In the neighborhood: will small agencies go the way of mom-and-pop stores?

Remember the neighborhood hardware store? Its shelves were crammed with all manner of goods. The owner and his veteran staff knew most of their customers by name and could find what was needed in a moment while doling out practical counsel in response to the vaguest questions about how to fix a "whatchamacallit."

Well, many of those neighborhood stores have disappeared, as "big box" home service centers expand across the United States, severely challenging morn-and-pop hardware, garden center, paint and lumber retailers. Within this highly fragmented and mature industry, Home Depot and Lowes have experienced tremendous growth and now dominate with roughly 35% market share--the top 25 chains account for half the market. Meanwhile, thousands of neighborhood stores have closed. Other stores are surviving, for now. Many independently-owned stores are blunting some of the warehouse retailers' scale advantage by leveraging buying cooperatives (such as ACE and True Value). And some stores are prospering by focusing on very well-defined market niches and delivering consistently extraordinary service.

While the service experience at a warehouse store may vary, many consumers miss the professional, personal advice and convenience of the small, neighborhood hardware store. As one wanders lost in the aisles of the giant warehouse, the value of personal, consultative service would seem to be well worth paying a reasonable premium over warehouse prices.

In 10 to 15 years, will consumers similarly bemoan the loss of the professional insurance agent? Although the value of professional, consultative advice to support important financial decisions seems obvious, might agent distribution undergo a change comparable to that of the local retailer?

Will the emerging economies of scale in insurance distribution favor a few nationally branded, frequently self-service "warehouses"? Perhaps a few financial services supermarkets finally will come to dominate insurance sales, with life insurance an important but secondary product offering. Perhaps a shrinking share of insurance sales will come from sharply-focused, boutique-like agencies that are in the right markets and deliver consistently superior service at a premium price. And, perhaps, clusters of well-run agencies will band together in networks to share technology and other back-office functions, and aggregate their distribution power to negotiate warehouse-like deals with product manufacturers (akin to hardware buying cooperatives). And they already are doing this through institutionalized producer groups or brokerage general agencies.

It is hard to predict the future of agent distribution, particularly when one considers the strong and contradictory forces of change at work.

Many factors seem to support expansion of agent distribution of insurance. For instance, demographic trends reveal a growing market of retired and soon-to-be-retired consumers. Their protection, long-term savings and income-management-in-retirement needs are complex and favor solutions central to what life insurance is about. With employers continuing to shift the risk of providing retirement income and other benefits to their employees (defined contribution rather than defined benefit programs), the need for professional advice should increase.

On the other hand, LIMRA reports a steady decline in the number of active, full-time life insurance agents; average retention of new agents remains low; many life insurers have exited, or significantly curtailed, their career agency systems; and many of the more productive life agents are within 10 to 15 years of their own retirement. Who will (and how will they) recruit and develop new agents to meet the presumably increasing need for professional advice? Uncertainties such as the long-term fate of estate, capital gains and income taxes further cloud the picture. And increasing regulatory scrutiny of sales practices (including relationships between distributors and insurers) raises the risks and costs of distribution.

More than likely, a variety of successful distribution models will evolve--much as has occurred in the hardware business. The challenges for insurers, for distribution management and for agents are to understand the forces of change and competitive pressures; adapt their business strategies to the emerging market opportunities, and focus their efforts to execute flawlessly.

As consumers are offered more choice in how they can buy solutions to their needs, so too will those consumers become more demanding. The distributors who succeed in understanding and fulfilling consumer requirements, cost-effectively and despite competitive alternatives, should continue to earn attractive rewards.

Richard K. Berry, a Best's Review columnist, is a Towers Perrin principal and consultant for the firm's Tillinghast business. He can be reached at [e-mail].