Distributors Dabble in Retail
By Dan Markham, Senior Editor
Some metal centers have found retail niches that provide a solid supplement to their core distribution business.
Klein Steel has built a reputation as one of the leading steel distributors in the Northeast, offering a wide range of products and processes from a variety of locations in the region. But the Rochester, N.Y.-based distributor recently donned a new and much different looking hat, that of a retail metals specialist.
The 40-year-old service center company has opened three retail metals shops at its existing locations in Rochester, Syracuse and Buffalo. It plans to open a fourth in Albany in the next six months.
“Our strategic plan for the next three years has us opening one or two a year at different locations,” says John Batiste, president of Klein Steel Service.
The venture makes Klein part of a small but committed group of metals service centers that supplement their wholesale business with a retail operation. One of the forerunners of the practice is Industrial Metals Supply Co.
IMS has five locations, including four in its native Southern California and a fifth in Arizona. Each has a warehouse and a retail store attached. The company has been offering retail sales for about half a century. “It has grown over the years,” says Eric Steinhauer, president of IMS, “but it’s a slow growth process. It takes a while to understand what each market needs.”
IMS continues to tinker with its retail model, opening a new location in Irvine, Calif., earlier this fall. The new operation, at 12,000 square feet, is larger than the typical 7,000-square-foot store, and features an updated layout inside. “We’re trying to make it easier for customers when they come into the store, with directional signage and different areas,” Steinhauer says. “We have a welding area, a fabricator’s area, a machinist’s area. It’s set up like a metals department store.”
Such a wholesale/retail combination can offer tangible operational benefits for an ambitious service center, but it’s not without its challenges.
Perhaps the biggest benefit of a retail operation is the outlet it provides for scrap. Rather than putting remnants and drops into the scrap bin, service centers can put them out front where they may appeal to a retail customer and sell at a much higher return.
“Pemco really doesn’t have a heck of a lot of scrap,” says David Fay, vice president of Pemco Inc., Hamilton, Ont. “We realized right from the beginning that this gave us an opportunity to sell what we would otherwise be scrapping.”
Steinhauer agrees that the ability to sell this material at a premium, as opposed to the loss in scrap, is one of the great advantages of retail. But it’s not without cost.
“You get a lot more in retail than you do in the scrap bin, but it also sits there longer until somebody finds the piece they like. The inventory turns are not very good, but the increased profitability on the scrap is,” he says.
To Triple-S Steel Supply’s Gary Stein, whose Top 50 service center company’s roots were in retail, the consumer side of the business is the ultimate testing ground for new hires. Triple-S has two retail operations in its home of Houston and a third in San Antonio.
“It helps us identify salesmen for promotion who really love customer service,” Stein says, “the ones willing to get down and dirty with the retail customer. It’s a great place to groom young talent.”
Batiste believes Klein Steel’s retail operations will serve a similar function. In addition to the customer service training the retail side provides, the company hopes to use some lessons learned from its expanded e-commerce offerings and apply them to the core business. “It’s a great laboratory to try out new ideas,” Batiste says.
But running a consumer-sales operation is not easy. “Retail is the hardest part of our business,” Stein says. One area where Triple S has been most challenged is in finding a software program that can accommodate the dual nature of the business.
“It’s outside the vocabulary of most software programs. They don’t handle feet and inches. We started with Invera’s STELPLAN, but we have heavily modified it and built a lot of our own external routines to handle the retail business.”
Dealing with customers in the building is much different than the service center model of “order it today, load it tonight, deliver it tomorrow,” Steinhauer notes. Customers often drive their pickups right into the facility to pick up a small order.
“Most of our competitors don’t even want customers on site. You have to deal with the safety issue, because now your customers are handling metal and walking through your warehouse. And security and theft become an issue, much more than if you’re running a closed environment,”
A retail operation also requires a commitment of labor. There must always be manpower on hand regardless of the activity level, and the public can be fickle. “If a guy walks in and he’s got a problem, you might spend half an hour with him that results in a $20 sale, or even no sale,” Steinhauer says. “You’ve got to be willing to put up with that.”
For those getting started, it is the willingness to work directly with customers, rather than what is stocked on the shelves, that will ultimately dictate the operation’s success. Executives uniformly believe that superior customer service is paramount to profitable metals retailing.
“When these guys walk in and they’re looking for something, you need to jump,” says Fay of Canada’s Pemco, which is opening a retail operation in Hamilton shortly after opening a service center there. The typical retail customer is very different than the person buying wholesale. In many cases, the retail shopper doesn’t know exactly what he wants. The sales team must be able to help him find a solution to his problem, and the store must have the necessary item on the shelf.
And those shelves aren’t limited to simply steel and aluminum. Successful one-stop metals shops offer metalworking tools, welding supplies, books and literature, protective gear, and much more. “Metals are just half the story,” says Steinhauer. “If you want to get into retail, you’ve got to make a commitment to it. It’s one thing to have the metals, but if customers don’t know how to drill it or don’t know how to fasten it, then they’ll go shopping elsewhere.”
Knowing the customer is crucial. Retailers must deal with individuals, rather than corporate purchasing agents. Inventory can vary depending on the specific makeup of the customer base. Pemco’s three locations all look different, with each outfitted to meet the needs of the specific mix of users in the area, Fay says.
Marketing is also a new challenge, with more conventional advertising and promotional tactics used to reach the one-man operations, maintenance men and do-it-yourselfers that make up a retail customer base.
While Pemco, Triple-S and IMS have long histories in retail to draw from when opening a new facility, Klein Steel is starting from scratch. To combat its lack of experience in running a retail operation, the company farmed out Retail Manager Joe Bailey to a national hardware chain for a full month so he could learn the ins and outs of this new type of business. “We wanted a guy with his talents and capabilities to shift gears and learn all he could about the retail business,” Batiste says. “We wanted to prepare him for a whole new mindset and all the work it takes to connect with customers and the marketing and advertising.”
Though demand in both wholesale and retail generally follow the same cycles, there is some advantage to operating a small-order retail business in a difficult economy. More customers are looking for a quick cash-and-carry transaction
In some cases, customers buy from both the wholesale and the retail side of their local service center, depending on how busy they are. The retail option prevents them from seeking out another supplier.
The ideal customer is the small retail buyer who eventually grows into a wholesale account. That’s one of the chief appeals of the retail operation to Klein Steel. “It’s complementary to the base business in a big way,” Batiste says. “It gets customers into the Klein Steel family. Our hope is that they will eventually be placing larger orders that require a truck from Klein Steel to make the delivery.”