Benfield: “We released Restructuring the Distribution Sales Effort in early 2006 and the book continues to sell well and gain a following. And we have been working in the areas of sales restructuring and pricing since then. But we felt a need to broaden our audience as we have significant experience in manufacturing and marketing through industrial channels. So, we were looking for a subject that needed research that involved both manufacturers and distributors and the influx of off brands was available.”

Markgraff: “Why research something so obvious? There’s already been a lot of talk about private labeling.”

Benfield: “First, let’s be clear on our definitions. Private labeling is a distributor branding strategy. Distributors have private labeled products for much of their 100-year existence. Off-brands are defined as products that are typically not made in North America and are not recognizable brands, hence the name off-brands. You can private label a domestic brand or an off-brand. In fact, in the research, the distributors readily know the difference between off-brands and private labeling. The problem is that there was some research done within the last year that refers to the influx of off-brands as private labeling and the popular press picked it up from there. The term private labeling is really a misnomer in the global environment.”

Markgraff: “Alright. So why do we need research for off-brands when it seems to have been around for awhile?”

Benfield: “There’s no doubt that off-brands were well established by the time we began the research. Some vertical markets have upwards of 30 percent or more of their inventory in off brands, and overall, there is 20 percent of durable goods’ channel inventory in off-brands. The research is timely, however, in that the amount of inventory coming in is starting to cause structural changes to channels, and this is where the research is concentrated.”

Markgraff: “When did you begin the research?”

Benfield: “Rich Vurva (editor of Progressive Distributor) and I have talked about this over the years. At a Technology Conference in late 2006, we decided to put together the research and go for it. We had both seen a rise in the purchase of off-brands over the past 10 years so we put an online survey together based on our experience and sent it out to the distribution base early in 2007.”

Markgraff: “You mention in the book that the responses were quick and the sample was dominated by executive staff and larger wholesalers. Is this representative of the distribution base? Isn’t it dominated by smaller companies and employees who aren’t executives?”

Benfield: “Certainly small companies dominate the distribution space but from a perspective of the amount of purchases and future change, the larger firms and their executives drive industry change. We got a very quick response on the survey and capped off the responses in the Spring of 2007 with 200 completed surveys. Close to 70 percent of the respondents were executives and, again, they were weighted toward larger companies.”

Markgraff: “What were the key findings from the research?”

Benfield: “The key findings are way too many to encapsulate in this interview. However, we found that distributors were buying an average of 20 percent of their inventory from off-branded suppliers. The average cost advantage was 35 percent, and the channel was adding entrants and expanding to accommodate the demand. A big shock, to me, is that off-brands are often 30 percent or more less than items made by domestic brand manufacturers who have plants overseas. We also found that the issues and implications for domestic brands were immense. In fact, after I got through the initial analysis of the responses, I realized that the research and its implications were in need of a greater understanding and more than I could do from my experience base. So, in the summer of 2007, I contacted Steve Griffith to see if he had some time to devote to the research. I have around 10 years of manufacturing experience at managerial and executive levels but Steve has been at the top of several manufacturers and built plants overseas and he knows the manufacturing challenges better than I.”

Markgraff: “What is the portent from the research for manufacturers.”

Benfield: “Well we found out that many domestic manufacturers are losing share very quickly and they are in denial about the extent of off-brands coming into North America. We found that distributors can easily get off-brands from up to six different sources and these sources offer very different service and value bundles. And we found that domestic manufacturers are investing in low value added services that many off-brands don’t offer and distributors don’t really care all that much about .”

Markgraff: “You mean that with a significant cost disadvantage, manufacturers are investing in the wrong services?”

Benfield: “That’s exactly what I mean. We did some very detailed measurement of support services, identified those that mattered and examined the difference between service quality of domestic manufacturers and off-branded suppliers. We found that domestic manufacturers are investing in services that were important yesterday, but today, and versus off brands, aren’t all that important. This is significant because support services can cost upwards of 30 percent of the product price to the distributor.”

Markgraff: “What are the services that domestic manufacturers may have to pare back?”

Benfield: “Distributors say that manufacturer field sales forces, co-op and promotion dollars are not all that important. And, they tell us that product quality, delivery, invoicing, credits, packaging, and even volume rebates from off-brands are equal to or better than domestic brands’ quality-of-service provision.”

Markgraff: “What about code certification and compliance and product liability? Are distributors who import off brands subject to substantial risk from these issues?”

Benfield: “Not as much as you’d think. Compliance bodies such as UL, ASTM, ASME, and other have been doing work for domestic brands who have been manufacturing in places like China for many years. Consequently, many have established presences in foreign shores and sell their services to foreign manufacturers. As far as product liability goes, there can be substantial risk for distributors but there’s a lot of fearmongering about this. We found major insurers will write liability coverage for distributors, and the policies and amount of coverage can run the gamut. We also found many importers and master distributors have liability insurance for their off-brands. So, overall, I would say the liability risk from off brands is overblown. But, there is a lot of negative press being driven by domestic manufacturers because they are in a tough situation.”

Markgraff: “What will domestic manufacturers need to do to compete?”

Benfield: “For some it’s too late. The distributors say this without hesitation. For others, there needs to be substantial change in attitude that off-brands are here to stay and need to be reckoned with. Beyond this, we devote several chapters to specific strategies and processes that manufacturers can use to decide what to do.”

Markgraff: “Do you really think many manufacturers will be caught blind-sided by this issue? It seems so pervasive.”

Benfield: “I don’t think that any company will be blind-sided, but I believe a lot of companies are in denial or are trying to threaten distributors with pulling of discounts, co-op dollars and other things if they buy off-brands. I do know that a lot of manufacturers are in denial about the impact of foreign products. I presented some preliminary results to a joint conference of manufacturers and distributors earlier this year. I extracted the comments specific to the industry and did an hour-and-a-half presentation on the implications. The room was packed with manufacturers and distributors, and it was obvious that the manufacturers were very uncomfortable with the responses from their distributors. I got the individual evaluations after the seminar and it was obvious distributors agreed with the implications from the research and found it useful. It was also very obvious many manufacturers were in denial and some even commented that they were “shocked” and “numb” from the findings.”

Markgraff: “So off-brands are tough news for domestic manufacturers and good news for distributors.”

Benfield: “Well, kind of. I mean manufacturers certainly have their work cut out for them but distributors have a lot of changes to successfully import off-brands. We devote several chapters to distributors and what they need to do to benefit from off-brands. The changes for distributors are substantial. They include a documented procurement process for off-brands, working with alternate sources for off-brands, and preparing for an eventual decrease in margin dollars as the price advantage leaks into the marketplace. If distributors think they can simply buy off-brands and pocket the cost advantage, then they are terribly naïve. We documented distributors who had extensive purchasing processes for off-brands that included product testing, certification, compliance, and foreign currency forecasts and hedging strategies.”

Markgraff: “You devoted substantial time to other changes that are not so evident but are beginning because of off-brands. Are these changes dynamic? Are they underway and prevalent?”

Benfield: “I think you are referring to things like channel conflict, co-operatives getting into off-brands, declines in sales promotion, and channel advantage for larger wholesalers.”

Markgraff: “Yes.”

Benfield: “We conducted more than 100 hours of interviews in addition to and following the research. What we found blew our minds. We found cooperatives conducting clandestine efforts to source off-brands for their members. We found sophisticated networks of wholesalers who had very detailed processes for procuring off-brands and we found powerful domestic manufacturers who were trying to strong-arm their distribution and the distributors just smiled and went about their way in purchasing more off brands. And there are any number of channel service providers including insurers, testing labs, and law firms who can advise and help distributors in successfully sourcing off-brands. And, the interesting thing, at least to me, is that many of these service providers used to do work for domestic manufacturers but, since the channel is changing, they are changing too.”

Markgraff: “You say that every part of the channel will change. Aren’t you being somewhat of an alarmist?”

Benfield: “I’d like to think I’m being a realist but at an alarming pace. That’s not just semantics. We haven’t found any part of the channel that won’t undergo change from the influx of off brands. Even distributor associations will need to change. They get a lot of their funds from domestic brands and many are being pressured to stay silent about the issue. So, associations can be in a real high-wire act when it comes to this issue. Do they critically research this without bias or do they cave in to powerful manufacturers and feed pabulum to and/or fearmonger their members?”

Markgraff: “If the changes are as monumental as you predict, why do you think the research hasn’t been done earlier?”

Benfield: “I don’t think a lot of insiders wanted to do the research. The implications are too upsetting to existing channel relationships. I’ve never viewed my job as patronage of the existing community. The consulting job, if it’s doing what it should, is to bring new knowledge forward; even if and especially if the knowledge is disruptive. The fact that 20 percent of durable goods channels are buying off-brands and this has been growing is probably one of single biggest subjects to hit distribution in my lifetime and I’ve been at this a long time. To me, the fact that it took so long to do the research says more about the relatively poor quality of much of industrial channel research than anything else. I don’t want to be critical and go off on a tangent but channels members need to demand better and more critical research from their educational bodies.”

Markgraff: “What do you mean by better and more critical?”

Benfield: By better I mean the quality of a lot of the existing stuff is too often low tech and dated and much of the existing knowledge is anecdotal, not statistically valid, and not cutting edge. We validated our findings using advanced statistics and can say confidently that it represents 95 percent of the durable goods wholesalers out there. We find a lot of research has no advanced statistics and is done with biased surveys. Much even fails to be informed-opinion and is woefully out of date. To give you an example, within the last two or so years, there were heavily funded and promoted research projects that decried the loss of U.S. manufacturing to overseas markets or entreated domestic manufacturers and distributors to work more closely together in partnership. I mean these were projects funded by major associations, on a national level, that were totally out of sync with what is happening! For example, manufacturing has been leaving North America for 30 years and there was this “research” project that lamented the loss of manufacturing jobs.”

Markgraff: “But isn’t manufacturing important to keep stateside and shouldn’t distributors and manufacturers explore partnerships?”

Benfield: “It’s not that these subjects are not important but to research them now is way too late and out of date with what’s really happening. In the last 15 years, the U.S. has lost tons of manufacturing and in that time the U.S. economy has set records in growth rates, low inflation, and low unemployment. So, just how is losing manufacturing, at least the low-tech/low value added stuff, all that bad? As far as manufacturer and distributor partnerships, the time for that was 20+ years ago. The seminal work on market partnerships was done in the 1970s by Jim Hlavacek out of Case Western and in the 1980s by Jim Narus and Jim Anderson out of Wake Forest and Northwestern, respectively. Today, a lot of domestic brands are lucky if their distributors don’t become competitors. So, again, while these subjects are important, to stress them in a time when manufacturing, communication, and transportation is globalized and information 24/7 just illustrates how far out of touch a lot of educational bodies and associations are with their research. It’s either that or there is a ton of patronizing and propaganda going on.”

Markgraff: “If that’s so, then distributors and manufacturers, at least the progressive ones, will look elsewhere for their knowledge.”

Benfield: “They already are. We find that the more progressive manufacturing companies and the larger wholesalers really don’t go to their associations for advanced knowledge near as much as they used to. They are seeking knowledge from many areas including consultants and researchers from industries other than distribution or manufacturing. And the interesting thing is that the Web, Internet research, and digital printing, many of the tools that allow distributors to check global prices on commodities, are the same that allow small consultancies like mine and Steve Griffith’s to do cutting-edge research and sell it for a profit.”

Markgraff: “Explain that.”

Benfield: “Well, one of the key things that we found is that distributors can check prices on commodities 24/7 all over the world. They can order online, and are aided by any number of online service providers to help get low-cost products to their warehouse. We cover a lot of these services in the book. In other words, the distributor can check information globally and process it to their advantage. They don’t have to deal with silos of knowledge imbedded in slow moving and often heavy-handed manufacturers. In the same way, Steve and I can put a research instrument online, get valid responses from an interested community, crunch the numbers, write up the results digitally, send it out to be printed, and sell it online. The web, digital technology, software, and global communication allows all of this to happen. You don’t have to be big to make products or do research anymore. You have to be swift and connected. A lot of the global manufacturers are smaller companies than their North American counterparts but they are fleet afoot. It’s the same with our consulting. We can do solid, valid work from our offices and don’t have to be a big consulting firm. A lot of people don’t know it but big consulting companies, like Accenture, don’t really have a corporate office. They are a bunch of consultants working out of their homes or in the field, just like Steve and I.”

Markgraff: “Where can the research be found and purchased?”

Benfield: “You can get it from Progressive Distributor at progressivedistributor.com, Benfield Consulting at benfieldconsulting.com, Merrimont Group at Merrimontconsulting.com or disruptioninthechannel.com.

Markgraff: “Thanks for your time.”

Benfield: “Thank you, always a pleasure.”