services, including seminars, design training and troubleshooting techniques, are ingredients for a competitive distributor, remarked Brian Day, marketing manager, Century Rain Aid, Madison Heights, Mich.

"There are many things that a contractor needs to do to be successful," he commented. "Distributors can provide those functions to relieve that burden from the contractor so he can do what he gets paid to do, which is to sell and install irrigation systems. What we need to do is provide them with a myriad of different services and capabilities to help them be more successful at their jobs."

Large companies in a position to acquire small wholesalers concentrate on the advantages of being more than a one-man operation, which includes the support of several regional offices in a business where environmental conditions determine profitability and national chains boast a geographic edge, Day noted.

"Geographic diversification helps in terms of finding ways to literally weather the storm," he said. "Businesses in the green industry are driven by positive economic factors combined with positive weather.

"If you’re selling top-end furniture and you have a great economy, rain doesn’t matter because people still want a new couch," he related. "With rain, people will buy a Jacuzzi and get the sprinkler system next year."

Large distributors who have clout with manufacturers also can serve as a sounding board for contractors’ ideas, concerns and input on products, Day added. "We can help provide the contractor with a voice going back to manufacturers. We can forward problems we hear about and see from our contractors and communicate product suggestions. We provide an information loop back to manufacturers from the contractor."

In the meantime, smaller companies must fine tune relationships with their client base to solidify their position within the distribution channel, Agnew advised. United Green Mark encompasses a five-state region and Agnew has been involved in 15 recent acquisitions, all of which produced successful operations and did not "squeeze out" small wholesalers. He said his company competes with smaller distributors who will continue to be strong market players as long as they maintain proactive business practices.

"The industry now is sort of like the Westward Expansion when land was available from the Homestead Act," Fields compared. "It was a frenzy and people moved west to stake out a piece. We’re seeing the same in consolidation, with West Coast companies moving east and Midwest companies moving west.

"The little guy has to expand his service and parts capability, and has a better chance of surviving because they are also a target for acquisitions, because smaller companies can be very nimble and move fast to meet the changing needs of their customers," he continued. "The middle guy has the opportunity to diversify – to provide more products and expand selling opportunity to get into nearby market niches."

And the middle guy should move quickly. A 1998 study conducted by The Farnsworth Group, Indianapolis, Ind., for Weather-matic suggested that mid-size players will be caught in the "economic and operational middle," with lower wholesale volume levels than niche- and full-line volume players. The report advised irrigation distributors to set a target market, structure a "profit formula," focus on meeting market needs and form partnerships in the industry channel with manufacturers and contractors with similar strategic goals.

The Impact Of
   Distributor Consolidation

    The 1998 Farnsworth Group study conducted for Weathermatic, Dallas, Texas, on competitive changes affecting the irrigation industry predicted:

    • The distributor segment of the irrigation industry will experience the greatest degree of "dislocation" of any industry segment.
    • The erosion of market share and accelerating price pressures will mandate most distributors to specialize or consolidate.
    • The large regional and national players and retail marketing trends will have a significant impact on industry change.

MAKING MASS IMPACT. Irrigation distribution is not a two-tiered division of small and large wholesalers. Though the spectrum of company size and focus shows extremes, another player threatens some distributors. Mass merchandisers – home centers like Home Depot and Lowe’s – are also seeking growth, and their strategy targets professional irrigation contractors, Bruner explained.

"The greatest impact that the mass merchandisers have had is the awareness that they have created in the consumer market – awareness for irrigation in general," he noted. "The awareness of irrigation systems is a positive thing. However, the awareness is not purely for irrigation, but also of pricing associated with the products and brands that are sold through these mass merchandisers."

Price-shopping customers question contractors who cannot match retail prices, however, which are generally 30 to 50 percent less than list prices. Ninety percent of contractors mark up their products to cover labor charges, which leaves customers weary of the discrepancy when shopping the irrigation aisle at a home center, Bruner explained.

"Contractors are afraid people will say, ‘You are not a doctor or a lawyer, you are a sprinkler repair guy,’" he said, describing why contractors pad product prices. "They are using the inflated profit cost to remove the objection that might be created by a true labor cost."

Contractors must sell expertise to compete with home centers.

Besides price constriction, distributors feel claustrophobic in a market with home centers because mass merchandisers offer extended hours, credit lines and free overnight direct delivery – all perks to attract professionals, Dixon added. "Mass merchandisers’ growth depends on reaching out beyond the do-it-yourself market. They have a focus to compete directly with wholesale distributors today, and to reach out to the contractor."

Mass merchandisers are achieving their goal in some respects, with some industry professionals predicting increased sales in coming years. The Farnsworth study calculates a 20 percent growth in the residential do-it-yourself market in the next few years compared to a 4 percent increase in the traditional irrigation distribution market. This figure results in a distribution chain composed of 30 percent do-it-yourself and 70 percent combined residential, commercial, municipal and golf installations, leaving a shrinking gap between the popularity of these segments.

The breadth of products home centers offer appeals to one-stop shoppers, but often a home center’s dedicated sprinkler aisle is as seasonal as a Christmsas decoration department. Agnew said that his company typically stocks six times the amount of irrigation supplies that a home center carries. Despite convenient hours and financial resources, mass merchandisers are not a practical supply source, as they target aesthetic do-it-yourself projects, he added. Irrigation, on the other hand, is a functional improvement.

"I am in a mass merchandiser once a week, and although they have done a couple of acquisitions, the footprint of their stores is going the other direction," Agnew observed. "The bigger stores have expanded their wall coverings, cabinets and floor offerings. They have become more design-oriented and the nuts and bolts are actually shrinking in the stores."

Contractors and distributors can differentiate themselves from mass merchandisers by offering product brands not available in home centers. This way, consumers will not question price and quality discrepancies. "Mass merchandisers might have 20 or 100 sprinklers, but they don’t have 1,000," added Wayne Miller, president, Century Rain Aid. "Irrigation isn’t a huge industry, and for most retailers, the mantra is ‘Sales per square foot,’ and there are other products that would be more appealing."

PRICING THE PRODUCTS. The importance of choice in today’s irrigation distribution avenue reaches beyond business decisions and marketing strategies. End-users can pour over product price tags, turn to home centers for a "deal," price-shop among contractors and settle with the least expensive offer.

Consumers who play the price game are not necessarily purchasing value. Consolidations have created more homogeneous irrigation product costs across regions, but contractors and distributors face a promotional decision when attracting customers. Companies who advertise just on price draw bargain hunters.

Agnew noted that the combination of consolidation and consumer cost awareness decreases regional price discrepancies. Also, the growing demand for irrigation services increases the volume of materials production which drives down prices for consumers, he said.

"You have to ask yourself, ‘Do I have the volume to truly be a broker, or am I a value-added distributor who gets the price he can at his cost base and adds valuable services that the contractor is willing to pay money for?’" Bruner pointed out.

Distributors must earn savings to pass on price cuts to their customers. Larger distributors’ high-volume purchases allow them the opportunity to bargain for lower prices and thereby provide them with a competitive advantage, noted Stuart Nyren, director of marketing, United Pipe and Supply, Tacoma, Wash. To gain similar purchasing power, some small wholesalers are forming buying groups, but the impact of these alliances remains unknown, he added.

"If I was a manufacturer, I would be very concerned because pretty soon I’m going to have three big, hungry gorillas at the table with me," Nyren said, visualizing future manufacturer-distributor negotiations as some distributors grow significantly.

Manufacturers’ role in the distribution channel piques the interest of many industry players, Bruner noted. They, too, have choices. "They are in a position where they are choosing which channels they will sell through," he said. "Rather than wholesale distribution being the only choice, the choice is how to get products to end users. The fact that they have an option is also driving some of these industry changes."

LOGGING ON TO SALES. If traditional distributors are brick and mortar, will future industry competitors be what Bruner calls "brick and click?" Internet developments play an undefined and unpredictable role in the irrigation industry’s changing structure, but still are a prevalent factor in the technological progression distributors face to stay on the edge. However, most contractors recognize the Internet’s convenient function as an information source.

"The Internet can be accessed 24 hours a day, seven days a week for specification sheets and product information," Bruner added. "It also creates open lines of communication among distributors, manufacturers and consumers."

Already, distributors are launching Web sites so contractors can conveniently place orders, check their account status and browse product catalogues. "We are using the Internet to expand our capabilities in working through our distribution channels," Fields noted. "Internet is basically an evolution of the distributor’s purchasing function – from phone orders to fax orders to Internet."

Some are curious as to whether or not the Internet will mimic and replace the distributor’s role in the supply cycle. E-commerce is thriving for some industries, but online shopping is new for the irrigation industry, and "brick and click" transactions remain to be seen. Most distributors are skeptical as to whether or not e-commerce will overpower traditional sales methods.

"To assume there’s a wave coming that’s going to squash us is panic business," Agnew commented. "A lot of the products we sell don’t lend themselves to the Internet. You can’t deliver pipe through UPS – it’s too heavy, too big and too bulky. "

The capability of distributors to sell their products over the Internet will create another avenue where customers can price-shop and manufacturers possibly can sell directly to end-users, however. "E-commerce can be a threat and a potential competitor to wholesale distribution," Bruner recognized. "At the same time, the traditional wholesaler, with established locations and relationships with contractors, is best suited to take advantage of the benefits of the Internet."

SHAPING OPPORTUNITY. In a tightening industry, staying strong means incorporating innovation, smart business sense, sharp marketing strategies and solid distributor-contractor relationships. "There is as much opportunity for the third generation of irrigation distributors as there was for the first generation," Agnew predicted for companies willing to adapt to the industry’s changing tides.

Consolidation compacts the distribution channel, but at the same time, these acquisitions prompt other companies to investigate more efficient business methods while fine tuning customer service. While acquisitions may leave less room for "mom and pop" operations, but there remains ample space for all three segments of the market to compete in the distribution chain, Carowitz noted.

"As the population ages, I think people are going to be less inclined for do-it-yourself activities and we’ll see a rise of professional contractors in the future, once again," he said. "The distributor and manufacturer that supports contractors will be successful and contractors will remain alive and well."

Irrigation distributors who plan on seeing their company through the "third generation" will be aware of the many choices available to manufacturers, distributors, contractors and end-users and must follow the industry’s direction while remaining innovative.

"The changes in irrigation distribution are so critical for all of us – manufacturers, distributors and contractors – in our positioning in the market," Bruner stressed. "If you are not an expert in distribution trends, you’re very vulnerable right now."

The author is Assistant Editor of Lawn & Landscape magazine.

October 2000
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