Distributors Dealing Direct to End Users

By John Honovich, Published on Feb 22, 2011

While the typical role of security distributors is facilitating sales of products between manufacturers and integrators, significant evidence points to a number of distributors dealing direct to end users.

Among industry people, this is a controversial practice. The traditional business structure is for only integrators to sell to end users. Manufacturers, their reps and distributors, help integrators by providing them products and information. Ultimately, the integrator is the direct connection and seller of products to end users.

By contrast, when distributors deal direct to end users, they generally have a crucial advantage. Since distributors usually buy from manufacturers and with very high volume, distributors typically get the best pricing for products. Normally, distributors apply a modest mark up and re-sell those products to integrators. Integrators then mark up the product again, bundle integration services and sell to the end user. When distributors sell direct to end users, they can sell for a significantly lower price (while maintaining their profit margins).

Two opposing schools of thought exist on this practice:

  • Cut Out the Middle Man: The minority view in the industry is that this increases efficiency by cutting out the middleman, aka disintermediation
  • Violate their Duties: The majority view inside the industry is that distributors have an obligation to support their manufacturer and integrator partners. Selling direct to end users violates that obligation and hurts the whole industry.

What Do You Think?

However, debate exists if this practices even exists. To that end, we conducted an investigative study to find evidence of this practice. We found over 30 online citations of bid results and contracts where leading distributors regularly sell direct to end users.

We suspect a significant number of deals are being made direct between distributors and security end users - more than many manufacturers suspect but still likely a distinct minority of deals overall.

Just from our research on the public Internet, we were able to find over 30 bid results or contracts showing various equipment only deals done by distributors. This almost certainly represents a small fraction of all the deals being done as our results were limited to what we could find from Google's indexes of public posted documents. This likely only covers a small number of governments and quasi governmental entities that require such disclosure. The true number is likely to total thousands of deals/contracts or higher over the last few years.

Determining the exact number or breadth of these deals is extremely difficult. While almost all distributors strongly and publicly claim to not compete with their integrators, the distributors are the only ones to know the true extent of their dealings. From our discussion with numerous manufacturers, cases definitely arise but these generally only happen when an integrator protests over a lost deal.

Making this more difficult to assess is that all 3 of the companies covered (ADI, Anixter and NAV) refused to provide comment despite us contacting their offical PR/media contact at least 3 times each over a 3 week period. We suspect this is a highly sensitive area that most of them would like not to be addressed. In the future, If they do choose to address this with us, we will share their response and input.

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Given this situation, it is hard to guess the total number of deals sold direct by distributors to end users. It must be a distinct minority, otherwise you would expect to see an out and out public war between integrators and distributors. However, whether, it is 1% or 5% or 10%, we obviously cannot tell. That noted, competitive dynamics and overall technology trends favors more and more distributors to consider selling direct to end users.

The End User Motivation

The attraction for end users is that buying from distributors can save significant money. Reviewing this bid results, distributor tendered bids are often 10 - 15% lower than those offered by integrators. Fundamentally, this is not surprising as it represents the removal of the integrator's markup (note: depending on the competitiveness of the deal the savings be significantly higher).

While end users face other risks in choosing this path (service, installation, design, etc.), the prospect of saving so much money on what many view as commodity parts will frequently be attractive.

Not only should it not be surprising for end users to choose this, rational end users, understanding these practices, might consider attracting or promoting their bids to distributors to get them to bid direct.

The Distributor Motivation

Even if distributors do not increase their margins in sales to end users, by selling direct, they significantly increase their chances of winning deals, especially if they are primarily competing against integrators.

Moreover, the more common it is for distributors to sell direct, the more vicious the cycle goes. Distributors will be pushed to sell direct just to stay competitive with their peers who are already selling direct.

The Manufacturer Position

The manufacturer position is the most complicated and interesting in the whole structure. While the manufacturer benefits from increased distributor sales, many manufacturers have a lot to lose by offending their dealers / integrators. The more established the brand and the more mature the dealer network, the more potential damage a manufacturer faces for distributors selling direct.

On one level, the manufacturer can stop distributors from selling direct to end users by cutting off distributors who do this. If the distributor can no longer access a manufacturer's products at large discounts, the risk of distributors selling direct is essentially eliminated.

However, most manufacturers have some dependency on their distributors. Distributors are often large customers of manufacturers. If a manufacturer cuts off the distributor for a few cases of selling direct to end users, the manufacturer risks losing many times that amount in total revenue.

As such, this is a difficult judgment call. We talked to a number of prominent manufacturers. While all acknowledged that distributors selling direct from time to time happens, they generally felt the cases were isolated, were generally done by distributor employees violating rules and that the distributors in general were committed to supporting their dealers. Whether or not manufacturers are right that this is isolated / 'rogue' type behavior is questionable.

The other fascinating element about manufacturer position is that less established manufacturers have a greater incentive to support distributors selling direct to end users. What motivates most manufacturers to oppose this practice is the established dealer network. Without it, manufacturers have little to lose and much to gain by encouraging distributors (or online re-sellers) to sell direct at the most aggressive price possible. However, how much that impacts (or will impact) the larger brands is questionable.

The Integrator Position

The integrator position is the most straightforward. The overwhelming majority of integrators dislike this practice, many strongly dislike it to the point of avoiding doing business with distributors they have reason to believe sell direct in their areas. Only a few integrators we spoke with had any tolerance to this behavior and those companies were open to simply sell services (and no products).

In a direct contest for lowest price between integrators and distributors, integrators are going to lose the overwhelming majority of times. To the extent this happens, integrators can either adapt their models or refuse to support manufacturers that allow their products to be sold through distributors going direct.

Distributor Review

In this final section, we provide an overview of each of the 3 companies and links to references. These 3 companies are the ones whose names continuously came up in discussions with integrators as well as the bid results and contracts we reviewed. NAV might be somewhat confusing to industry people as NAV markets themselves as an integrator. However, clear evidence points to them acting not only as a distributor but a very aggressive one at that.

ADI Review

ADI (Ademco Distribution, Inc.) is a distributor of low voltage and security equipment including alarm, AV, structured cabling and surveillance products from over 400 manufacturers.  Acquired by Honeywell (and folded into its Home and Building Control division) in early 2000, ADI operates over 100 wholesale stores in the U.S. serving primarily small to medium sized alarm and surveillance integrators.

While ADI operates walk-in brick and mortar wholesale outlets (unlike Anixter or NAV), to 'protect dealers' their stated policy is to sell products only to licensed alarm/security integrators.  Interestingly, when we interviewed numerous integrators for this report, it appears that those who actually use ADI as their primary distributor agree this policy remains intact - while those that don't use them are almost universally under the impression that anyone with decent credit can buy ADIs products.

In our research, we found various divisions of ADIs parent company Honeywell bidding directly on RFPs (including their Building Solutions Division in VA and Honeywell International in NY) however, ADI also appears to be blurring the distributor/integrator line by bidding directly themselves.

Examples:

Anixter Review

Anixter is a logistics and supply-chain management company who expanded into security equipment distribution. Unlike ADI, Anixter does not operate retail stores for product distribution.

In business since 1957 as a cabling, wire, fasteners and other small, low-margin components distributor, Anixter entered the security market in 2001.  The competitive advantage they have over more traditional supply houses in serving the security space lies in their robust supply chain and contract management capabilities.  With warehouse and sales presence in 271 cities across 52 countries, Anixter's ability to move boxes was established long before they started distributing security products.  But their 'advantage' does not end there. 

Anixter also employs an in-house Demand Creation unit (their name) to aggressively pursue procurement relationships directly with end users in the health care, education, government and Fortune 500 verticals.  These verticals commonly use 'equipment only' fulfillment contracts awarded to product suppliers based exclusively on price (commodity).  As Anixter has added a significant number of distribution contracts with security manufacturers (sometimes at superior rates due to their large distribution footprint), they were then able to use those lower rates to win exclusive vendor status (sometimes state-wide) for specific manufacturers products. 

Examples:

North American Video Review

North American Video (NAV) is a security integrator notable for providing solutions in the casino and large sports complex markets.  However, NAV also repeatedly acts like a distributor, selling equipment only to customers across North America. Indeed, of the three, NAV was the most well known by industry people as being an aggressive specialist in selling equipment only at very low prices.

North American Video (sometimes operating under the 'Halifax Security' name) has bid on (and won) numerous 'equipment-only' RFPs from state and local government, education, and law enforcement entities in much the same way that existing PhySec distributors traditionally operate (no integration).  By leveraging their heavily discounted rate from manufacturers based on volume primarily from their casino installs, NAV has been able to make significant strides into the vertical distribution space.

Examples:

  • Los Angeles  County Metropolitan Transportation Authority Bid# OP26102645
  • Huntington, NY – Security Camera Equipment - Bid #: TOH 10-07-055 [link no longer available]
  • Missouri Dept of Transportation - Bid# D5-11-017Q [link no longer available]
  • Missouri Dept of Transportation – Bid# RFB 5-090323LK [link no longer available]
  • Broward County, FL – Public Communications Office – Bid# d0783617q2 [link no longer available]
  • Shelby County (Memphis, TN) School District [link no longer available]
  • Nebraska State Administrative Services
  • Nebraska State Penitentiary
  • San Francisco, CA Bay Area Rapid Transit (BART) Bid# 8877 (IP cameras) [link no longer available]
  • City Of Sacramento (CA) IFB #: B10131061008 [link no longer available]
  • Montgomery County, MD School District
  • City of Ft. Lauderdale, FL [link no longer available]
  • City of Freeport, NY BID #09-09-elec-081 [link no longer available]
  • Duval County, FL School District [link no longer available]
  • San Diego International Airport
  • Santa Barbara Metropolitan Transit District [link no longer available]
  • Manatee County School District MCSD No. 08-0013-MR [link no longer available]

1 report cite this report:

Online Surveillance Market 2011 on Mar 05, 2011
Online sales of video surveillance products is already a sizable market...
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