Distribution Disruption: A Strong Industry Sees Change Ahead

For most industries experiencing strong revenue growth, disruptive change is off the agenda. That’s not the case for distributors, however.

The Harris Williams Specialty Distribution Group recently attended the National Association of Wholesaler-Distributors (NAW) 2019 Executive Summit, and came away with an impression of an industry eager to change things up despite ongoing success.

As Vice President Graham Gillam observes, many in attendance reported strong results in 2018 and aren’t seeing any signs of softness this year. In fact, wholesale distribution generated $5.7 trillion in revenue in 2018, showing the fastest year-over-year growth (7.6%) in more than five years.1

However, as he also notes: “That doesn’t mean there isn’t any trepidation about 2019.”

In particular, says Gillam, attendees expressed a growing awareness of the lateness of the current business cycle, as well as the potential changes wrought by continued and growing uncertainty emanating from Washington.

Labor is another concern. “Wages have been rising, and it seems to be getting more difficult to attract talent to the industry. That’s particularly true for younger workers, and extends from the cabs of trucks to the warehouse to the back office. They don’t always see distribution as the most modern, appealing industry in which to work despite the tremendous opportunities available,” says Gillam.

Facing potential market change, legislative impacts, labor challenges, and a shifting competitive landscape, it’s no mystery why leading distributors are embracing disruption and innovation. Indeed, those were the topics of both keynotes and informal discussions, says Gillam. “Leading distributors are proactively striving to become more agile, versus waiting for the market to disrupt them.”

Such forward-looking distributors are on the radar of both strategic buyers and private equity investors, observes Managing Director Bob Baltimore. “Market shifts separate the best, most agile operators from everyone else, and we’re continuing to see strategic buyers and private equity investors run hard after those distribution assets that are truly differentiated,” he says.

What exactly are these buyers and investors looking for? Baltimore and Gillam emphasize five fundamentals: growth history and opportunities, resilience through business cycles, resistance to disintermediation, true value-add for customers and suppliers alike, and technology adoption.

Of these, technology enablement may hold the most power, says Gillam. “The right technology can help distributors build stronger customer relationships and make them a more integral partner, thereby combating disintermediation, while helping address labor challenges. Technology can also boost efficiency, which helps distributors whenever the business cycle shifts.”

In Baltimore’s view, one simple premise holds true: “No matter market conditions, the most successful distributors are those that provide differentiated value to their customers. We’ve seen that make the difference countless times.”

Baltimore concludes that the high degree of fragmentation across many distribution levels provides a wealth of opportunities for informed buyers and investors looking to build leading distribution platforms. “The industry is fundamentally strong, and conditions provide innovative operators with opportunities to pull ahead. That’s a great place to be,” he says.

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1. https://www.naw.org/state-of-the-industry/, NAW 2018 State of the Industry

Published February 2019