Sramana: How does the supply chain work in your industry? Where is the margin getting eroded?
Pavel Sokolovsky: Here is my version of how the industry came to be. In the 1950s and 1960s, the manufacturers wanted to have national exposure for their products. This required boots on the ground to install and service the product. They had to have a way to reach the contractors. Contractors needed the product very quickly in order to satisfy their clients and they were generally not in a position to hold inventory. This created a need for a local distributor. They hold inventory to sell to the contractor so that homeowners can get the product quickly.
There were a lot of local distributors and they did not necessarily want to maintain massive amounts of inventory. This led to the rise of regional distributors. A lot of times, local distributors buy directly from a regional distributor. That places three levels of markup before the inventory hits the homeowner. Manufacturers realized that in order to manage their regional distributors, they needed outside representatives local to the region who knew the players and the games. Every single person in that supply chain takes a percentage on the product before it hits the homeowner.
In the 1950s, you needed this drawn out supply chain. In the US, it was difficult to move information and products across the country. Times have now changed. Moving information across the world costs virtually nothing. With the advances in logistics, it is much less expensive to move products across the country and it is definitely a lot easier to move products across the country. This means that the value provided by all the people in the supply chain has significantly eroded.
Local distributors can still provide value by having the product ready when the contractor needs it. Since 2007, distributors have been focused on minimizing the amount of inventory they maintain, so many of them are eroding their own value proposition.
Sramana: What is the markup between the manufacturer’s price and what the homeowner pays?
Pavel Sokolovsky: There could be a markup of as much as 100%.
Sramana: Is your value proposition reconfiguring the supply chain to provide better prices for homeowners?
Pavel Sokolovsky: Reconfiguration is one option. We can also find the players in the supply chain who have operating efficiency and actually deliver value. We don’t intend to put every distributor out of business. We do intend to work with the really good ones. We work with manufacturers when that makes sense. We want to look out for the homeowner’s experience.
Sramana: I have been trying to figure out if there was an opportunity here to build a reasonable margin business.
Pavel Sokolovsky: We certainly believe so.
Sramana: You have done decent growth in a bootstrapped mode, and you really need margin to have that growth. What about future plans? Are you going to accelerate your business by taking outside investment?
Pavel Sokolovsky: We think that this market is going to get a lot bigger. There is no clear winner in this market yet and we intend to become that clear winner. We are exploring all strategic options to see how we get there.
Sramana: This has been a very interesting story. Congratulations on your success to date.