More mergers, fewer employee prospects
ID's exclusive survey shows that consolidation is creating new challenges for distributors while a strong economy is hindering efforts to recruit new talent
By John J Keough -- Industrial Distribution, 7/1/1998
Industrial Distribution's 52nd Annual Survey of Distributor Operations clearly shows that the pace of mergers and acquisitions continues to quicken as distributors look to expand their geographical reach, reduce costs, and increase market share. At the same time, distributors are increasingly turning to technologies such as bar coding, electronic data interchange and the Internet to meet customer demands.And for the first time, distributors report that finding qualified people is their number one concern to ensure profitability in the years ahead.
Those are just some of the key findings of our 1998 survey, conducted with Texas A&M University for the second consecutive year. The purpose of the survey is to determine the trends and issues affecting the industrial distribution channel, and to allow distributors to see how they stack up against their peers. Survey results are based on interviews with more than 450 distributor executives from around the country.
The survey shows that in the past two years, 26 percent of respondents were approached with an acquisition offer. Indeed, many of these distributors had two to three offers. What is particularly significant is that 40 percent of distributors in the $l0 million to $20 million range have received such an offer. These are distributors who many observers believe are especially vulnerable because they are being squeezed by larger, national distributorships and smaller, niche players. On a regional basis, more distributors from the South were approached with an acquisition offer than any other part of the country.
To underscore how extensive merger activity is, our survey revealed that 18 percent of re-spondents had been acquired or merged within the past 18 months. A breakout of those figures shows that 25 percent of respondents in the $10 million to $20 million category reported being acquired -- the same percentage as those in the $5 million to $10 million range. Not surprisingly, only 19 percent of the largest distributors -- those with more than $20 million in sales -- have been acquired. It seems clear that the acquisition focus is on the small to mid-sized distributor.
While the percentage of distributors who would welcome an acquisition offer remains high, there is a strong indication that many distributors want to keep their independent status. Our survey shows that 68 percent of the responding distributors would not entertain an acquisition offer. This was especially evident in distributorships with less than $5 million in sales. However, distributors in the $10 million to $20 million range were divided on the issue. Nearly half (47 percent) say they would be willing to listen to an acquisition offer.
"I always wanted to remain independent," one Northeast distributor with $12 million in sales told ID. That is until he received a telephone call from a larger competitor asking him if he was interested in selling. "I told him no but we agreed to meet," the distributor said. "He made me an offer I couldn't refuse. I would have been foolish not to accept it."
Many distributors feel the same way. The price for purchasing distributorships has skyrocketed. Take the case of Premier Industrial Corp. of Ohio (now Premier Farnell), which was sold for 24 times its earnings two years ago, or WESCO Distribution, Inc., which was purchased in a management-led buyout for $1.1 billion this June. Only a few years ago, WESCO sold for $340 million.
But what happens after a distributorship has been sold? Distributors tell us it leads to increased sales, lower costs, better training and more opportunities for advancement. Independent distributors, however, are quick to point out they are more flexible, more streamlined with fewer layers of bureaucracy, make decisions quicker in regards to adding or dropping lines, and have tighter control of their businesses.
"I'm content, very content, to be a small distributor,'' the president of one company told ID.
With the merger craze, another phenomenon seems to be developing. There have been several cases recently in which employees of an acquired company have started their own distributorships. Regardless, more than a third of respondents say their business has been impacted by merger activity in their trading area. The end result is that these distributors are being forced to provide more services, lower their margins, and hire more salespeople.
Another factor impacting a distributor's ability to compete is, of course, the continued geographic expansion of home centers. About half of the distributors who responded to our survey say the increased number of home centers has had an impact on their business.
Integrated supply gains steam
The use of integrated supply agreements continues to grow, according to our survey. Nearly 37 percent of the responding distributors say they have such agreements with their customers. The numbers were especially higher (44 percent) with distributors who have sales of more than $20 million. Distributors in this category report that more than 20 percent of their sales now come from integrated supply.
Nearly every distributor that has integrated supply agreements -- regardless of size -- predicts that they will become a bigger part of their business in the next few years. One advantage of such an agreement is the length of the contract. Most distributors say that the contract usually runs three years.
Trends in technology
The use of technology continues to increase at all distribution firms, regardless of size. Nearly 57 percent of distributors say they are now using EDI. In fact, more than 90 percent of distributors with sales above $20 million use EDI while 72 percent of distributors with sales between $10 million and $20 million have EDI capabilities. Seventy-four percent of the distributors surveyed say they decided to use EDI to meet customer requirements. Distributors primarily use EDI for purchase orders/acknowledgments, invoices, advance shipment notices and requests for quotations.
Nearly 40 percent of those surveyed say they now use bar coding. This technology is especially prevalent among larger distributors (70 percent), while only 23 percent of smaller distributors are using it. Distributors use bar codes to better control inventory, increase productivity, and cut costs. More than 68 percent of distributor executives say they were forced to implement bar codes because of customer demands.
And the survey shows that bar code use will grow. Nearly 43 percent of the distributors who do not yet use bar codes say they plan on doing so in the next 18 months.
Internet use by distributors continues to soar, as well. Seventy-seven percent of the responding distributors say their company has access to online services, with 99 percent of them reporting daily use of the Internet. Distributors report they use the Internet for e-mail, product information, competitive information, news, and database searches.
Distributors also say they're getting prepared for any computer problems resulting from the Y2K issue. Nearly 88 percent of respondents report they are working to resolve those software/hardware problems. But four percent say they haven't addressed any Y2K difficulties or aren't even familiar with Y2K issues.
And nearly half of the distributors say they now have Web sites. Especially significant was the number of larger distributors who have sites (80 percent). Just 23 percent of smaller distributors report having a Web site. About 55 percent of the distributors with sites report selling products via the Internet in 1997.
Other distribution trends
There is significant brand churning (the adding and dropping of lines) taking place in distribution. Forty percent of distributors say they are carrying more lines or have dropped lines within the past two years. And 45 percent plan to add or drop lines in the next two years.
In order to remain competitive distributors are providing a variety of services for their customers. These services include consigned inventory (84 percent), just-in-time delivery (63 percent), product training/seminars (57 percent), on-site vending machines (22 percent), and on-site storeroom /tool crib management (18 percent).
A number of years ago, distributors were considered by some in the industry to be nothing more than order takers -- product providers doing nothing to add value to the transaction. If that ever was the case, it certainly isn't so today. Nearly 92 percent of the distributors we interviewed say they are full service providers who must meet -- and exceed -- customer expectations. They also note that distributors today must integrate new technologies into their business operations and make more brand recommendations for customers.
As in other industries, distributors are optimistic about the economy both this year and in 1999. But the strong economy has created a unique problem for distributors: finding qualified people. For the first time since ID began this study more than 50 years ago, finding qualified employees topped concerns identified by industrial distributors -- 64 percent list the problem as their number one concern.
Other concerns listed by distributors include economic conditions (54 percent), distributor competition (41 percent), manufacturers selling direct (26 percent), mergers and acquisitions (18 percent), and manufacturers selling to non-authorized integrated suppliers (18 percent).
Many distributors, particularly the larger ones, also report having a formal total quality program in place. Across the board, a total of 38 percent of those surveyed have implemented quality programs. However, 61 percent of the distributors with more than $20 million in sales have implemented a quality program. In contrast, 54 percent of distributors with sales of less than $10 million report having such a program.
The origins of ownership
In every survey ID magazine has done in the past few years, the results have shown that most distributorships are family-owned enterprises. But that may be shifting. In this year's survey, only 53 percent of respondents indicate their company is family managed. A few years ago that figure was 66 percent. Of the larger distributors, 81 percent are not family owned. However, more than 60 percent of distributors with sales of $10 million or less are still owned by families.
Other ownership results show that distributorships have been in business a long time. The average distributor respondent has been in business for 30 years. In fact, 13 percent of the distributors surveyed have been in existence for more than 40 years. The average sales volume of our respondents was $8 million.
Last year was a good one for distributors. Sales increased an average of eight percent. One interesting statistic showed that outstanding receivables averaged only 36 days, down sharply from previous years when receivables averaged 43 to 45 days. Whether this is an aberration is still undetermined and it is a statistic we'll be tracking in our next survey.
In summary
Our Annual Survey of Distributor Operations reveals the major trends and issues in the distribution channel. What's clear is that consolidation will continue at a rapid pace, particularly among the smaller to mid-size companies; smaller firms that decide to remain independent will carve out specific niches to serve the end user; and other independents will continue to join consortiums or buying groups. Also, integrated supply will continue to grow and there will be an increased emphasis on the total supply chain to reduce costs. Technology use will increase, especially as it applies to bar coding, EDI and new software.
Perhaps most importantly, distributors will have to find new ways to find qualified people. Most companies, particularly smaller businesses, find job applicants in their immediate area. This may mean, as we have advocated in the past, local distributorships should partner with community colleges or universities to help boost the labor pool.
At any rate, the distribution business continues to undergo major changes. How distributors -- and manufacturers -- adjust to those changes will ultimately determine their future. I
HOW HAS THE ROLE OF THE DISTRIBUTOR CHANGED IN THE PAST 3 YEARS?
Understanding customer needs and applications 97%
More of a full services provider 92%
Integrating technology into business 87%
Making more brand recommendations 49%
WHAT SERVICES ARE YOU PROVIDING CUSTOMERS?
Consigned inventory 84%
Just-in-time delivery 63%
Product training/seminars 57%
On-site vending machines 22%
Tool crib management 18%
WHAT DO YOU USE ONLINE SERVICES FOR?
E-mail 87%
Competitive information 79%
Product information 77%
Communications 59%
News & information 57%
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