I would love to connect with searchers looking into Wholesale & Distribution (WSD) companies or those who have acquired a company in this area already and also I would like to understand more thoroughly reasons of other searchers for not trying to enter the space.
I have come across several different Wholesale & distribution companies for sale and I keep wondering, what might actually present a good opportunity for a searcher in this space. I have put together a few thoughts on the general search-fund criteria as well as other criteria specific for the WSDs.
Let other search funders know what you think and whether you would or would not consider an acquisition of a WSD company.
An industry out of favor
Based on 2018 Stanford study search fund statistics, Distribution & Wholesale industry has been falling out of favor in recent years and focus on this industry has declined between 2011 and 2018 from around 28% to only 5% across the ETA community. Another source points out that in 2018 the space constituted 29% of US GDP. That, in my eyes, makes it quite a large space for simply just avoiding it.
Generally, never-ending pressure on margins translating to efforts for disintermediation and/or efforts to capture more value by manufacturers might present a threat to distributors. A distributor can defend a strong position by adding increased value to the supplier and customer through various value-adding functions, efficient use of capital or by simply helping to develop markets in specific areas (eg. where manufacturers are not attracted due to improbable efficiencies of scale, lack of necessary skillset or regional knowledge).
Having done that intro, let’s go back to the search funders basics; so, what are the first things a search funder sees when he/she looks at a WSD:
Low margin sales: This is the critical one as it is very rare to see anything with EBITDA >15% in the space. Lower margin means lower cushion in case of economic slowdown and in many markets also suggest a lack of a strong competitive position.
Ease of business: Although operations might get complicated, the basic business model is simple as long as you can get up to speed in terms of category/product management for the segment. The more added value WSD tries to create, the more complicated the business gets on one hand and the stronger position may evolve on the other.
Recurring revenue model: This seems to be present in a large majority of cases, given long-term relationships with repeat customers.
For simplicity, I'm not going through with any remaining general criteria here.
Overall, yes, margins are not very good, but other than that, it might not be that bad from the bird's eye point of view. Would you agree?
General strategic position differentiators
Following are some of the attributes which I feel are indicative of the strength of the position a WSD company holds.
Please, add others if any come to mind in the comment section.
Customer proximity (eg. ownership of relationships and customer data)
Risky position: Companies without direct access to the customer plays the weaker set of cards (as I believe is widely accepted learning).
Relatively more stable position: For example, private equity group Supply chain equity partners focuses on deals among WSDs. The vast majority of portfolio companies have a direct relationship with the end customer or in a few cases with a customer whose business is to provide technical solutions to their end-customers.
Added value services – perceived mainly by manufacturer
Risky position: WSD company performs only basic function (eg. category management, basic fulfillment, returns management).
Relatively more stable position: WSD company adds value, for example in terms of cost rationalization, information sharing, product development, or a strong market development function.
Added value services – perceived mainly by customers
Risky position: same as above
Relatively more stable position: WSD company adds value through services which can range from high service levels in logistics & fulfillment, consulting & training, solution design & installation, support & repairs, relationship streamlining or others.
A relative share of customers costs
Risky position: Cooperation with large category-dominant retailers & large homogenous share in retailer’s costs presents a position which might motivate your retailer to find ways of getting directly to your manufacturers (eg. vertical integration).
Relatively more stable position: A lower relative share of your customer's costs takes you out of focus with fewer incentives to “optimize you”.
Other specific indicators of WSD position strength
Does WSD's manufacturer or its competitors provide a direct-to-customer channel in any way?
Risky position: The rise of Direct to customer & amazon like channels is on the rise mainly in retail. WSD's should watch out for lurking threats. Sometimes, an entirely new product or region provides the right entry point for the manufacturer to test and learn the direct-to-customer channel just to be able to skip the WSD in the future.
Relatively more stable position: There are no signs the supply chain is under disintermediation pressures nor any of adjacent supply chains are.
Level of supply chain & overall process integration
Risky position: Lack of deeper integration, starting with basic EDI or consignment warehouses to demand planning, customer data sharing, etc.
Relatively more stable position: Cooperation in terms of strategic or financial planning or eg. participation in product development.
WSD's historical performance
Risky position: WSD’s track-record in developing and serving the market is relatively worse than that of distributors in other markets or brands.
Relatively more stable position: A proficient customer-centric WSD with segment appropriate strategy who can execute on it can easily become a competitive advantage partner for a manufacturer (eg. minimization of faulty deliveries etc).
Existence of exclusive distribution contracts
Risky position: From my perspective, a lack of distribution contracts presents one too risky position for a search funder to invest into.
Relatively more stable position: Strong contracts which reflect an appropriate level of strategic partnerships protect the position of a WSD company in a supply chain.
Other possibly useful angles:
I’m wondering whether there is any relation to the overall capabilities and size of a manufacturer and the risk of weakening WSD position. Although I’m trying to find a more straightforward link between these two, it always comes down to the factors already listed above.
I also feel the entire discussion above 1) would benefit strongly from incorporating more views from a channel marketing perspective and channel mix considerations, an area I’m not familiar enough to comment on and 2) will also depend heavily on the B2B vs B2C breakdown.
A few sources:
http://www.supplychainequity.com/investments.shtml https://hbr.org/2018/12/building-a-direct-to-consumer-strategy-without-alienating-your-distributors?autocomplete=true https://www.naw.org/state-of-the-industry/