We are in an era of consolidation and dogfights for market share between competitors and alternate channels. One of the primary distinctions that the industrial distribution channel offers to vendors is the reach to niche markets, and the support mechanism for these markets. When that reach and/or support is not efficient, the market will eventually find the most efficient route.
I wrote the paragraph above 18 years ago. Ouch! I would not change a word today. I went on to write: Distribution by its nature demands flexibility to constantly changing needs. Manufacturers have to be part of that flexibility as a solution, not a rigid option based on past practices and market controls that used to work. Distributors have to be proactive today to offer solutions in partnership with their vendors for true efficiency. Double ouch!
The reason this came back to me was a conversation with a distributor about rebates, buying and marketing groups, and emperors with no clothes. Rebate structures are still driving dysfunctional behavior that makes distributors more vulnerable to emerging competitive threats, no matter the source – more so in certain sectors than others. So when I hear concerns about AmazonSupply or other alternate channels emerging, I have to wonder how much the world, markets and customers have to change before adapting to sustainable business models.
One of the traditional strengths of distribution – very responsive customer service – can also be one of its biggest weaknesses. It causes them to be reactive, not proactive in adapting to changing market conditions. The same could be said about manufacturers, but coming from a more rigid policy and channel management position.
There are examples where distributors and manufacturers have found innovative ways to meet in the middle to reward and support specific channel behavior in ways that protect and enhance value and profitability. Those channel partners that have addressed these issues are much better positioned to adapt.
We are in a very hot summer when it comes to consolidation. Competition between strategic and financial acquirers is intense from many reports we are hearing. There is a lot of deal-making and shopping, and it is a seller’s market at top-drawer EBITDA multiples for distributors with healthy balance sheets and business models that have adapted to the intense pressures of the long, slow recovery. Rebate structures held value in their time, but today make individual companies, and in most cases entire channels, more vulnerable in current market conditions.