Commentary: Year Ahead Looks More Positive, More Complex - Modern Distribution Management

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Commentary: Year Ahead Looks More Positive, More Complex

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As the lead article in this issue outlines, 2006 is looking more positive than six months ago. Good news. M& A activity is heating up. Most industry observers expect Home Depot’s 12X EBITDA purchase price (almost double valuation multiples of two years ago) for Hughes Supply will continue to reverberate through the industry.


Yet nearly every conversation with distribution executives, particularly those with a majority of larger customers, raises concern about the longer-term economic fundamentals and health of distribution markets. The auto industry may be the most visible, but many large customers are in a state of flux with their manufacturing strategies and supply chain (putting it nicely). That’s adding even more complexity for distributors to plan and manage a business plan that doesn’t look like a Disney movie.


There have always been dysfunctional customer relationships that distributors either managed profitably or not. But the luxury of perpetually trying to turn a dog into a stallion is gone. New business development has to be a core competency of a distributor today regardless of size.


As Adam Fein’s article shows, despite an uptick in consolidation activity in 2005, less than one percent of the 270,000 distributors in the U.S. are companies with annual revenues above $100 million. There are no magic wands, but there are great opportunities for financial buyers, as well as for smart distributors to grow strategically.


It has been the observation of this newsletter for decades that the smart strategic money in distribution tends to outperform the deep pockets. That doesn’t matter much to those with a short-term exit strategy, but a world of difference to those who are still hungry to innovate and find ways to grow.

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