The distribution I enigma of decking

f f,/Hor-esll-E (HoL.sAL): The sellf I ing of goods in large quantities to be retailed by others.

That's what is written on the online definition site, Wikipedia, about the two-step distributor (wholesaler).

So what happened? Today I see distributors' trucks with one piece of material instead of full units. Many retailers have no broken units in stock, suggesting that they did not buy a "wholesale" unit and break it.

Of course, I am talking about decking and railing. In my last article, I wrote about what a retailer can do to sell more decking (May, p. I0-11). But what about the distributor? What can a distributor do to sell more decking?

Let's get into the right frame of mind first. Right now, it seems that there is a pricing guideline used across the industry for distributor pricing: A direct or truckload price, an out of warehouse (OOW) unit price. and a broken unit or piece price. Pricing fluctuates through the year with winter buys and season pricing, etc. Certainly reasonable.

Logic dictates that if a retailer is able to take the risk or "move the cheddar" as I like to say, he can buy truckloads at a huge discount, especially if he does so in the winter. With this purchase, he can be vastly competitive against the guys who buy OOW or pieces. He usually enjoys caveat support mechanisms such as truckload prices on OOW units and reduced piece pricing. Such service should support healthy margins and good competition if the programs are honored; support and investment nurtures loyalty and protection.

Devil's advocate: the temptation of the sale is a vicious, hungry, eating machine. It doesn't take much, and a retailer who only buys units is getting truckload pricing, a non-stocking dealer is getting unit pricing on broken unit orders, and the bad thing, these pricing mishaps are happening in markets where other retailers are buying truckloads, therefore creating a nasty margin issue.

Let's look at it. Retailer A buys 20K linear ft. of product at winter buy price (say 5Vobelow season price) and feels like he should be able to make 3O7o off his stock.

Dealer B decides to buy four units OOW at a winter buy price that is also 57o below season price, but he pays more than the truck guy because he is in a hisher cost bracket since OOW units cost more than directs. He knows that he has to compete with Dealer A, but the only way to do so is to match his price, so he takes a margin hit and only marks up his material 2OVo, give or take a few points. This is reasonably healthy competition, since they are both making investments.

Finally, Dealer C comes along and decides to not buy anything in the winter buy season or stock anything in his retail yard. He knows that he has to compete with dealers A and B, so he decides to take a margin hit and only make 107o. He may now be cheaper than the others. Since he has no cash invested and virtually no risk, this is a logical move for him. He took business from the competition and made a few bucks in the process. He doesn't stock any decking, so he didn't lose a sale opportunity on his inventory. He cherry-picked the market with no investment and won. Do you blame him or the pricing?

This is a nasty scenario. Before you know it, the others get wind of this pricing debacle and call up their rep. The logical conclusion from the rep is to cave and give the dealer better pricing so he can overcome the competitive situation. This happens and the market price of the product is now lower. The stocking dealers are dropping their margins to turn product. They are reducing stocking buys, and they are ordering more piece orders from distribution. This has been the trend in the decking industry over the past decade. The introduction of countless colors and options has only exacerbated the situation.

The issues at hand have been seen before in many categories-vinyl siding, windows, roofing, all categories where the traditional supply yard flourished and therefore the distributor did, as well. Now, much of that has gone to one-step distribution and cut out both parties. The cost structure allows for a one-step distributer to bring in SKU-loaded directs from the manufacturers and piece them out to the contractors, since they have eliminated a step in the process and can afford to do business this way now. The margin supports full-line stocking opportunities and they flourish. There are few in the decking business with this sort of model, but they are growing in numbers.

Considerations of how to begin to remedy this issue include placing more separation between pricing lev- els and more control over who has access to what. Perhaps set a required buy-in in stock inventory to be able to receive pieces at all.

My theory is that a truck buyer should be able to get 3O7o and still beat an OOW piece buyer at l}Vo. Also, creating programs for value adds to the end-users for buying from stocking dealers, such as co-op enhancements and so forth.

Finally, perhaps wholesalers could consider getting back to what they are good at-selling whole units. Then again, Wikipedia has been known to be wrong and the world of the twostep wholesale distributor may have changed forever.

Nevertheless, I continue to support the industry and will evolve with it. I just hope I can make a few bucks in the process.

- David Elenbaum is president of Specialty LBM Holdings of SC, Simpsonville, 5.C., a company engaged in sales, distribution and installation of outdctor living products. He serves as a national director of the North American Deck & Railing Association and is chair of the NADRA CPAC committee. Reach him at dav ide le nbaum@ gmai l.c om.

By Colin Szewaga, Air Barrier Association of America