By Benjamin Brits
The role of wholesalers in any sector may not get much thought, while in fact they can add a great deal of value to an industry.
Some of the areas that wholesalers add value include advanced knowledge in market trends and conditions, supporting new technologies to market, stock holding and storage. Further, wholesalers could essentially provide a finance arm to industry with varied account models, offer convenience for clients with national footprints, distribution, and delivery options.
Historically the wholesale environment has always been structured depending on how the world economy performs. In time of contraction, there is a lot of consolidation in terms of brands while in times of expansion there is breakaway with the separation or creation of new entities to again service a flourishing market. They key factors however always remain in the success of the wholesaler being stock volumes, product mix and product knowledge while reliability builds trust with customers.
“More recently, pre-Covid, trends showed a strong heading towards technology adoption and solutions in energy efficiency. Now, post-Covid lockdown and subsequent economic conditions, we have found that purchases have become a lot more cost sensitive. So, clients have been looking much closer at capital expenditure and up-front costs of energy efficiency because with these products and solutions, a payback period is involved as the up-front cost is higher. When things are going great, it makes sense to spend on technology. When things are tough, people just want to have open stores or equipment fixed as cost effectively as possible. So, a definite trend is that up-front cost is important right now,” says Rodney Taylor, managing director of Eurocool.
Another trend that has emerged, and that shows the great significance of its contribution to the economy of South Africa, is the impact of the lockdowns on the hospitality industries and the limitations on travel to the country. The rolling waves of infections have also prolonged this sector being able to get back on its feet and thus affecting the HVAC industry in a big way with occupancy rates falling significantly.
We monitor our normal stock holding, using various forecasting tools available.
Statistics show that tourism alone accounts for nearly 7% of the country’s gross domestic product and not to mention the significant contributor to employment at 4.5% (Figures from StatsSA). Essentially, a very big sector for the HVAC world where no, or low occupancy, at venues means plant equipment does not work, room ACs do not work, and investment into the sector is stalled on new projects.
“The market requirements today are also driven primarily from the end user and contractors. End users particularly, are becoming more and more informed of what’s happening out there with internet access and social media being what it is. If one goes back a few years, the wholesalers would drive industry changes while a scene from today is one where the end-users are driving a lot of the market trends because of their increased knowledge and access to vast amounts of information,” adds Taylor.
“A wholesaler’s greatest function has always been supplying to the trade while supporting the brands we represent through marketing and distribution channels. For other businesses that have operated on similar protocols, trends are that they have opened purchasing to the end users. To work with us we still insist that clients are trades people and must have a registered business to purchase from us. When a company loses its focus and identity it becomes a problem for the sector and so it’s important for us to stand by our model of only supplying to the trade,” adds Kumar Singh, HVAC Product Manager at Metraclark.
Quality suppliers and relationships
On-boarding manufacturers or new technology is not only about meeting volumes and management needs, or price for that matter. For wholesalers, not only do big brand names form part of their product ranges and for all products in fact, but they also need to meet certain standards and regulatory requirements where applicable, and even international energy efficiency ratings. They may further be required to comply to certain local criteria too.
“We are constantly approached by suppliers that would like to see their product marketed in South Africa and as a wholesaler we have to answer a number of questions such as: is this a good product for our business? Is this good for the industry? Is there really a home for the product in the sector? Once that outcome is established, part of the valuation will continue with supplier quality and reliability, that are key elements and are basically the strength of any brand,” says Taylor.
When you talk about quality and reliability, big brand names would obviously come to mind while some may still be grappling with the chances taken on cheap imports from the East. There are of course companies that enter a market with the objective to dump poor quality goods into a country and will aim to sell X number of units and then disappear, essentially leaving many clients unhappy without access to service and repairs, and even total replacement. However, this is not always the case while quality and reliability has shown great improvement in recent years from that region and where wholesalers may very well engage given all the boxes are ticked.
Where wholesalers tend to avoid engagement, are in situations where there is very little demand for a particular product, or there might be an opposition product already in the market that is well established – making moving the product that much harder and therefore also less appealing.
For wholesalers, an exceptional relationship with their supplier’s is an obvious proviso, where long-term engagement is the objective. Wholesalers would note that the relationship, support, and loyalty with suppliers would be on par with that of the relationships with their clients – because there is benefit to all parties.
“In terms of suppliers, quality is important and as important as the product sold is the technical support and service we provide through our own qualified technicians and teams. Also, the functions such as custom design and commissioning for systems through our engineering department all make it possible to support our customers in their service to their own clients. This has always been something that has been important to us,” says Singh.
Stock items, volumes, and pricing factors
In terms of stock and volumes, quantities are mostly based on historical movement and there are naturally some items that move a lot quicker than others. However, there are so many variables involved with stock that can be as simple as supply and demand and can move according to industry trends or current trading environment factors. Dynamics could also be linked to legislative changes and the changes in refrigerants for example.
“Stocked items could also vary according to factors such as green technology adoption, changes in the construction sector, the requirements from consultants or particular demand in certain sectors such as mining. If you had to look back over the last couple of years, South Africa has built more malls per head that the US so there is continual adaptation to what the markets require. We are also in a phase of our own regulatory changes that will play a role in what is supplied from wholesalers. In Europe, the HVAC industry is already shifting large scale to natural refrigerants, and this is something local wholesalers will keep their eye on,” says Singh.
“We monitor our normal stock holding, using various forecasting tools available. We also look at the element of seasonality that’s involved in wholesaling. Our industry has always been busier in summer than in winter according to our statistics. Further, we also need to watch for trends in the market where, for example there has been significant growth in recent years in the CO2 industry that requires sourcing and research around CO₂ related components that then in turn need to be on the shelves. A lot of information and newer technologies comes back to the local environment from participation at international exhibitions, thus following the trends in the global market too,” adds Taylor.
Pricing factors today have also been heavily affected by major increases in shipping costs that is purely related to supply and demand. There is not only a huge shortage of shipping containers themselves but space on vessels due to the changed landscape of the sea freight industry routing and simultaneous global demand of commodities, particularly to China. This has resulted in almost a tripling of the cost of shipping.
“One of the key factors that has always influenced pricing in our industry, irrespective of conditions, is the exchange rate and this is a significant driving force because 90% of what we sell is imported and so has a direct impact on pricing locally. We are constantly keeping in contact with the suppliers to ensure that we are sourcing value products, so the best product for the price,” notes Taylor.
These factors have a direct impact onto wholesalers because although there are volatile exchange rates and increased costs, maintaining a certain level of stock to support the industry is unavoidable and is still needed by the industry to continue to function, particularly where for example the food chain or medicine distribution remains an essential service. These factors lead to better ways or methods of getting products from A to B where packaging could be revised or where larger quantities of components are imported with potential local assembly, so there are also continual and smarter innovative ways to get around these challenges to manage costs transferred to the client at the end of the day.
“Although these costs do get passed on, there is a point that is reached where we engage in negotiating with suppliers based on volumes versus cost-reduction to assist the local market. But generally, the market realises that when the exchange rate runs, prices are going to go up because everyone is in the same situation, so there is little ‘resistance’ to the fact, but when the exchange rate runs in the opposite direction, as a wholesaler you just have to ensure that you are not sitting with too much ‘expensive stock’. In the end, costs are generally balanced out,” Taylor adds.
We are constantly approached by suppliers that would like to see their product marketed in South Africa and as a wholesaler we have to answer a number of questions.
“The pandemic has definitely not been favourable in terms of pricing because of the big impact on logistics as mentioned. Supply lead times have thus also been affected. The exchange rate is a factor and is often assumed the only driver of price, but this is a misconception. We must realise that we are not anywhere close to where we were a couple of years ago while factors that provide far more of a cost impact these days is the oil price and therefore the cost of logistics both on an international and local level. Global supply chain disruption also has a carryover effect such as what we saw recently with the blockage of the Suez Canal and hundreds of container ships being halted or re-routed,” says Singh.
Business and economic risks
Wholesalers have several business risks to start, from stock levels to the right product mix and credit facilities. With the changes in the business environment due to global economic activity, it has surfaced that some new risks exist as manufacturers want to engage directly with end users. This is not a global trend and in fact is only a local scenario that wholesalers are collectively opposed to.
“This is indeed occurring with certain suppliers. As wholesalers, we believe everybody in the whole supply chain from the OEM, to distributor, to contract, to end user has a role to play. As a manufacturer you have to be good at manufacture, as a contractor you have to be good at your role, as a wholesaler we have to be experts in our field including stock holding, sourcing, marketing, and logistics,” says Taylor.
All role players have particular knowledge and areas that they are good at and should stick to. Unfortunately, situations come about of not ‘staying in your lane’ and this is very risky because you cannot be good at everything. Wholesalers cannot manufacture nor be a contractor that requires particular skill. Manufacturers don’t have the service to assist clients on breakdowns or where multiple products are installed in a plant or equipment set.
These types of risks can certainly be managed by wholesalers and again where strong relationships are maintained with both the supplier and client. Cutting role players out of the value chain are not considered long term solutions however, and generally don’t tend to sit well with the industry as a whole and further based on historical occurrence is an area of continual failure.
“At the moment, globally, there is also a huge shortage of electronic components which is having a major impact on not only our industry, but industries such as the automotive industry and home appliances – basically anything that is made with electronic chip sets. This is not the first time this has happened, although today also sees many more products that contain electronic components. Availability of raw materials is thus also a major risk for all supply chains that rely on production or manufacturing and goes further to other raw materials such as steel shortages that we have seen recently, all exacerbated by the pandemic where many production facilities had to close and have not stopped playing catch-up,” adds Taylor.
Counterfeit products are also on the rise and a risk for all businesses not only the suppliers but the contractors and clients as well.
“Changes in the supply chain dynamics, including counterfeit products, has actually been happening for years, possibly decades. The current environment and the state of the global economy has also pushed several companies into a state of just covering expenses at any cost, and for several reasons too. This in itself holds much risk, but the reality is that the world is working though difficult and unprecedented times and therefore we should be wary of being over-opinionated as to other company’s strategies, however unethical business practices have to be avoided,” Singh states.
Changes for the future
In terms of what we can expect to see in the future on the wholesale side is a big swing towards the incorporation of e-commerce solutions.
“E-commerce is something that is on the rise globally and will definitely be something this sector adopts too. Today every supplier essentially has to up their game in terms of what convenience you are offering the customer. If you take the likes of an Amazon and see what they have implemented in terms of solutions to their clients as a member of the wholesaling community, you have to realise adding value to the customer,” says Taylor.
Upping the game in terms of product knowledge and client service is also high up on the agenda. There is always going to be a need to interact with someone with knowledge around a product because ALL the information is just not available or covering every single aspect in a brochure or product information online is usually just too extensive. This also is a major factor in being able to advise clients what products partner well together, clarifying elements that may not make sense and the ability to troubleshoot which, when combining products in a system, can’t possibly all be represented.
This particular value will always come from people and therefore partnering with the correct wholesalers offers this benefit. Products can really be purchased anywhere, while product expertise and knowledge is another specialist offering of the wholesaler.
“As financers/financial service providers to the industry for companies that naturally meet qualifying criteria, and with the legal and financial framework changes that have been implemented in the last decade, we will also continue to see the role of businesses such as wholesalers supporting clients with not only access to credit, but administrative and legal documentation and advisory that can be applied in their own businesses. We already have to comply with the terms of the various laws and acts in SA. This is also an opportunity to educate the industry but also to ensure they are protected legally and financially so that we are protected and don’t have to sit with a lot of bad debts on our books. That being said, offering and managing credit is a skill in itself,” Taylor concludes.