Independent A/V retailers are suffering a bout of distribution déjà vu.
In the 1980s and early 1990s, the independents worried about the threat of big-box retailers. Now, in an ironic twist, they're worried about the small guys, low-overhead custom-installation specialists who, they contend, are underbidding them with the controlled-distribution lines that they helped build. These self-employed specialists often work out of their homes, so they don't have to cover the cost of operating a retail storefront or commercial-zone showroom.
Dealers also worry about the influx of new competition from security, lighting and commercial sound installers.
In large measure, the new competition is attributable to the proliferation of two new distribution channels: stocking reps, which stock some of the brands that they represent, and rep/distributors, which began as rep firms but later opened separate two-step companies as separate business entities.
Specialty-brand suppliers began turning to these channels in the 90s, in part to open up distribution to small custom-only companies that didn't qualify for credit or meet minimum order requirements. The channels also helped suppliers service installers that buy products just before the products have to be installed.
At first, specialty dealers expressed little concern because the channels were tapped mainly by suppliers of "behind-the-scenes black-box" products, which lacked brand awareness and price sensitivity.
The entry of well-known A/V brands into the channels, however, has aroused specialists' fears, as is the growing price sensitivity of formerly "anonymous" products, such as in-wall speakers. Many consumers, said one specialist, now want bid proposals to break out the cost of architectural speakers. "People look at the labor cost and the five biggest components in a bid," the dealer explained.
Specialists also fear that more specialty brands will open up these channels because, as one dealer said, "they need more volume."
Meantime, eager rep/distributors are clamoring for specialty brands, said Marantz sales VP Charlie Boornazian.
In fact, in recent weeks, Samsung and SharpVision launched rep/distributor programs. Marantz, on the other hand, lets reps buy products through sample accounts to cultivate small installers, but many reps don't take the company up on its offer.
In their defense, several suppliers told TWICE that they can't afford to ignore the thousands of custom startups that opened for business in the past decade to meet consumer and builder demand for custom-installed A/V systems. Some of the suppliers also contend that specialty dealers alone can't deliver the volume they need in the custom market because the retailers "hopped on the bandwagon later than they should have." In fact, one supplier said, rep/distributors make it possible for more installation companies to enter the market to help fill demand, which still can't be met by the current combined number of install-only companies and A/V dealers.
Suppliers also say they hope to create the next generation of regional specialists by helping the small guys grow into direct accounts in much the same way that they assisted small, credit-unworthy dealers in the '70s and '80s grow into local and regional powerhouses.
Many brands also believe they're minimizing channel conflicts. One way — practiced by Mitsubishi, SharpVision, SpeakerCraft and Yamaha — is by requiring rep/distributors (or stocking reps in SpeakerCraft's case) to get advance approval before selling into a new account.
Some specialty retailers, however, say they're anxious nonetheless. "Some A/V manufacturers — the American companies — give rep/distributors carte blanche," one dealer lamented. In that case, "you're putting distribution in a market totally at the discretion of reps," another dealer complained.
Nor are some dealers comforted by the practice of suppliers that require prior approval of a new account. Some stocking reps and rep/distributors already sell to unauthorized accounts, they contend.
Dealers are also concerned about direct competition from stocking reps and rep/distributors, according to two industry veterans. "A lot of stocking reps are doing their own custom jobs, taking business away from dealers," said one marketer. Another said the channels are selling to architects and designers, who in turn hire self-employed installers to do the install.
Some specialists admit their concerns are as much theoretical as they are real. "It's more perceived than real," one independent specialist admitted, "but it's fast moving to reality. Manufacturers in a down economy are looking for sales."
For Wayne Puntel, the threat is real. "We're frequently undercut with our own brands," said the owner of Cleveland-based AudioCraft, which operates four stores and a separate custom business. Even though low-overhead bidders are at a cost disadvantage when buying through stocking reps and rep/distributors, they're able to undercut established dealers because they're not paying for their investment in storefronts, displays, inventory or showrooms, he and other retailers contend.
AudioCraft dropped Fujitsu plasma TVs because "installers sold them at 8 to 10 points over our cost," Puntel pointed out.
He fears other manufacturers will open distribution in an undisciplined way. "I don't see where it [the growth of stocking reps and rep/distributors] will benefit a business like mine."
Another A/V specialist said low-overhead competitors use his brands to undercut his bids "all the time." If he's aware of such bids, however, he usually gets the deal by asking the customer whether the low bidder will be in business in a few years to offer post-sale support. "A lot of the times, we'll get the deal because "the consumer knows he'll need support," but the company nonetheless has to sacrifice 10 points of gross margin, he said.
He also said he might not be aware of all of the jobs lost because of low bids from low-overhead installers.
Even this dealer, however, said he understands that many smaller suppliers can't survive without distribution through these channels. "Lesser brands that can't get position have no choice," he said. Non-name brands and assorted black boxes that tie together branded electronics in a custom system are also "totally appropriate" for these channels, he also said. But "it's the companies with a clearly stated controlled-distribution policy that concern me."
"I spent a tremendous amount of money building a custom company," he said. "I provide a service, have excellent installers and very good demonstration facilities, and someone without any of these can copy my proposal because he has access to my products."
At least one supplier contends that the custom market is so big, channel conflicts are unlikely to occur. "The custom market is so big," he said, "you can't see the conflicts in most cases. Most of the time, you're not competing with a trunk slammer on a bid, so it's a moot issue."
This supplier and others speculated that dealers are concerned more about winning back the "back-door" business they lost to stocking reps and rep/distributors. "The little [custom] guys bought from retailers before," said one marketer. In some cases, retailers got full margin, but in others, dealers cut a deal, sometimes selling at 10 points over cost and taking advantage of volume rebates and MDF, other suppliers said.
For specialists who say the conflicts are real, the challenge is to help suppliers maintain distribution discipline. Said Myer-Emco owner Jon Myer during the PARA conference, "We [retailers] can provide the extra distribution for suppliers, but we have not done it for them."