According to a report released today by RSM McGladrey, executives of U.S. wholesale-distributors have altered their growth and operational strategies to offset sector weaknesses and the rising costs of doing business, mainly associated with labor and energy.
 
RSM McGladrey’s Distribution Industry Report was extracted from the results of the firm’s 2008 Manufacturing and Wholesale Distribution National Survey conducted earlier this year. More than 960 industry executives, including 303 Distribution executives from 284 companies responded to the survey.
 
According to the survey, business conditions for many distribution companies have declined. Thirty-eight percent of those surveyed described their companies as thriving and growing,”a decline of 21% from RSM McGladrey’s 2006 survey. However, many executives retain some measure of optimism, as 45% reported their company as “holding their own.”
 
Economic concerns have caused many distribution companies to alter their growth strategies for the upcoming year. Increasing brand recognition is the most popular growth tactic cited, increasing from 44% in 2007 to 49% this year. Strategies that saw a sharp decline -according to the survey -include vertical integration, creating private label products and growing with large retailers.
 
Mergers and acquisitions have also been a prominent growth strategy in the past, but executives that plan on engaging in such activity dropped from 48% in 2007 to just 18% in 2008. This is most likely due to the tightened credit markets in the U.S., as well as lower valuations.
 
Distribution companies, inherently dependent on logistics and billing, have increased their spending and reliance on information technology (IT). Eighty percent of distributors report that IT is increasingly critical to their business, while 75% plan on expanding the use and functionality of existing systems. More than half of respondents indicated that their companies plan to align their IT strategy with their business plan (66%), implement new technologies (55%) and train employees to use their current systems more effectively (53%).
 
Despite the importance of IT to the distribution industry, the survey indicates that many companies have significant weaknesses pertaining to risk management. Almost 25% of executives surveyed do not have effective disaster recovery systems, test their network security at least once a year or expect to increase their spending on information security.
 
Some of the ways that companies are combating changes in costs include looking at self-insurance, especially those in the $100 million to $500 million revenue size. While in the past larger companies have used self-insurance as a way to approach plan administration costs, smaller companies are now exploring self-insurance, as well.
 
Companies are also looking at wellness programs as a way to combat healthcare costs, according to the survey. Over 60% of companies with more than $500 million in annual revenues report that they employ a wellness program, while only 18% of companies with less than $25 million in revenue implement such a strategy. Disease management programs are also utilized.
 
Many distribution companies are also embracing green initiatives. Almost half of the largest distributors, as well as many smaller companies are being asked by their customers to become more environmentally-friendly. But many companies have also taken such steps on their own, with 38% of executives reporting a reduction in non-recyclable waste and 23% eliminating the use of certain chemicals.
 
The complete RSM McGladrey 2008 Distribution Industry Report is available here.