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TMB - The Wholesaler - Features: April 2007: Buying Groups

Leveling the playing field for independent wholesalers

Special to The Wholesaler

Among PHCP wholesalers, buying group membership today is as commonplace as computerized inventory or e-mails. But it wasn’t always that way. Forty years ago there was no such thing in this industry; buying groups in other product sectors such as auto parts, hardware, foodstuffs, etc., predated the PHCP version by decades.

The modus operandi of buying groups is simple and straightforward: Non-competing wholesalers (or other entities) band together to pool their purchases from selected vendors. Their accumulated buying far exceeds the purchasing power of any one member and earns larger volume discounts accordingly. Through this process, the members seek to compete more effectively -- to “level the playing field” -- vis-à-vis giant competitors such as the plumbing industry’s national wholesale chains. As noted later, buying groups in the PHCP field also provide members with other benefits, but their indispensable function is to enhance members’ purchasing clout.

This concept first saw light of day in the wholesale plumbing field in late 1968. It was then that six prominent wholesalers of the era organized the pioneer group known as C.L. Watt. This name was not eponymous but rather an acronym for the founding firms: Capitol Supply of Springfield, Ill.; J. Levitt, Philadelphia; Westside Supply Co., Omaha; W.T. Andrew, Detroit; Trumbull Supply, Youngstown, Ohio; and Treaty Co., Greenville, Ohio.

C.L. Watt’s industry debut was a quiet affair. While there was no deliberate effort to keep its existence under wraps, the founders opted for a low profile while the fledgling enterprise got its sea legs. But as we’ll see, this prudent move was characterized by buying groups’ principal critic as wholesalers “skulking about like banana republic revolutionaries.”

Low profile or not, C.L. Watt’s concept inevitably inspired other wholesalers to form their own groups. The first to come was Interco, put together in 1973 by four well-established wholesalers headquartered in upstate New York and one in Pittsburgh. A year later, wit & Co. Ltd. was formed. Interco did not survive, but two other groups emerged later -- Omni in 1980 and Embassy 11 years after.

Coming late into the industry, these latter two groups were spared a spectacular display of editorial fireworks by the late Charlie Horton, founder and longtime publisher of Supply House Times. Charlie was a gifted writer, knew the plumbing wholesale business from A to Z, and had a talent for invective. For reasons that still puzzle many of us, Charlie harnessed these considerable talents for an all-out, take-no-prisoners attack on buying groups in the October 1975 issue of his publication.

His timing was no accident. That year, October was the annual ASA Convention issue of Times, exhaustively distributed at the convention and sure to be read by most manufacturers and wholesalers attending. Charlie’s assault was a journalistic tour de force that critically -- and often savagely -- covered every aspect of buying groups in mind-numbing detail. Charlie filled no fewer than 38 full, closely written editorial pages with his diatribe, including a slashing ad hominem attack on former ASA executive Chuck Gilchrest, lately recruited to preside over C.L. Watt.

All of it was peppered with such vintage Hortonisms as “sucker deal,” “a three-dollar bill,” “odium and risk,” “24-carat baloney,” “blood bath yet to come,” “can’t do much good for their members,” “a continued artificiality that contributes nothing,” etc. Near the end, Charlie opined that, “Buying groups will surely peter out in our industry.”

Few readers had the time or patience to read Charlie’s entire effort. But it was unquestionably Topic A in the convention’s corridor talk. Nothing ever came of his predictions that buying groups were headed for grave legal and economic difficulties as well as ultimate collapse, but his onslaught had the unintended effect of putting buying groups solidly on the industry map.

Charlie Horton was no fool, and over time he watched, perhaps ruefully, as existing buying groups gained traction and new ones sprang up. In March 1981 he grudgingly recanted his opposition. Charlie blamed the intemperance of his 1975 tirade on the reluctance of early buying groups to tell their stories publicly. And in fairness to his memory, it should be noted that whenever a prospective source stonewalls, a good editor’s instinctive reaction is one of suspicion and even hostility.

Supply House Times did not continue its anti-buying group crusade beyond that 1975 effort. Nor did any other responsible source take up the cudgels. We were all in a full-blown recession, and the industry had other fish to fry. This was certainly true of incoming ASA president Lavoy Moore, a gentlemen whose mien and outlook was far too positive to waste time tilting at buying group windmills. Lavoy’s successor was to be Bill Schultz, not one inclined to lead the charge for or against this issue.

Initially, the early buying groups confined their activity to purchasing functions. But as they matured, other services were added. At first these involved such common business denominators as insurance and vehicle leasing. But over time and in varying degrees, the industry’s buying groups developed a wide variety of marketing and promotional programs.

Beyond the purchasing function, easily the two most prized advantages of buying group membership are unstructured. The first involves networking. All of the industry’s groups impose geographic constraints on membership to avoid having two or more members competing in the same trading area. The result is a free flow of information among participating wholesalers, both at group meetings and between them. To many members, the networking opportunities alone are reason enough to join a group.

Another membership benefit involves above-normal discounts offered by some vendors not affiliated with a buying group. It works like this: Supplier A is an official member/vendor and accordingly enjoys a steady flow of orders from its wholesaler members. Vendor B wants some of this business, and often it’s in the wholesaler’s interest to keep both A and B happy with orders. So the wholesaler diverts some of his purchases to B and for this business receives the same price, the same rebate, as if A had sold it. Such an arrangement is commonplace, especially with PVF products.

There are also transactions where the manufacturer’s rep benefits from his customer’s membership. In this instance, Wholesalers A and B are both bidding on the same job. A is a national chain, the purchases of which are not commissionable to the rep. B belongs to a buying group where every order earns a commission. Obviously the rep will do everything he can to see that B gets the business.

As noted, four major buying groups currently serve the PHCP wholesale market. Among these, structure, management and operating practices vary somewhat as do membership profiles. Following, in alphabetical order, is a thumbnail of each.

Affiliated Distributors
Founded in 1981, A-D, as it’s commonly called, started life as a buying group for electrical distributors. By 1984 it had become the largest group specializing in that product area. In 1995 the group launched the first of three new divisions servicing the PHCP field, this one for PVF distributors. Six years later, the Plumbing Supply Division was formed and soon thereafter C.L. Watt voted to become part of it. Most recently The HVAC Group, then the largest buying co-op in the heating and air conditioning sector, opted to become part of A-D, thereby creating its HVAC Division.

At latest count, these three divisions reported a combined membership of well over 100 firms with aggregate purchases of $8 billion-plus. Throughout their formation period, the parent organization has steadily increased its member services and now characterizes itself as a buying and marketing group.

Its principal membership focus is on mid-size to large local and regional wholesalers, and its marketing programs concentrate on joint member-supplier activities in such areas as marketing agreements, bidding on national accounts, automated EDI remittance transactions and separate annual meetings for each division.

Affiliated Distributors employs a staff of 40 people and operates under a nine-member board of directors, three of whom represent various sectors of PHCP distribution.

Embassy Group Ltd.
Embassy is the newest of the industry’s major buying groups, having been established in 1991. Its membership includes, in a single organization, distributors in all three sectors of the mechanical products market -- plumbing, PVF and HVAC. The group is 100% member-owned with approximately 65 wholesale firms operating in excess of 500 locations. They do business with roughly 75 vendor members to the tune of almost $3 billion annually.

Embassy has a small staff headed by president Walter Gumm and including an executive vice president and a program administrator. There is a seven-person board and, unique among industry buying groups, Embassy requires all members to participate through committee membership in key areas of the group’s operations and management.

This buying group has the smallest wholesaler membership of the four. But its roster includes a number of dominant regional chains with up to 40 branches, and otherwise well-known and respected wholesale firms. Sixty-one percent of the member firms belong to ASA, and six of their CEOs have served as president of that association.

In terms of wholesaler membership, Omni is easily the largest industry buying group. At present count, about 225 wholesalers operating 500-plus locations belong. The membership is heavily concentrated in plumbing and PVF supplies, though the number of HVAC wholesalers is growing. Estimated purchases are roughly $3 billion a year.

One hundred percent member owned, Omni is governed by a nine-member board of wholesaler members. The day-to-day operations are run by a support staff with extensive plumbing industry experience. Special attention is paid to relations with participating vendors, each of which is assigned a “Member Liaison” wholesaler contact.

In addition to the customary buying functions, Omni offers a very broad range of marketing functions and opportunities. These include frequent buyer programs, a “Fall Roadshow” which offers special buys each October, a “Spotlight Vendor Program,” which features pre-scheduled promotions by individual vendors at various times of the year, etc. As is the case with most groups, Omni’s annual spring meeting is a selling/buying event. In an interesting twist from the usual such affair, Omni’s version enables buying members to earn “Spring Meeting Dollars” which can be used only to defray hotel and travel expenses incurred to attend the meeting.

WIT & Co.
Second in longevity only to A-D, WIT was founded in 1974 by five Midwestern wholesalers led by the late Peck Johnston of Johnston Supply in Marion, Ind. From the outset, the group was member-owned with each participant holding an equal share in the organization. Current wholesaler membership is in the 85 to 90 range and vendor count is in the neighborhood of 150 supplier firms.

The group has long since expanded beyond its Heartland base and has members throughout the U.S. Plumbing remains the largest component of wit purchases. But from the outset it has also had a foot in the HVAC camp, and now has a separate division to serve that member sector.

The WIT organization includes a professional staff, a seven-member board of directors and nine standing committees dealing with everything from vendor relations to member education. WIT wholesalers tend to be either very substantial local firms or compact regionals with a dozen or more outlets. No fewer than nine WIT members have been elected to the presidency of ASA and at least four to HARDI’s top spot.

Proving their worth
Thirty-plus years after Charlie Horton’s attack, buying groups have become an accepted and essential part of the plumbing, HVAC and PVF supply chain. The combined membership of the four major groups described above totals close to 500 wholesale firms operating an estimated 1,500 locations. Aggregate buying volume of these four groups is in the neighborhood of $15 billion -- or nearly one-third of annual purchases of all PHCP wholesalers, including giants such as Ferguson, Hajoca et al.

Notwithstanding this obvious economic clout, a question sometimes raised is whether buying groups can withstand the relentless consolidation pressures now present in the industry. Perhaps the best answer lies in why buying groups were created in the first place. From the outset, the stated purpose of each group was to enable to members to remain competitive and independent. It is difficult, nay impossible, to imagine how these goals could be maintained without the buying groups that serve the industry today.

Additionally, a number of smaller groups specialize in one or another part of the PHCP spectrum -- HVAC controls, kitchen and bath products, decorative plumbing and hardware, etc. For the most part, these are of only tangential importance to the PHCP wholesaler and so are excluded from this report.

Buying Group timeline

1968 -- C.L. Watt, the first plumbing industry group, is formed by six prominent wholesalers.
1974 -- Interco Systems founded by five plumbing wholesalers in upstate New York and Pennsylvania.
1974 -- Wit & Co. founded by five Midwestern plumbing wholesalers.
1975 -- Chuck Gilchrest, popular ASA executive, is named president of C.L. Watt.
1975 -- Supply House Times publisher Charlie Horton launches an editorial attack on buying groups.
1981 -- Affiliated Distributors founded as a buying group for electrical distributors.
199? -- Interco Systems ceases operations.
1991 -- Embassy Group Ltd. formed for wholesalers in plumbing, PVF and/or HVAC.
1996 -- A-D creates a new division for PVF wholesalers.
2001 -- A-D starts new division for plumbing distributors. C.L. Watt members vote to join A-D, making its combined plumbing and PVF volume No. 1 in its product sector.
2006 -- The HVAC Group, largest in the heating-air conditioning field, joins A-D family of buying groups to form its form its HVAC Division.
2007 -- PHCP industry buying groups account for estimated annual purchases of $15 billion, nearly one-third of all wholesaler purchases in this product sector.

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