Whether it’s higher rebates, requests for longer net terms, expectations of onerous indemnification or demands of exclusivity, suppliers say distributors are putting them in an untenable position. So the question now becomes, when is enough enough?
It all started about eight months ago, when a $10 million supplier received a note from a Top 40 distributor based in Chicago: Payment terms shall be 3.5% 30 days, net 90 (i.e. all invoices shall be paid within 90 days from the invoice upload date provided that we may reduce the amount invoiced by 3.5% for all or any portion paid within 30 days from the invoice upload date). Certification and Technology Fee: As a participant of our certified supplier program and certified user of our supplier portal, each calendar quarter supplier will be assessed a certification and technology fee in the amount of 3% of the total amount invoiced by supplier to us in the calendar quarter – based on invoice upload date.
The supplier was nearly apoplectic. “It was just heavy-handed and, frankly, outrageous – it can’t be tolerated in our industry,” he says. “It also speaks to a last-ditch desperation effort to save a poorly managed cash flow by this distributor where rather than correct their issues, they want to jeopardize suppliers. Of course, we rejected this and will not do business under such conditions. Remember: There have been a few major bankruptcies in the industry of the past decade which have bilked suppliers out of tens of millions of dollars. The pattern is when these huge distributors start to pressure their suppliers, it often means they’re becoming financially insolvent. We’ve backed away from them so as not to get hurt.”
Supply & Demands One thing is for sure: Distributors are making increased demands of suppliers, some of which include: higher rebates – often as high as 7%; longer net pay terms; an expectation of indemnification; requests for product exclusivity; and a relatively new trend, prebates – asking suppliers for money up front prior to being considered a preferred vendor.
BDA (asi/137616), for example, asks all of its suppliers to provide indemnification, says Rick Rayl, vice president of purchasing and operations for the WA-based Top 40 distributor, which is perhaps not surprising considering the distributor’s instrumental role in forming QCA, the industry’s product safety watchdog group.
However, it seems as though, based on supplier feedback, these mandates are ramping up and suppliers are hitting their pain threshold. Despite that, many who shared their stories asked to be quoted off the record. “That’s the rock and the hard place we’re in,” says one WI-based supplier. “We’re being nickel and dimed and being asked for outrageous concessions from distributors, but we’re made to feel like we can’t say no or even verbalize criticism about it.”
One supplier who couldn’t even dress up as demure for Halloween, Shepenco’s (asi/86850) Dan Townes, however, is opting to offer his thoughts. “It’s just ludicrous,” says Townes, president of the TN-based pen and pencil manufacturer. “Demands of 60- to 90-day payment terms, coupled with requested prebates, may only hasten the demise of the distributor in the historical distribution channel.”
Mitch Mounger, president of WA-based Top 40 distributor Sunrise Identity (asi/339206), points out that while his company only asks its preferred suppliers for indemnification and rebates, many non-preferred suppliers will offer rebates in the hopes of getting more business. “But we don’t accept,” Mounger says, acknowledging that the average distributor-requested rebate is 3%-5%. “That’s about average, but some go as high as 7% and many are based on growth.”
To be fair, in many cases, distributors themselves are being stretched thin from their clients. Mounger says that while Sunrise does ask its preferred vendors for 60-day terms, many of his larger clients are asking for up to 90-day terms.
“We’re paying rebates quarterly these days as opposed to one lump sum at the end of the year, which actually helps with cash flow,” says the CEO of one Top 40 hard goods supplier on the East Coast. “We’ve extended terms for certain customers, but that’s end-user driven, and we extend longer terms for certain distributors dealing with Fortune 500 companies. Distributors should have to pay sooner than the supplier, because we’re the ones assuming all the risk. If something goes wrong, we eat it; if something goes right, and it isn’t to their liking, we eat it as well. We pay for the equipment, warehouse millions of dollars’ worth of inventory, among many other things, that they should have shorter terms than their customers offer.”
The president of a Midwest-based supplier doing about $20 million per year also sees a trend in large distributors asking for net 60-90 day terms, but says he attempts to negotiate with them and mitigate the cash flow strain by occasionally allowing discounts for paying net 30 days (“which is crazy,” he says) – and this is after rebating. “Some accept net 45 and others refuse and won’t pay faster than 60-90 days,” he says. “Our goal is to try to find terms that work for us and still maintain a preferred relationship with the distributor. In addition to better terms and rebates, they always expect preferred prices. These demands squeeze earnings and can negatively affect cash flow. However, not complying can hurt revenue. It’s the ultimate catch-22.”
Diminished Returns Sharon Eyal, president of Top 40 supplier ETS Express (asi/51197), agrees that more distributors are asking for more concessions from their suppliers. “We’re getting to a point of a diminishing return with all the demands distributors are requiring,” Eyal says. “Staying on the current path will weaken good suppliers, which will result in less competition and less innovation.”
Eyal uses the airline industry as an example. “We really don’t have any competition outside the big four – American, Delta, United and Southwest – therefore our domestic airlines are probably the worst in the world when it comes to service,” he says. “I don’t know anyone who says they love an airline outside of Southwest, because they actually get it. I would hate to see our industry head in this direction, and the process has already started. If we look at all the mergers and acquisitions in the last 24 months, more and more are consolidating. I can’t speak for other suppliers, but we decided to make a move against the grain in 2013 by scaling back rebates and low margin offerings, so we can allocate that spend toward making us a stronger, more efficient supplier. I knew we would have negative feedback from our larger clients; however I had to make a decision that was in the best interest long-term for our company.”
The vice president of sales for a $5 million supplier based in the Midwest agrees. “We are being asked more and more if we are a member of distributors’ ‘preferred’ programs and I say ‘no, we are not.’ We’ve always stood firm saying most of our pricing is better than any EQP pricing you get with your preferred supplier. But I’ve noticed a few that have crazy terms where they expect us to sign our life away and they pay in net 90. I finally asked, ‘Who are you to tell us how you’re going to pay us? We ship your product in good quality, on time and expect to be paid on time and our terms are net 30. If you choose to pay differently then we will make you prepay and turn you over for collections.’”
This same supplier VP maintains that distributors can’t have special pricing and set terms to suppliers and expect the suppliers to want to work with them. “I have no desire to pay someone to buy my products, and that’s what this industry is coming to,” she says. “We hear, ‘Well, we can’t compete if we don’t get EQP,’ and we respond with, ‘Well, how much value do you bring to your customers?’ This subject irritates me so much, and more suppliers are just basically bending over to the distributors and letting them tell us what to do. Honestly, if this keeps up, why shouldn’t suppliers go direct? We deal with these issues from distributors daily, but it’s OK for distributors to import their own products for a project? If some suppliers started going direct, distributors would burn the barn down.”
Memo Kahan, president of CA-based Top 40 distributor PromoShop (asi/300446), notes that because his company is part of the Legacy buying group, they ask all suppliers for 45-day terms. “Look, it’s a business decision, just like when my clients – especially the Fortune 100 companies – ask for 60- to 120-day terms,” he says. “You weigh the cost of absorbing that with the guarantee of steady business with a company who’s stable.”
Kahan also points out that the requests and discounts his buying clients make of him are often much more deep and onerous than those he would even consider making of his supplier partners. “This is a cash-flow driven industry and I’m very well aware of that.”
One owner of a $15 million a year supplier company says that the number of distributors is shrinking, giving the top one percent stronger power, forcing suppliers to make some hard choices on what they think they have to do to survive. “That’s business, and each supplier has to make those choices to decide if they want to have that business,” he says. “Essentially, some distributors have had success with asking for more and will keep asking for more until they are told no. But I’ve also been told that when you look at some of the balance sheets of the mega distributors, often the only reason they can survive is because of their long terms and rebates. So if enough suppliers told these guys no, they would probably go under quickly. I don’t think that’s a stable model in which to operate.”
CA-based Top 40 distributor Jack Nadel Int’l (asi/279600) has had 68% growth over the last five years, but during the recession of 2008-2009, Craig Nadel, the company’s president, was very clear and admirably honest about the importance of rebates to his company’s bottom line. “Listen, during the recession, rebates were more than 100% of our profit,” he says. “They totally helped us keep the lights on.”
Nadel says rebates are about 3%, but with hard good suppliers it can be 5%, and acknowledges that the rebates are asked mainly of JNI’s preferred vendors with the quid pro quo that the company will try to drive more business to the suppliers by sending out email promos on their behalf to JNI’s reps. “While we don’t promise suppliers that we’ll spend a specific amount with them, we do promise to make the effort.” Nadel also points out that JNI’s reps aren’t locked into using only preferred suppliers. “We tout our preferred suppliers, of course, but we don’t mandate it,” Nadel says.
One OR-based supplier had this lament: “Rebates, free samples, free specs, waived set-ups, waived repeat set-ups, waived ancillary charges (PMS matches, poly bagging, special shipping/boxing), discount terms, insane payment terms, better-than-EQP pricing, catalog placement fees, price concessions for orders that are already under $50 net, fees to participate in a multitude of shows – some that cost more than $10,000, online program fees – there isn’t always a lot of meat left on the bones after all is said and done,” he says, adding that some distributors demand that suppliers use the distributors’ system to enter tracking, orders, etc. are starting to become more frequent as well.
“When the exchange results in mutual growth, some of the demands can be worth it,” the supplier says. “The distributors who ask the least are who we have some of our best relationships with. I believe that many still see us as a true partner and understand the big picture and want us to be a healthy provider. When some distributors can’t compete on their own value, they push back on the suppliers to compete on price.”
Says the supplier who originally reached out after receiving the onerous distributor letter: “The industry can never let a CorplogoWare happen again,” he says, noting the FL-based Top 40 distributor that infamously imploded in 2008. “Our family-owned businesses are our livelihood and need to be rigorously defended against powerful, unethical and mismanaged, large predatory corporations. And we hope other suppliers do the same.”