For the past two years, the distribution sector has been riding high on benefits from pricing, resulting in generous revenue growth and profit margins during that time. It’s part of the reason distributors thrived during the COVID-19 pandemic while many other industries suffered.
The distribution industry wasn’t going to get by with high prices forever, though. Over the past two fiscal periods, pricing’s impact on revenue growth has noticeably weakened, and the distribution sector as a whole has seen its revenue growth decelerate as a result. “Price-increase fatigue” may be playing a role in that deceleration: End customers are starting to push back on price hikes and are seeking new ways to reduce the costs of their operations.
To maintain their profit margins as pricing continues to stabilize and supply chains normalize, distributors might consider managing their manufacturer suppliers more strategically, as MDM CEO Tom Gale and Dorn Group’s James Dorn discussed during MDM’s latest QuickTake podcast.
“It’s going to get harder and harder for (distributors) to maintain those profit margins that you’ve seen over the last couple of years here,” Dorn said. “And a lot of that is due to the end customer going through this price increase fatigue. So, you’ve got to start deploying new strategies in order to maintain those same profit margins that you’ve benefited from over the last few years.”
Distributors have also increased the number of suppliers they work with due to supply chain disruptions caused by the pandemic, as well as an industry-wide increase in mergers, acquisitions and organic growth initiatives. With the ever-growing list of suppliers that they’ve taken on, now is a good time for distributors to rethink how they manage those suppliers, Dorn said.
“We think now is an ideal time for distributors to optimize their supplier base and get more strategic on how they stratify their supplier base to effectively compete with the new challenges that are coming into the market ahead of them,” he said. “And you could do that through category management and supplier management practices of trying to work with your suppliers in new ways to have them help you deliver more value to that end customer.”
For example, a distributor and their suppliers might have great success in one market, but then struggle in another market they’ve entered via M&A or organic expansion. In this case, distributors should utilize a “war room” approach and determine which suppliers can help them win market share in a given region, Dorn said.
“There’s a lot that’s changed in the market over the last few years, and there’s a lot that’s still changing moving forward,” he said. “So, it’s just a great opportunity for distributors to get more strategic in how they work with their suppliers and try and get those best terms with their suppliers to give them hopefully the best opportunity of winning new market share with their end customer.”
Listen to the full podcast episode via the audio player above, and check out our full library of MDM Podcasts here.