The Argument for a Small Distributor Renaissance

In MDM's first 2022 podcast, we explore three factors for how smaller distributors can gain competitive advantage against larger competitors.
The argument for a small distributor renaissance

“The higher-tech we get, the more we lose high touch.” That’s one of three reasons why Al Bates, principal of Distribution Performance Project and dean of financial performance benchmarking, sees opportunities emerging for smaller independent distributors in the current business cycle. (Listen to the podcast with the player below). The challenge, he says of these growth opportunities, is to generate profit from them. It’s also why he wrote his latest book, “Profit Guide for the Small Distributor,” where he details a profit-first methodology and playbook.

Bates has been the godfather of distributor profitability/performance analytics across five decades. Known as the prophet of profit doom, he is bullish on the future prospects for smaller-sized distributors to be successful. Al has seen more P&Ls and financial metrics across every sector of distribution and more business cycles than anyone — that’s not a hard claim for him to defend.

My key takeaways from Bates’s observations are that more sophisticated digital selling channels and analytics are powerful tools to gain competitive advantage, but they can create unintended consequences — not only for the teams pushing the envelope (the companies with the capital and talent to resource), but for competitors as well. Here’s a summary of his key points:

  • First, while he thinks larger distributors have an overwhelming advantage in technology because of deeper resources to invest, Bates thinks the higher-tech we get, the more we lose track of high touch, and that creates an opportunity into a significant share of the marketplace — millennials as well as older folks. “Even though the millennials claim they don’t need any human interaction, eventually, if I may use the television commercial, we eventually become our parents,” Bates says. “And we’re already seeing some of that in some of the psychological and sociological research done that says, the more I stare at a computer, or the more I stare at a phone, the more I eventually begin to want some human interaction. That doesn’t mean I have a salesperson going out and making the rounds, and as they did in the old days, but I think it means if I know the owner knows who I am, and appreciates who I am, I’ve got an advantage.”
  • Second, he believes metrics used today for customer and item profitability are leading large companies to jettison unprofitable customers, where there is a lot of opportunity, but an effort that requires hard work. Yes, that leaves smaller distributors with a bunch of problem accounts, he notes, but Bates sees emerging opportunity there for profitable growth.
  • Third, even the best of large firms tend to develop fiefdoms — sales, operations, finance, etc. — that give more agile and entrepreneurial smaller distributors opportunity.

Given his enthusiasm, will we see some distribution sectors be dominated by small distributors? “I don’t think that’s a chance at all,” Bates says. “I think they’re going to have to — if I can go back to some of the phrases my old business school teacher used — I think you have to ooze into the pockets of opportunity. I think you have to be very nimble. You have to find out where the opportunities are.

“And then, as my other business professor said, ‘You … got to be like an old time wildcat. Or, in West Texas, you got to dig a lot of wells.’ And I think that smaller companies, given the ownership and the management style, I think they’re more likely to dig a lot of wells. And I think the larger companies rightly should wait until the wells are dug and see if they’re there, and then maybe go steal the mineral rights.”

That’s quite an analogy to start 2022 off! And as in past cycles, there is yet another level of fragmentation that keeps creating value for large and small distributors alike.

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