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 Joel's Blog

The Zombie Distribution System

09/26/2018



If the name Hammacher Schlemmer is known by the general public at all nowadays, it's as the very expensive seller of player pianos and other very expensive "lifestyle" curiosities. But the store's origins are as a large hardware store (based for a long time in New York City's Union Square area, at 4th Ave and 13th street, about 5 blocks from my apartment). Above is a picture of a page from the store's 1908 catalog. H&S not only sold tools directly, but it also distributed tools to many smaller stores. The catalog's page features some Stanley planes; the store's wholesale discount sheet, shown on the right side of the photo, shows that other store could buy the planes generally from anywhere from 25%-30% off. I am not sure what some of the discount ranges signify. (At the end of this post you'll see a picture of the front page of the discount sheet showing terms and conditions. The sheet is unique in my collection and generally rare. I found it in the front of the H&S catalog.)

Back in the days of this catalog, customers would have typically bought their tools from a local hardware store. These tools would have been purchased by the store from a regional distributor, who in turn got them from the factory -- or the importer. Each tier of sales cost money. The hardware store owner needed to make a living. The sales rep who sold to the hardware store needed to make a living. The regional distributor needed to make a living, and the factory had to make enough money to keep the sons of the founders in fancy golf shoes.

This system made a lot of sense because the cost of shipping goods was huge. You needed to ship by sea or rail. Goods needed to be handled by many people, and the final wagon ride to the store - well, it made sense to group stuff together. Involving a distributor made a lot of sense because the distributor could organize an efficient shipment of lots of different things from different vendors for one store, rather than tiny shipments made onesy-twosey. Just having one representative travel around selling lots of different lines made sense because traveling by train or buggy miles just for an order of two boxes of screws was very wasteful.

Even after the introduction of trucks, the system kept going until the 1970's when the interstate highway system drastically lowered the cost of individual packages going long distances. Delivery companies like UPS and FedEx made direct shipment to the end customer (or store) commercially viable.

In 1978 Home Depot was founded. The company's their major brilliant innovation was buying directly from the factory. Essentially they could sell stuff far less expensively than a local hardware store could because they were paying distributor cost, not wholesale. Home Depot's competitive advantage of course led to the collapse of the local hardware store and gave Home Depot the power to lower costs even more by squeezing costs out of manufacturers, many of which decided to downgrade their quality for Home Depot goods or go overseas to lower costs.

Nevertheless many American manufacturers still insist on selling through distribution rather than directly. What this means of course is that even if you purchase something from the company website, the prices are included extra margin for the non-present distributor - or middleman.

What does this practically mean? American products from old-line companies are a lot more expensive than their newer, more streamlined competitors since the cost structure includes the middleman, even if the middleman serves no real purpose in the 21st century.

Backward thinking also affects investment in the means of production. Some old-line manufacturers are not willing to replace machinery that more or less works. When I worked at Black and Decker, it was nearly impossible to make quiet-to-specification gears on our old, worn-out, gear making machines. But we could not get approval to replace the machines because the cost of keeping the machines (zero) was far less than buying anything new, even though the product we produced had lower sales. The accounting perspective was that it only made sense to invest if you were building a new factory to expand something somewhere, not to upgrade a current profitable venture. Black and Decker instead bought an appliance company and eventually got out of the industrial power tool business that I was part of.

There are lots of reasons why American companies have trouble competing, but these are some of the big issues.

Why should you care?

A few months ago we got word the Baldor was dropping production of their top-end 6" grinder that we use for our custom grinders. It was expensive, too expensive, but worth it for those rock solid cast iron tool rests. But apparently for a big company like Baldor, the low volume wasn't enough to keep it going. That's a real shame. A little investment in machinery, a less expensive distribution system, and their grinders would be a lot more competitive in pricing. They would appeal not just to those who want the best, but also those who just want a great grinder. Note: the 8" grinder is still in production and lesser Baldor 6" grinders will still be sold (albeit not by us).

Over the years some of my favorite products have been discontinued by large American makers. The volume is just too small to interest them. Norton got rid of its Lilywhite stones for this reason. Now Baldor. There are other examples, but it's too depressing to think about. Every time I hear a story like this I tell my rep that if the company feels that the volume is too small for them, they should just sell the division to someone who wants it. These are still viable products. Heck, Unicomp, the company that made the fabulous M-Clicky keyboard for the original IBM PC's, still makes them as a niche business for people who want a great keyboard. I am very grateful. I have two - one PC, one Mac.

PS - we still have a few 6" custom grinders in stock, but even after we run out the store demo model, which is my own grinder, is staying with me for the rest of my life.

Term and Conditions for wholesale
Join the conversation
09/26/2018 Ken Altman http://www.altmanbows.com
You mentioned Black & Decker; I've got a Black & Decker 3/8" variable speed drill, and a B&D worm drive "skillsaw" that I bought forty years ago. These are HEAVY DUTY commercial grade tools that are still going strong. Nothing like B&D's stuff these days.
09/26/2018 jessica wickham http://www.wickham.com
That must have been quite the neighborhood back in the day... I wonder when Kamenstein's Hardware popped up? Also there was apparently an amazing hardwood dealer in the (former) Astor Wines building on St Marks... Would be so fun to travel back in time...
09/26/2018 ROBERT TILLER
A real shame true quality is going by the wayside in our disposable world of just barely good enough to be average. I have some of the old B&D professional tools and an old Stanley router(think R2D2) as well as some others(Porter Cable, locomotive belt sander) that are still in use with updated grounding power cords. I will admit that variable speed drills are an advantage. Pro construction folks factor in tool disposability when doing large jobs. I like my Baldor grinder. Seems that we folks enjoying "accumulated life experience" AKA Getting Old Syndrome have taken too much as a given when we think that old standbys will always be there, like the corner bakery that we grew up with and is suddenly gone.
09/26/2018 Daniel Burgoyne
I am confused with what happened to the US made pro tools all the while German and other European pro tools got to increase their market share in the US. Festool, Hilti, Fein seem to have taken over the top of the line tools and they are competing with the same cheap tools that apparently caused B&D and Baldor to drop some of their best lines.
09/27/2018 Brian moran
Not just power tools of course....Stanley is another case study.... who still uses their no. 40 push drill or ratcheting screw drivers like me? Anyone still have local machine shops like the community ones that used to help you make replacement parts or blades for tools? Other that Lie Nielsen, I can’t thing of another domestic manufacturer of higher end hand tools... now we are all guilty of looking oversees since US sourced goods are so limited.... I agree with Robert and Daniel... bring back some of the good ole days! And the local corner deli and bakery!
10/09/2018 Mike
From my perspective (my day job is global equity fund manager, so I look at US publicly traded companies and their international competitors all day long), the US market is somewhat unique in that our market allows both huge corporations and one-man bands to compete. The statistics support this - take a look at the "ease of doing business" studies by the world bank - the US is always in the top 10 which is remarkable for such a large country. In our little world, look no further than Gramercy Tools, Lie Nielsen, Lost Art Press/Crucible, Bad Axe, and hundreds of others small to mid tool manufacturers who have been able to (profitably, I assume) tackle end markets that are perceived to be too small for the big guys. Try doing the same in France - GFL - getting credit, regulatory compliance, registrations, etc, are all a nightmare. There is a reason France ranks #31. Ask Michel Auriuo.

It might seem like Festool is gaining market share on B&D, and that might be true in our little hobby woodworker world, or a few specialized part of the installer world. But the fact is B&D's real threat is from TTI (ryobi/milwaukee). B&D has about 15% market share in DIY/contractor tools, TTI has 9% and growing. Yes, Festool is (likely) growing in the highly specialized world, but they are barely even on the radar in terms of the big market, which is DIY/contractor tools.

That said, I agree with every you say about Zombie distribution and large companies being too unwilling to invest in smaller markets. Unfortunately, for now, Taiwan will occupy that space. I am told the old baldor powered PM66 saws are much nicer than their newer made in Taiwan PM2000s, even though the PM2000 is generally considered a nice machine. There really is not much of a market for $5000 table saws.

I own some Dewalt tools, in addition to a whole bunch of festool, and I have to say the dewalt stuff is great. (I assume most people know that Dewalt is owned by B&D, and they market it as the pro brand. It seems Porter Cable is slowly being phased out). Dewalt is high quality, affordable, and durable. It might lack the finesse of some festool products, but they make up for it in power (sometimes the germans are a little too efficient) and durability. The brushless cordless stuff is particularly nice. The real tragedy, in my mind, is that Bosch has been unwilling to put together a compelling and coherent system of tools that compete in the specialty world. You can cobble together a festool like kit of Bosch if you really want to, but good luck finding all the components. Their dealer support/network, here in the US at least, sucks. They are losing market share.

My local Ben Moore store has a festool display (CT, drywall sanders) and it is, somewhat ironically, collecting dust. Very few painters want to spend $500 on a vac or $750 planex when they can just pay a laborer to sand drywall with a $3 sanding sponge.
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