Product expansion has long been a strategy by some of the largest distributors – Grainger, for one – for growth. More recently, mid-sized distributors have been following the same strategy.
The idea is that product expansion will help distributors gain a greater share of their existing customers’ wallets, as well as make themselves more attractive to customers looking to cut down on the number of suppliers. Many distributors have added janitorial or safety supplies, for example, to their product offerings over the past 10 years.
But a recent article from Cohn Reznick, an accounting, tax and business advisory firm, brings up an interesting question: What is the impact of product expansion on the bottom line? Is product expansion killing profits? The article is primarily focused on manufacturers, but the points raised provide food for thought for distributors considering or already engaging in a product expansion strategy.
Offering more products may result in the need to expand inventory, which may result in increased warehouse and labor costs. Whether or not the products are stocked by the distributor itself, they must spend time on product sourcing. How do you know if that time or effort is worth the return?
And distributors may add more products before they really analyze their existing portfolios, which could contain slow-moving or low-performing SKUs that are already in need of examination. As Jon Schreibfeder said in Inventory: The Good, The Bad and The Ugly, any inventory that you lose money on is “bad inventory.” And “ugly inventory” is inventory that should never be carried.
“You lose money on it, and it doesn’t contribute to any other profitable sale,” he said.
The Cohn Reznick article talks about the need to eliminate non-performing or unprofitable products when you add products so that you don’t depress your return on assets.
Many distributors have succeeded in expanding their product mixes, and that diversification has helped soften the blow from downturns, including the Great Recession. But care should be taken to ensure that any expansion in product lines or categories will result not only in greater sales, but also in greater profitability.
