So much has been written about the state of distributors in our industry recently that by now, even I'm confused. Some are leaving the industry under financial duress, while simultaneously a select few are prospering. Luckily, as one of the benefits of being in this industry for 20 years, I can make a call to lots of mentors to sort it all out for me.
This time is no different. After getting past the "Now, don't use my name, but..." part of the conversations, I've become better educated.
I hadn't been tracking to begin with, but in the past few years no less than five significant distributorships have gone by the wayside. That's frightening when you look at the principals of these businesses. They are some of the very brightest in the business, reputable industry members who made decisions that just didn't work out. They likely will re-emerge as leaders, either in this industry or others.
Manufacturers have taken big financial hits in each of these situations. It is clear that many manufacturers are concerned about how far they go into the "open account" column with distributors. When a company goes out of business via a bankruptcy, it's pretty much a given that the money in the open account status is gone.
Some common traits in business are good indicators of a company's current financial health.
How businesses pay, for example, is a big indicator of health; this is true in our industry, as in others. Reading off a list that had been posted by his phone, one manufacturer gave me a list of six major distributors he predicts will be the major survivors of distribution shakeout in the upcoming years. All the companies he listed take advantage of every discount offered from this manufacturer. One manufacturer tells of a distributor who occasionally pays before he even receives the product. There will always be the distributors that carry the off-brands, but his statement is a little scary - considering there are more than 100 listings for distributors in the 2002 directory issue of this magazine.
Another common trait is that most successful distributors are also large operators. They don't generally put this on their business card, but it's a fact. Even those that didn't operate previously have been forced in increasing numbers through operator foreclosures, or just to survive. I know the operating community at large objects to this vertical integration practice, but we need to get over it. It's a reality. We could talk for days about who our operating competition really is, but it's not the distributors. The Internet, consumer electronic games, and the entertainment industry in general all offer new challenges to our industry that we need to be focusing on.
One industry member pointed out that brand loyalty is not what it used to be. I can see the difficulty in distributor decisions. If you were to hang onto your Atari, Midway and Seeburg lines (to name a few) through brand loyalty, you would be in big trouble today; you'd be better off marketing hula hoops. They're all gone, along with a slew of others. You can't pick up a trade magazine today without announcements of what distributor has dropped one line to pick up another. The music distribution business theme song could easily be "What Have You Done for Me Lately?" It reads like a game of musical chairs. The sands seem to be shifting constantly.
A major issue in the distribution business is the dramatic increase in direct sales to operators by manufacturers. There was a time not too long ago - OK, maybe 20 years ago - when operators bought every piece they operated from distributors. Now, any operator of significant size can buy almost any piece direct from the manufacturer. I pulled up a major video game manufacturer's website and found advertising for leasing games to operators. There might be some consideration directed back to the local distributor, but it wasn't mentioned in the lease application. Anyone can buy this stuff.
I spoke to a friend of mine who is now a salesman in the gaming industry. I learned there are no distributors in that industry. The manufacturers directly sell and lease to the location/owner operator, along with support. Furthermore, there are very few operators; the casinos own or lease the majority of their games from the manufacturer. In trying to differentiate which is the better program, one big difference jumps out: The location owner's average net worth is significantly different in our two industries. In most instances, our typical beer joint owner couldn't qualify for a video game lease, let alone pay cash for equipment.
The reason most operators still buy pieces from distributors is that we are in an industry of small to medium-size businesses. The distributors frequently play a financing role - if not through direct loan terms, then by offering payment terms often extended beyond 60 days and rarely requiring any personal guarantees on the open account line. It's just easier.
One large operator-buyer I visited with still buys many of his company's video products through distribution. It's very much a buyer's market out there, so margins are slim for distribution sales to large buyers. Two questions drive his purchasing decisions: First, do they have it in inventory for immediate shipping? Second, can they be depended upon for after-market services like installing DBAs and security devices? I found that this buyer generally has the opportunity to buy the product direct, but in many cases it's easier and more cost-effective to buy through distribution. When the video game manufacturers become operator-friendly, performing standard after-market customization such as installing DBAs, this segment too will change.
Another large operator, who can buy from wherever or whoever he wants, likes the idea of limiting the product accountability. That is, he likes to limit the number of suppliers he needs to call when something goes wrong. This operator feels like he has leverage with his distributor as a customer. When he calls, he wants action. If better servicing his location customers costs him a few extra dollars in equipment, he feels he makes up for that in his competitive advantage over the direct-buying operator who's in the location on his cell phone talking to a guy seven time zones away trying to order a part.
This ties into another key ingredient to a successful distributor operation: service support. This doesn't appear to be the situation in all cases, however. A distributor can market his products focusing on price or value. Our industry has examples of distribution operations that have great prices but just average service departments. Bottom-dollar pricing and outstanding service departments don't seem to be a frequent combination.
Business is constantly changing. Being a distributor has never been more challenging. Between the Internet, Federal Express and the phone company, operators can get any information they need, and any replacement part can go from anywhere in the world to an operator's desk by 10:00 the next morning. Today, we can sit at our desks and perform video game rotations over our desktop computers. The world continues to shrink.
All segments of the industry are changing right before our eyes, and the companies sticking to their old ways have an uphill struggle ahead. Conversely, distributors who have thrown out yesteryear's playbook, or at least modified it significantly, are staying current with the demands and trends of the industry.
It takes being a step ahead of the competition in all aspects of this
industry. There's no view worse than what you get chasing your competitor.
Let him look at your elbows.