The Pure Distributor

For a few PEI members, sales-only is the way to go.

The “pure” or “true” distributor was a term coined in the early days of the Petroleum Equipment Institute to describe the companies whose only business was the selling of equipment. According to early notes, “Active membership was confined to companies principally engaged in the business of reselling equipment from their own warehouse stocks.” Howard Upton, the Institute's first executive director, recounts that a provision in the original membership rules stipulated that active members must maintain a minimum inventory of $10,000 worth of oil marketing equipment.

Over the years, markets grew for these companies in response to customer need and the realities of the marketplace, and many distributors added service and contracting work to their mix. By 2008, “pure distributors” described only three percent of the 500 distributor companies on the membership rolls.

The PEI Journal set out to talk with some of the Pure Distributors hanging on to the “sales-only model” of distribution. What we found was that these companies were not just hanging on, but thriving, secure and confident in a model some see as past history. You may be surprised to read what they have to say.

TPJ: Why are you a sales-only organization?

Lee Smith: When my father retired from petroleum equipment sales in 1992, he wanted to continue to interact with customers and manufacturers, and with my mother started Phoenix Pump. They considered the sales-only niche the company's strong point.

Bob Becker: Selling to gas stations was becoming a cut-throat business. The margins weren't what we needed to keep our business going. Becker & Associates' customers include major oils, airports, refineries and processing plants, not c-stores. We're also a stocking distributor of filters and hose for the aviation industry.

Mark Cowie: White-Tucker Co. has had the advantage of doing business this way since 1910.

Robert Grunow: Service work requires an overhead that I didn't want Peachtree to have. I have no employees, by choice. If my hands aren't involved in the sale, my thinking, my decision making, then I'm not in complete control, and I want to be in complete control. I get the job and I get the profit. There are no secrets to this business. You buy it, mark it up, sell it, cover your overhead and hopefully make money out of the deal.

Brent Howard: I didn't want Baja Pump USA to compete with its customers, the service companies and contractors.

Ann Thomas: Petroleum Marketing Equipment became certified as a woman-owned business in 1993. We realized we could get more business from sales than from anything else, so we set out just to sell equipment.

Loren Semler: As the marketplace developed standards that made equipment and installation requirements more cookie-cutter, Semler Industries moved up the pipeline into refinery and bulk transfer, and brought on a mix of industrial products for different markets.

Brian Savage: Being a sales-only company enables Savage Associates to focus on the development of solutions for customers' challenges and needs.

When so many other companies have moved into service and contract work, why does the sales-only model work for you?

Brian Savage: Solutions can be creative and innovative when you are selling and marketing, but not when you are split between sales and service and installation. As an example, John Savage, the founder, designed and installed the very first bottom loading system for Shell of Indiana in 1948.

Brent Howard: Another key to success is to keep overhead low. The margins in this industry are ridiculous, so we find other areas to make money. Being located right next to the border allows Baja Pump to sell a lot of product to Mexico, which is a lot more profitable than selling in the United States.

Mark Cowie: White-Tucker sells to contractors who don't want to purchase product from their competitors, that is, distributors that not only sell equipment, but service and build with it.

Bob Becker: We sell the need for product, not the price. When Becker & Associates visits an industrial plant, they may need filters, and we'll ask about their compressed air. We work with them to find solutions to their needs.

Robert Grunow: Peachtree's ideal customer is a commercial end-user, and I sell everything for underground, and some aboveground equipment. I don't get into canopies because that involves subcontractors, but I sell canopy lights and island forms. I don't do POS systems, but do sell fuel management and tank monitoring systems.

Does anyone do online sales?

Lee Smith: About 10 percent of Phoenix Pump sales are via our Web site.

Bob Becker: We've seen a huge increase in sales this past year because of online sales.

Let's talk about inventory. How much do you keep?

Ann Thomas: Petroleum Marketing Equipment keeps about $1.7 million worth of inventory at each location. We don't want obsolete parts, parts that aren't moving, but sometimes that's hard to control.

Lee Smith: Phoenix Pump keeps a reasonable quantity of items and is well stocked, but not heavy in all areas. We ship direct from our manufacturers and have on hand the common items that customers need.

Bob Becker: Becker's facility is 8,000 sq. ft, and about 5,000 of that is warehouse space. We currently have $200,000 worth of inventory in there. We can afford to warehouse product with our margins and can get better prices.

Mark Cowie: Substantial, but I won't give a number. Let's just say of those three percent sales-only companies in PEI, White-Tucker probably has the largest inventory. We have hundreds of thousands of SKUs.

Robert Grunow: I don't have a large inventory. I used to work for a large company that stocked several hundred thousand dollars worth of inventory in its warehouse. Some of the inventory sat on the shelves for years. All they could do was hope for a buyback from the manufacturer, and it rarely happened. I work out of my house and have no employees. I sell stock on demand. The stock I have turns over very well. I keep a range between $4,000 to $8,000 in stock, and if it sits too long, it goes on special. I get rid of it.

Working out of your house, what are your margins like?

Robert Grunow: I have the discount the larger companies have and sometimes more. I quick pay, and my margins are better than 18 percent.

As a dedicated sales company, tell us about your retail sites.

Brent Howard: Baja Pump has a small will-call area at our location.

Mark Cowie: There is a will-call at White-Tucker's Dallas and Houston locations, and customers do walk in to buy.

Lee Smith: Phoenix Pump is not set up with a retail storefront, but we do have some walk-ins. Mostly, we go to the customer.

Ann Thomas: Petroleum Marketing Equipment's Placentia location is a walk-in store with a counter and warehouse, and we sell a lot there.

What's the biggest challenge of being a sales- only company?

Brent Howard: There is no room for error, because if you make a mistake, there go the profits.

Ann Thomas: I agree. Making enough profit.

Lee Smith: Being properly inventoried and priced is the challenge for us.

Loren Semler: If you do have a problem in the field and the customer wants you to service the product, you don't have a tool truck with someone to send out there right away.

Robert Grunow: A downside to having no employees is that I do all the other work to make a business run. Having the time to get out and make the sales calls is my challenge.

Brian Savage: Constant monitoring of relations with manufacturers and suppliers. The relationships change all the time.

Mark Cowie: The service contractors set up as distributors are our biggest obstacle. When we're bidding a job alongside a contractor we deal with each and every day, and they have the lines direct, that's a challenge. But we probably win eight out of ten of those jobs.

And the best thing?

Bob Becker: I love the personal contact and being able to make a customer happy. We don't have to employ a lot of hourly people who, when things are slow, are still being paid even if there is no work for them to do. Our people are busy all the time.

Mark Cowie: The customers we deal with every day and the manufacturers who support us are great people. We have history in this industry.

Brent Howard: Sales-only companies do not have as many headaches as those who do service. We keep a low overhead, and there aren't as many employees. Our business is less complicated as we cope with fewer personnel issues.

Lee Smith: We can focus on just growing sales.

Robert Grunow: I get the job, I get the profit.

Loren Semler: Limited exposure and few liability risks. We don't risk losing a trained service tech to a competitor who offers that tech a dollar more an hour. On the other hand, though, we are selling an engineered piece of equipment and our salespeople require longer spool-up time.

Brian Savage: I think the best thing is the ability to be creative in finding solutions. We sold an inventory reconciliation program, the first of its kind, to a customer in Russia. You can become very innovative.

Ann Thomas: There is no conflict of interest with our many customers that are contractors and service companies.

If you had to start over again, would you still be sales-only?

Ann Thomas: Yes.

Mark Cowie: Yes. The pros of being able to deal with more customers outweigh the cons of having a service group.

Lee Smith: This is a good niche and we've worked hard to be successful. Down the road, we may incorporate service and installation work as a way to expand our presence, provide something else to our customers, and of course increase sales.

Why aren't others doing the sales-only model? Are you a dying breed?

Robert Grunow: The retail industry demands a storefront, and I don't think many companies can do what we do.

Mark Cowie: I'm starting to see a trend in Texas. Some smaller jobbers are hiring their own technicians, and they're no longer using distributors' service techs.

Ann Thomas: Years ago, jobbers had their own maintenance crews. Then the oil companies found it was cheaper to outsource that work. It's now coming full circle. We have a customer right now who has in-house service, and I'm sure there will be more.

Bob Becker: I don't think we'll see more companies adopting this model. We're seeing a lot of companies either merging or going out of business. I sold Becker & Associates to two of my employees a year ago. While I'm still very active, I've seen a wealth of growth in sales this past year through our Web site.

Mark Cowie: I see more contractors going out of business than distributors. Look at the history of the sales-only companies and see how long they've been in business.

Brian Savage: What is dying is what we as distributors know, our product knowledge and our expertise. There's a knowledge gap right now between my generation and the younger generation.

Brent Howard: I purchased Baja Pump three-and-a-half years ago and knew that I would not make any changes until I was comfortable with the model. I'm considering adding testing or service work, but not as primary growth areas. Our growth is going to come from sales in Mexico, which is a market like the U.S. was 40 years ago.

Will there be a resurgence of the sales-only model of distribution? Will more companies focus purely on sales because service work will be done by in-house employees? The PEI distributor model is indeed varied. Howard Upton writes that it is “untidy.” Stay tuned.

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The PEI Journal • Fourth Quarter 2008 • Volume 2, No. 4 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.