BOLSTER ELECTRONICS: DEALING WITH DEALER DEMANDS

In May 2012, Brian Vickers, the owner of Vickers Industrial Supplies (Vickers), a dealer that had been selling the Bolster line of industrial video equipment in northern Alberta for the last five years, approached Rob Jackson, the general sales manager of Bolster Electronics (Bolster), to request a better pricing discount than his company was currently receiving as a dealer. Bolster distributed its products primarily through two national distributors who in turn sold through dealers across Canada. The Bolster management team was reluctant to deteriorate their relationship with their national distributors by selling directly to regional dealers. Brian Vickers presented a strong case that his firm had earned the right to receive distributor pricing. Jackson knew that Vickers was generating a growing business volume for Bolster in an important market segment, the Canadian oil sands region, and as a result he was giving the request some careful thought.

COMPANY BACKGROUND

Bolster was one of the largest suppliers of state-of-the-art industrial video equipment for harsh environments, in Canada. Industrial video equipment was often used for outdoor security purposes, but it was also useful in many other applications such as to monitor production equipment while it is operating. Bolster's product line included video cameras and all associated equipment to provide complete video monitoring systems for companies that needed video surveillance and monitoring in harsh environments. Harsh environments were very dirty, very hot or potentially hazardous, including potentially explosive locations such as oil refineries. The product line was easily adapted for wireless or hard-wired applications using the Internet or industrial communication protocols.

Bolster was located in Waterloo, Ontario. It distributed its products through two national distributors, and several executives in the company were opposed to adding a third distributor selling directly to dealers. Bolster was one of the top four major product suppliers in the Canadian market and was a small player in the U.S. market. In the United States, the company sold to 12 regional dealers who had approached Bolster, but it had no national distributors there.

Bolster preferred to sell through distributors as this allowed the company to focus on technology development and let the system engineering responsibility rest with the distributor. Bolster defined a distributor as a channel partner who 1) stocked inventory, 2) had video system engineering expertise to help dealers and end-user customers with system design and 3) had a sales force to sell to local dealers as well as end-users. On the other hand, dealers were defined as resellers who purchased video equipment, as required, from the distributors and who might stock a small inventory of products. Dealers normally sold simple systems that did not require much system design or sold replacement equipment for existing systems. Dealers normally stocked only products that had a track record of sales volume. Distributors kept a compete inventory that could be supplied to dealers usually within one business day faster if an end-user was suffering a production outage as a result of a piece of video equipment failure.

Bolster's product line had a good reputation in the market, and occasionally an end-user would contact Bolster directly to inquire about purchasing some video equipment. These end-user inquiries were always referred to one of the company's distributors. Bolster had made it clear and well known that their business policy was to sell through national distributors, who would be the company's channel to market. In return, Bolster expected their national distributors to dedicate resources to grow the business volume and brand equity of the Bolster product line. The exception to this implied distributor exclusivity was a short list of original equipment manufacturers (OEMs) to whom Bolster sold directly. The most notable OEMs were transit bus manufacturers requiring tamper-proof video systems that could withstand the ongoing vibration of a moving vehicle.

Bolster had 10 technical sales reps who would call on distributors and dealers. Occasionally, a technical sales rep would help the sales team of a channel partner and visit an end-user customer to land a big project. If asked by a customer for a recommendation, a Bolster sales rep would never recommend one channel partner over another. The performance measurement and incentive pay for each sales rep was weighted equally on the company's overall performance and their own territory performance. The compensation of the sales team was competitive in the industry with a high portion being a fixed salary component.

The Market

The electronic security industry included alarm systems, controlled access systems, video surveillance and other security systems. The harsh environment electronic surveillance market was a small sub- segment of a growing global security industry.

In 2012, within the harsh environment video surveillance category in Canada, it was estimated that less than 10 per cent of the market was sourced online or purchased from non-Canadian suppliers. The top four suppliers were similar in size and collectively represented approximately 60 per cent of the market, with the remaining 30 per cent being supplied from a long list of smaller or specialty companies. Consequently, competition was primarily between the four Canadian companies. All four primarily used national distributors, some of whom were Canadian subsidiaries of multinational manufacturers that had set up their own Canadian distribution system. Independent distributors often carried more than one supplier's product line but usually had one primary line. Bolster was the primary line with both of their national distributors.

Industrial video equipment was used by a wide range of market sectors including the chemical, oil and gas sector; the agricultural sector; the construction industry; municipalities; and many sectors that required remote monitoring in outdoor locations or automated process monitoring in manufacturing facilities.

Bolster's executive team had many years' experience in the industrial electronics business. In their experience, end-user customers were looking for several important characteristics when they were shopping for a video surveillance or monitoring system: the equipment and the system must have a good track record of reliability; it had to be easy to learn and operate by non-technical users; it must fit the specific environmental conditions and communications requirements of the customer's site; the customer must have confidence in the design team's capabilities, so they were confident the system would function and communicate properly when installed; and the system supplier must be available for ongoing service support. After all these conditions were met, the end-user was still looking for the lowest price, since in almost all cases the cost could not be passed along to their customers. Consequently, the system designer/supplier was as important as the equipment they were supplying.

National Distributors

Since its founding, Bolster had used National Electronic (National) as their distributor. This had resulted in success for both companies in the early years of industrial video technology. National was a large industrial distributor with five distribution hubs, 20 satellite warehouses and 10 sales offices across Canada. National carried a wide range of electric, electronic and communications products. Its video system engineering teams were centrally located in three of the distribution hubs in Toronto, Hamilton and Vancouver. National had a sales team of 125 technicians and engineers located in their 35 locations across the country.

In 2004, a second national distributor was added following a drop of approximately 7 per cent market share by Bolster. Executives felt that National, while expanding other product lines, was not giving the video surveillance business the focus it needed. A new distributor, Albright Industries (Albright), based in Montreal, would help make up the shortfall. Bolster felt that Albright might also provide growth in the Quebec market, where National had always been a little weak. Albright was much smaller and did not have an industrial video product line. They had design staff, warehouses and sales offices in Montreal, Toronto and Halifax.

National expressed their disagreement with this move, and for a while Bolster wondered if National would move the Bolster product line to be their secondary line rather than their primary video surveillance line. Bolster executives expressed their commitment to National and indicated that Albright was to focus on new business, not take business from National. Even though this had not always been the case, by and large the two distributors did not compete for the same customers. Over time, the dissatisfaction seemed to disappear and National seemed to step up their game. In 2012, National was by far the larger of the two distributors for Bolster.

Vickers Industrial Supplies

Vickers was an industrial supply company in Edmonton, Alberta. It had been serving the industrial sector of northern Alberta for over 20 years with a wide range of supplies, which ranged from electrical cable to lighting fixtures to electronic security systems.

Vickers' main office, warehouse and engineering team was in Edmonton, with a warehouse and sales team in the prosperous oil sands area of Fort McMurray, a six-hour drive north of Edmonton. Northern Alberta, and specifically the oil sands development area surrounding Fort McMurray, had been the fastest growing economic area in the country for several years.

National Electronic had a warehouse in Calgary; however, in 2012, neither of Bolster's distributors had a video system design team in Alberta. National had a sales office in Edmonton, which was a three- or four- hour drive from its Calgary warehouse in southern Alberta. Albright did not have a presence in western Canada. In 2007, Bolster's market share in northern Alberta was one-third the share it held nationwide. Jackson had been trying to convince National to grow its presence in northern Alberta for some time.

In 2007, Brian Vickers had approached Bolster with the request to take on the Bolster product line and be the company's distributor in northern Alberta. The Bolster management team welcomed the opportunity to grow their participation in the market and agreed to sell directly to Vickers, but offered a territorial dealership rather than a distributorship. As a concession, Bolster provided technical support, sales team training and system design services to Vickers. At the time, Vickers had two sales people handling industrial electronic and communication equipment. Bolster was rewarded with approximately 5 per cent market share in the local market in the first year.

In the following five years, Vickers' sales volume with Bolster had grown 10 times, all of it coming from the Edmonton and Fort McMurray areas. In 2012, Bolster's highest market share region was in northern Alberta. Vickers had doubled its sales team to four people, all of whom had attended training at Bolster's head office in Waterloo. Although the team was small, it had the capability to design small video systems and rarely turned to Bolster for technical or design support. As a dealer, Vickers was not required to stock inventory, but as the business volume grew, so did its inventory.

Early in May 2012, Vickers again asked Jackson to be named as a distributor and qualify for a distributor's discount for the following reasons: (1) they had increased Bolster's business in the area by over 10 times in the past five years; (2) they were performing a warehousing and design function in the area comparable to a distributor's operations; (3) their salespeople were highly trained and serviced the area better than either of the national distributors; (4) they were now servicing over 75 per cent of the accounts in the area; and (5) Bolster's total market share in this area was the highest in Canada. Vickers pointed out that with the added discount of a distributor, they could add more resources and increase market share to over 90 per cent with more attractive bids to industrial customers in the local market.

Pricing Practices

Video surveillance or monitoring systems had three main elements: the system design, the video camera equipment and the associated communications hardware to connect the video feed to the customer's monitoring system. System design generated good contribution margin for the distributors. If the system was fairly standard and did not require much work, sometimes the distributor or dealer would consider this a cost of sales rather than a priced-added service. In any case, this was the distributor's or the dealer's business, and Bolster was interested mainly in the equipment pricing. Bolster tried to maintain an overall gross margin of 40 per cent (of factory price). This was becoming increasingly difficult as technology matured and competition from the other major players in the industry increased. Pricing structures across various product lines varied but typically it followed the discount guidelines below.

PRICE PAID BY EXAMPLE

END-USERS Suggested List Price $100

OEM'S List Price Less 35% $65

DEALERS List Price Less 38% $62

DISTRIBUTORS List Price Less 48% $52

JACKSON'S DECISION

Jackson believed that most of Vickers' success lay with the fact that the dealer carried a broad set of product lines, carried a good level of locally stocked inventory, delivered exceptional customer service and had excellent customer relationship management. Local firms preferred to deal with the Vickers team rather than National's sales rep who called in the area and whose nearest warehouse was in Calgary.

Jackson felt that in some ways Vickers deserved a distributor's discount, but he realized that in granting such a discount, he would be setting a precedent for Bolster. Additionally, Bolster was under real pressure to maintain its contribution margins at the industry standard of 40 per cent. Jackson knew that the addition of a territorial distributor would endanger the company's relationships with the national distributors, and although Vickers' volume was appreciated Vickers purchased $3.7 million from Bolster last year it was less than 10 per cent of the national distributors. On the other hand, territorial distributorships seemed to be the best method of increasing turnover in areas where participation was low, although good local distributors were not always available. Jackson was undecided about what action to take with regard to Vickers' request, particularly since continued refusal to grant the special discount might well mean loss of the dealer's business to a competitor.

Questions:

Calculate total contributionfor Vickersat dealer pricing

Calculate total contributionfor Vickersat distributor pricing

What isVickersfinancial benefit from distributor pricing over dealer pricing?