- The pandemic has highlighted the importance of distributors and their respective supply chains, giving best‐in‐class companies an opportunity to enhance customer relationships and take share.
- TricorBraun, Continental Batteries, and Brady Industries each demonstrate different ways of winning during and in the wake of COVID-19.
- Despite distinct value propositions, these companies share the hallmarks of world-class specialty distributors: great human capital, technology, and supply chain relationships, and a focus on helping clients solve challenges.
Enduring Appeal, Evolving Role
Specialty distribution assets continue to appeal to a broad range of investors for many reasons. For instance, there are many distribution platforms, often operating in highly fragmented industries. As a result, the potential for significant acquisition activity, often at highly accretive multiples, remains a core and highly attractive valuation creation playbook.
However, as the competitive landscapes within many distribution subsectors evolve, the most valuable platforms are increasingly being defined by characteristics beyond the legacy buy‐and‐build playbook that has proven so accretive over the years. Going forward, long-term success will hinge upon new systems, processes, and technologies that accelerate growth, make life easier for customers, and create data-driven businesses. Robust and agile supply chains will also be essential.
"The pandemic has fundamentally highlighted the importance of distributors and their respective supply chains," says Bob Baltimore, a managing director and co-head of the Harris Williams Specialty Distribution Group. "There were supply chain disruptions and very unnatural patterns of demand as businesses scrambled to meet the needs of their customers and employees and make sure their environments were safe."
Baltimore adds that truly best‐in‐class distributors were able to step in, leverage the relationships they had with their suppliers, and adapt their supply chains to get products to their customers in a rapidly changing environment. Doing so enhanced their relationships with their customers and allowed them to take share from those who could not.
"There is substantial value creation potential for specialty distributors with diverse businesses in terms of geography, customers, and products," adds Graham Gillam, a director in the Harris Williams Specialty Distribution Group. "In an environment like we had in 2020, in which demand and supply chain disruption was unlike ever before, such diversity proved to be the key to stability."
In some specialty distribution categories, such as packaging, there's a tremendous amount of customer and product innovation each year, which can be challenging for businesses to navigate. Baltimore emphasizes that specialty distributors functioning as true solution providers with customers, and bringing them new ideas and innovations, can help their customers succeed and focus on their core business operations. "Those who are thought partners with their customers and proactively bring new ideas and potential solutions can form strong relationships that produce long‐lasting and entrenched relationships."
Click below to read about three recent Harris Williams transactions, which demonstrate the wide variety of opportunities in the specialty distribution industry and the common traits that characterize leaders.
TricorBraun, a portfolio company of AEA Investors LP, is a leading full‐service packaging solution provider in the large and fragmented North American rigid and flexible packaging industry. The company serves as a substrate‐agnostic supply chain partner to more than 3,500 recurring customers in a diverse range of large and growing end customer segments. It provides a critical link between its customers and a fragmented base of over 1,000 domestic and international packaging suppliers. Harris Williams recently advised TricorBraun on its sale to funds managed by Ares Management Corporation's Private Equity Group and Ontario Teachers' Pension Plan Board.
"TricorBraun is an example of an industry‐leading specialty distributor with great supply chain and client relationships," says Baltimore. "It understands what its clients are looking for on an hourly, daily, weekly, and monthly basis, and it has the systems in place, from both a human capital and technology perspective, to make it all come together."
"Their value proposition is very client-focused," adds Gillam. "TricorBraun's broad capabilities enable the company to offer its customers complete, end‐to‐end solutions for all of their packaging needs across substrates and product types."
A unique characteristic of TricorBraun relative to many other distributors is its packaging design function. In consumer goods, packaging is an essential representation of the brand and the first and most tactile encounter that consumers have with the product. Recognizing the significance of packaging to brand image and ongoing product evolution, Tricor continuously works with customers on packaging design.
"In a high‐growth brand, packaging can evolve quickly," notes Gillam. "The distribution relationship needs to be very agile, constantly innovating to help brands stay relevant to the market. TricorBraun's front‐end client experience in helping solve a problem, design, and source a packaging solution and develop their brand sets it apart."
"TricorBraun provides a unique value‐add that is tailored for each customer, from startup brands to medium‐sized companies to large CPGs," says Brandt Carr, a director in the Harris Williams Industrial Group. "They can evolve with a brand as it grows because their solutions span the spectrum," adds Carr.
This value‐add position has led to client relationships that are quite tenured. "The ability to meet very specific and evolving needs for different customers, and having sales and commercial organizations that are adaptable and flexible is key to growth," Carr adds. "As your customers grow, and you meet their changing needs, you grow too."
Notably, TricorBraun has also embraced technological innovation, and is constantly striving to add new capabilities to better serve its customers, maximize operational efficiency, and add agility to complex supply chains.
"The company's ongoing investments in technology paid dividends in 2020, when it was able to seamlessly adapt to the new operating environment it found itself in," says Baltimore. "Its customer-facing capabilities helped it respond to rapidly changing demand patterns, while its operating technology backbone proved superior to the competition, enabling it to gain share."
Gillam notes that TricorBraun's enterprise‐wide focus on commercial excellence and infrastructure investments revitalized its growth and margin profile, setting the stage for accelerated growth going forward. "The company leads with technology, from customer‐facing applications to product development and fulfillment," he says. "It has also done a good job of making acquisitions to move into new markets and skillsets."
In fact, adds Gillam, TricorBraun has completed 22 complementary acquisitions since 1996 (eight since 2017) to broaden its product portfolio and addressable consumer segments. "A passionate, growth‐focused culture pervades the entire organization, and a proven approach helps TricorBraun integrate new acquisitions and drive growth."
Continental Batteries is a leading distributor of aftermarket batteries to the electric utility vehicle, automotive, commercial, marine, and industrial markets. The company is a critical supply chain partner, serving as the link between battery manufacturers and customers across a broad and growing application base. Harris Williams advised Continental, a portfolio company of Incline Equity Partners, on its sale to H.I.G. Capital.
The battery industry is characterized by attractive demand dynamics, including non‐discretionary replacement cycles, a growing installed base, and the critical role distributors play in recycling used products. These resilient demand drivers buoyed Continental through the pandemic, with many months showing positive year‐over‐year growth. The company's business model is diversified across geographies, channels, battery technologies, and end markets, which enables it to pivot as demand shifts.
"Continental has a unique and attractive distribution model with compelling competitive barriers," says Brian Lucas, a managing director in the Harris Williams Specialty Distribution Group. "There are a range of structural and regulatory elements that provide meaningful barriers to entry and ensure its critical role in the distribution value chain."
The company sits in the middle of a closed‐loop system, with regulations requiring the product to be recycled. "It's much more than just front‐end fulfillment," Lucas continues. "The distributor plays a crucial back‐end role, picking up the product and getting it returned to the manufacturer for recycling. Not many industries have that end‐to‐end distribution role."
Local distribution is also an essential element of the of the supply chain, Lucas notes. "It's just not economical to move these heavy and hazardous products very long distances. And, as you increase your scale and density, you have more optimal routes, which leads to a flywheel effect of margin benefits. There's a pretty defensible position for distribution in the industry. "
"Continental also stands out for its comprehensive offering of products and value‐added services," adds Nicholas Petrick, a vice president in the Harris Williams Transportation & Logistics Group. The company has a product suite of more than 3,000 SKUs used in a wide array of applications. "It also offers its customers services such as specialized logistics, inventory rotation and charging, category management, and merchandising. Those services help Continental build strong customer relationships and make it a value‐added partner."
In this large and fragmented industry, Continental is a leading consolidator, having demonstrated the ability to effectively identify, execute, and integrate accretive acquisitions. "Having completed 17 acquisitions since July 2018, and with numerous near‐term actionable opportunities, it has a great M&A track record, and a proven playbook to realize synergies and create value," says Gillam.
Continental's scalable technology infrastructure is one indication of the company's potential to grow as a platform, notes Petrick. "Continental has made investments in the team and infrastructure to support scaling to a substantially larger business," he says. "Its systems across the enterprise are fully integrated, with detailed customer and branch‐level reporting and analytics underpinning operational cadence. There's the potential to build a national platform that can start disrupting the market and serving customers differently. With the right execution, it will be an exciting future."
Brady Industries is a full‐line janitorial supply, equipment, and foodservice distributor. Harris Williams recently advised Brady on its sale to Individual Foodservice (IFS), a portfolio company of Kelso & Company.
"Janitorial supply distribution is attractive because of the highly recurring nature of the demand," says Gillam. "Sanitation was already an important part of business operations pre‐COVID‐19, and now it has become an even greater focus. Businesses have enhanced their cleaning and sanitation requirements, and customers are hyper‐aware of the cleanliness of the spaces around them. More frequent and in- depth cleaning is driving demand for additional products from distributors. That's a trend we do not anticipate changing in the future."
Brady is an attractive platform in the janitorial supply and sanitation distribution industry. The company carries a wide breadth of products as well as private label offerings. Gillam highlights the company's solution‐oriented approach: "It provides integrated customer support, expertise, technical support, and service across a full spectrum of customer needs. Moreover, in combination with IFS, the company can now provide an even more comprehensive and compelling offering to its customers."
"The strength of Brady's supply chain during the pandemic is another important factor that makes the company stand out," says Pete Morgan, a vice president in the Harris Williams Business Services Group. "It had scale and a track record of being an invaluable supplier partner, making it important to its suppliers. Brady was able to get the product it needed when many people in the country were unable to. It could serve its customers in this time of increased demand, and it was able to do so with high‐quality products and highly dependable service."
Baltimore points to several synergies between Brady and IFS: "Through the acquisition of Brady, IFS can cultivate a broader geographic reach and become a super‐regional competitor. Brady will expand IFS's geographic footprint and presence in the hospitality sector, as well as offer IFS expanded capabilities in janitorial and sanitation product distribution."
Both Brady and IFS recognized the benefits of combining leadership across the two businesses. The Brady management team has achieved impressive geographic expansion, multiple acquisitions, and strong overall growth. Brady's positive reputation, its proven M&A engine, and its name as a preferred partner make it a magnet for smaller companies looking for a buyer. IFS valued the opportunity to bring a premier acquirer under their tent.
Finding the Hot Spots in Specialty Distribution
Given the M&A activity and opportunity in the industry, what should buyers and investors be looking for?
"World‐class distribution businesses have great human capital, technology, and supply chain relationships, and have found a way to be meaningful to their clients," says Baltimore. "They demonstrate their ability to meet customers' rapidly evolving needs and operational challenges, which helps them become critical partners. Distributors that stand out are true solution providers: Being there with a solution when the customer needs it sets a distributor apart."
Gillam agrees, noting that "businesses that had invested in infrastructure and technology before COVID could quickly adapt and operate in changing conditions." TricorBraun, for example, made meaningful investments in the supply chain, particularly in Asia, to differentiate in the market. "It was the right thing to do for their business at the time," Gillam says, "and, last year, when other supply chains were collapsing, they could secure the product customers needed while others couldn't."
Baltimore adds that the sophistication of the distributor organization is important to both its suppliers and customers. "Those distributors with scale and proven market presence tend to get great treatment by the manufacturers. They can make sure they have product availability, which is what their customers rely on them for every day. A sophisticated procurement organization and tactical relationships with suppliers allow a distributor to get products when needed."
Lucas says technology enablement is another critical aspect to consider, as it enables the distributor to flex with market and customer demands and differentiate its capabilities. "The right technology can help distributors build stronger customer relationships and become a more integral partner, thereby combating disintermediation. Technology can also boost efficiency, which helps distributors whenever the business cycle shifts."
Baltimore agrees. In his view, a straightforward premise holds true: "No matter the market conditions, the most successful distributors provide differentiated value to their customers. We've seen that make the difference countless times.