The Year in Distribution - Modern Distribution Management

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The Year in Distribution


liquidity for shareholders but maintaining majority ownership. Another distributor transitioned to 100% employee-owned.

Fighting the Forces
MDM has presented several case studies over the past year on distributors who have implemented strategies to make themselves stand out and even grow market share, despite challenging market forces. Arguably, distributors are facing many issues outside of consolidation including price inflation, losing customers to the other side of the ocean, a slowdown in housing, and not being left behind in the rush to adopt technology.

Independent distributors from non-competing sectors have joined to make themselves more attractive to customers and suppliers. This trend is not new you see it in the form of marketing and other groups and joint supply agreements but more distributors are seeing the value of working together to provide convenience to their customers and better compete with the big players.

Three distributors electrical, HVAC/plumbing and PVF recently opened a branch together in central Pennsylvania to not only cut overhead costs but also save their customers time by allowing them to pick up their supplies at one place rather than go to three. One customer told them: “Why hasn’t anybody else tried this?” Another group of distributors formed an integrated supply alliance.

Other distributors are considering their core strengths and capitalizing on them. Tooling distributor C.J. Smith Machinery, for example, saw its fee-based safety audits take off after a request from one of its largest customers. The service has strengthened Smith’s relationship with its customers and has opened the door for more sales to meet safety requirements uncovered during the audits.

Technology has also become a way to differentiate service levels to customers and suppliers from integrating systems with customers, to revamping call centers to improve service, and using software to ensure on-time delivery and lower fuel and labor costs, distributors of all sizes are finding ways to leverage technology for competitive advantage. (See MDM’s Technology Case Study archive.)

While there are definite pluses to being acquired by a company like Home Depot that has purchasing clout, marketing power and a great deal of money, HD and other large distributor market moves won’t be fatal for smart independent distributors who want to stay independent and invest in a deliberate way to differentiate their offerings and cement their value for customers and vendors in 2007.

Top Stories of 2006
Home Depot’s Market Moves
Technology Case Studies

the DIY retailer a strong growth platform and it is eager to continue growing into new channels. It pushed further into electrical this year with its purchase of Edson Electric, as well as some utility supply companies. And Joe DeAngelo, HD Supply’s top man, says the division is looking to increase its presence in industrial markets. So it’s not a question of if, but rather when industrial distributors will need to prepare for that.

But Home Depot is not the only giant that is reaching into new channels and expanding quickly. London-based Wolseley seems to be growing at a faster pace than HD Supply the $25 billion global distributor of building materials, plumbing and HVAC supplies made 53 acquisitions worldwide in fiscal 2006, mostly in Europe and the U.S.

While most of those acquisitions were relatively small, many under $10 million, Wolseley is keeping its eyes open for a larger acquisition. It proved it is not afraid to make a big buy when it bought the DT Group, a Nordic building materials distributor, for $2.48 billion earlier this year.

Wolseley also makes no secret of the fact that it wants to enter the electrical market in the U.S. as it has in England, though it has only made baby steps in that direction. It purchased small electrical services companies in the hot Las Vegas market, a move that stayed mostly under the radar.

Other distributors continue to diversify and broaden their product lines through acquisition some, like DXP Enterprises, have bought up a string of safety product distributors. WESCO International Inc. acquired Communications Supply Holdings, extending its reach into the low-voltage and data communications supply industry. Grainger, more a fan of organic growth, diversified its product offerings in a big way by adding 39,000 new items, mostly fasteners.

Private Equity Moves In
In the past year, interest from private equity has picked up to a sprint. To be sure, many big deals have involved private equity in the past decade including Clayton, Dubiler & Rice’s 2004 investment in global electrical distributor Rexel Inc., and WESCO, which was owned in turn by a few investors before going public.

This year, small and big distributors have sold to financial buyers. Caxton-Iseman Capital bought Valley National Gases. Brazos Private Equity Partners LLC bought master distributor ORS Nasco Inc. On the smaller side, Singer Equities acquired PRC Industrial Supply and so on. Former Sonepar USA CEO Richard Worthy is rapidly building a portfolio of electrical distributors, US Electrical Services, with the support of private equity. His focus has been on smaller local or regional distributors, so far only in the East.

Your suppliers are also being bought out. Rexnord was purchased by Apollo Management this year. WestView Capital Partners acquired Radiac Abrasives. Recently The Carlyle Group announced it would pay $1 billion for roofing and building products manufacturer ElkCorp.

But what does this mean for your company? As a distributor, if a supplier or customer is bought by a financial buyer, that likely means operations will change, sometimes significantly. These firms are looking for a strong return on their clients’ investments. They are concerned with a company’s market share and its cash flow, as well as other factors that maintain or speed up growth.

The new owners will take a close look at costs which means you might have to prove your worth to a customer or supplier to keep their business and they may change management. This means decision-makers may change. Know your value and make sure your customers and suppliers do too.

Distributors who don’t want to sell to the big players or allow a full buyout by private investors, but want to retain some stake in their company are finding creative ways to do so. One electrical distributor sold a 49% stake in its company to a private equity firm, providing
From Home Depot’s acquisition of Hughes Supply to Wolseley’s global market moves, private equity’s push into the sector and Grainger’s massive product expansion, distributors in 2006 saw some major shifts. The year saw some independent distributors make some strategic moves to differentiate and cement their value to customers and suppliers. Here’s an overview of the year in distribution.

When you think of 2006, the top item is the big deal. The top news story hands down was HD Supply’s explosive growth, sparked by its $3.4 billion purchase of Hughes Supply at the start of the year.

But other distributors have kept equally busy. London-based Wolseley has become adept at making small acquisitions in key U.S. markets while it continues to expand rapidly in Europe. MSC Industrial grabbed up Kennametal’s distribution arm, J& L Industrial Supply, boosting its presence in the Midwest. In the electrical world, Rexel made a big move with its $725 million purchase of GE Supply.

Grainger jumped into new markets with its vast product expansion, notably in fasteners it plans to eventually double the size of its catalog. And other distributors like industrial and medical gases supplier Airgas (which recently bought most of Linde Gas’ U.S. bulk-gas operations) seem to be announcing new additions to their families every other week. And then there’s the grand influx of money to distribution from private equity firms, who have renewed their interest in the sector.

As the big get bigger, and more distributors diversify, questions arise: Will manufacturer-distributor relations erode as channels become more complex? And how will these moves in connection with other market forces such as manufacturer off-shoring affect independent distribution? It’s tough to say.

It’s an interesting time for distribution. Consolidation, combined with the coming generational shift at many smaller distributors, has the phrase exit strategy” popping up all over the place. While some family-owned distributors are selling to big international, national or regional players, others have found more creative ways to keep the business in familiar hands. And those who aren’t ready to hand over the reins are employing strategic moves to differentiate themselves to their customers and suppliers.

As a result, and despite reports of a potential economic downturn, many distributors are optimistic for the new year as they come off a year of strong growth.

Orange Makes Its Move
The Home Depot has been slowly building up its wholesale base over the past five or six years, but it made its biggest move this year with the purchase of Hughes Supply, Orlando, FL, for $3.4 billion. Hughes opened up new markets for HD Supply including industrial PVF and electrical.

HD Supply has been recording triple-digit growth in the past several quarters, thanks to its acquisitions. Organic growth has been slower in the third quarter it was a modest 7 percent, in part due to a slowdown in housing. Home Depot has ambitious plans for its supply division; it aims to grow to $23-$27 billion by 2010.

As in any acquisition, employees, suppliers and customers are the ones who decide whether it succeeds. Home Depot says it thoroughly vets its acquisition targets and has an intense integration process that involves ensuring customers feel comfortable with the change. Still, we hear from time to time at trade shows and conventions that customers sometimes move to other distributors after a supplier is bought by a large distributor.

As one regional distributor told MDM shortly after the Hughes acquisition, the level of customer service Home Depot is able to maintain will likely determine whether it succeeds in wholesale distribution, an industry historically dependent on close ties.

The Big One?
Or is it? Home Depot’s foray into the wholesale world is providing

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