Appliances: A Distribution Dilemma

Although my columns in Kitchen & Bath Design News deal largely with cabinet distribution, my own experience in distribution was primarily in the area of appliance sales. Trying to determine why I emphasize cabinet distribution in my columns, I came to this conclusion: I really don't know who or what an appliance distributor is anymore in the current business'environment.

Various market pressures have contributed to the dilemma of appliance distribution. During the growth years after World War II, appliance manufacturers sought out exclusive distributors, with synergistic product lines, to introduce and represent their products within their market area.

At that time, if a manufacturer approached an established independent distributor offering a non-exclusive franchise, his chance of signing a franchise with that distributor was virtually nil. As a result, most appliance franchises spelled out an exclusive territory for the distributor, as well as a cancellation clause if the distributor didn't maintain reasonable market share. It was a true "partnership" between distributor and manufacturer. Each was dependent on the other's success.

However, emerging market forces compelled a change in this philosophy. Appliance retailing chains became a major factor during the 1970s and '80s. In the '90s, many of those chains have disappeared, leaving Sears, Circuit City and Best Buys to dominate white goods and electronics retailing. Home center chains such as Home Depot and Lowes are also actively selling appliances both free-standing and built-in.

Home Depot Expo showrooms are now proliferating, actively pursuing the custom kitchen market while offering an upscale product package plus installation. These multiple-location retailers buy direct from manufacturers who sell to them at favorable pricing. Practically speaking, since these chains have locations in many markets, no one distributor of a product line could sell its entire group of stores without conflicting with its fellow distributors in other markets. Inevitably, territorial conflicts among distributors resulted, with manufacturers called upon to referee. As a result, many major manufacturers now pursue a dual strategy: Sell direct to chain accounts and depend on small independent builder-distributors to serve the remaining retailers on a non-exclusive basis.

Until the 1960s, builders were cautiously building homes on available lots. In later years, project builders bought acreage and built houses by the hundreds in metropolitan areas. They, like the chain stores, made direct deals through factory branches. Thus, the exclusivity enjoyed by independent distributors was further diminished.

'Many flavors'
Today, appliance sales come in many flavors. They are available factory-direct to large builders, chain retailers and even some kitchen and bath dealers (usually through a factory rep). The rest of the market is primarily served by non-exclusive appliance wholesalers. These firms sell to smaller dealers, kitchen specialists and, in some cases, direct to consumers. They compete more on price than on service, since their margins are very tight. They're also not often constrained by their manufacturers to sell only one line within a product category. Frankly, I don't believe these manufacturers' lack of territorial protection for these accounts leaves them with enough leverage to dictate terms to their non-exclusive distributors.

In terms of specialty appliances, it's interesting to note that many of these lines do recognize that their success is largely determined by the allegiance and effort of exclusive independent distributors. These manufacturers recognize that promotion and sales effort require reasonable margins for the distributor. The proliferation of wholesale outlets for a single line within a market does, indeed, shrink margins to a point where ambivalence about a product line has replaced loyalty, local promotion and sales effort.

Buying groups further add to the confusion and diminishing market potential for appliance distributors. These buying groups are a reaction to the favorable pricing and dominance of volume dealers, such as appliance chains and home centers within metropolitan markets.'

Kitchen and bath dealers do need appliances (especially built-ins) to complete their bill of materials. Buying groups help them purchase more competitively without the dealer bearing the cost of inventory.

The dealer's view
The diminished margins on major appliances have caused many kitchen and bath specialists to consider the sale of appliances (particularly free-standing) as an accommodation to their customers, rather than as a profit center within their operation. Nevertheless, a typical 10-to-20% gross margin on appliances still adds to the net profit of a kitchen job, as opposed to selling cabinets, tops and accessories alone.

Typically, the homeowner asks the kitchen dealer or "whotailer" to recommend appliances, install them and plan the kitchen to accommodate these products. As a result, kitchen specialists generally have an involvement in appliances whether or not they sell them. An 8-to-10% margin after paying a maximum commission of 25% to the salesperson does enhance the ultimate net profit, after all. It beats serving as an unpaid consultant to their clients.

A few adamant dealers I've observed in my travels have installed kitchen displays without appliances as a means of protest. A few have included built-in appliances in their displays on a consignment basis from a nearby retailer. In these instances, it's understood that they'll refer their clients to the local retailer for the actual sale of the appliance.

Where do we go from here? My feeling is that the present situation will pave the way for more specialty manufacturers to establish exclusive distributors to supply kitchen specialists who supply homeowners and builders of custom homes.

Generally, the margins on these products are better than with the major appliance brands. Fortunately, the economy over the past few years has made homeowners less price-conscious, making them more receptive to upgraded appliances. However, success in these specialty appliances depends on product knowledge and a sincere sales effort by the kitchen specialist or whotailer.