Brent Grover: Get Big, Get Specialized or Get Out
Three strategic choices for your distribution business.
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Which of the following options most closely describes your plans for your company?
- We’re mostly trying to grow so we can stay big enough to have a seat at the table.
- Size isn’t our main goal. We are a specialized distributor that “flies under the radar.”
- We are trying to build up our profits so we can sell the business for a good price.
Business owners tend to do a lot of soul-searching this time of year. Did I achieve my goals for the past year? What do I want to do with the company in the coming year? The big question for effective business leaders might be, “Is the business a better company today than it was at the beginning of the year? What can I do to make this company better next year than it is today?”
Now that your business plan for the new year is
underway, and hopefully is on track with your company’s strategic plan, I have a suggestion for you. Close your laptop and forget about the spreadsheets, flow diagrams and graphs. Pour yourself a glass of your favorite
beverage or step outside for a brisk walk by yourself.
Take a deep breath and ask yourself three questions:
- Is your distribution company big enough to compete effectively? Do you have the needed buying power to attract the right suppliers and get the best prices? Can your business continue to attract great managers and sales people? Do you have the critical mass to meet the growing demands of your customers, employees and suppliers?
- If you are simply not big enough to have “scale,” is your business adequately specialized to compete effectively in the niches you have carved out for yourself? Are your small specialty areas growing fast enough to sustain your company? Can you maintain your distinctive advantages so you can avoid having to go head-to-head against bigger players?
- What will you do if your company isn’t big enough, or specialized enough, to continue to thrive? Are you doing everything you can to build up the value of your business in anticipation of a sale, or are you going to preside over a gradual liquidation of the company?
Get Big
How much sales revenue is needed to be big enough to compete? The answer depends on your line of trade and upon your geographic market. Many smaller distributors have devised ways to have the “look and feel” and critical mass of a much larger company:
- Most independent distributors are members of buying groups to leverage their purchasing power. Some of these groups are highly effective.
- Some buying groups offer importing programs, centralized warehousing and private brands for their members. Again, some of these groups are very successful.
- Groups of competing distributors are using technology to share inventories.
- Some enlightened non-competing distributors are sharing warehouse locations to enable local presence in more markets.
- Distributor groups have found ways to share customers through integrated supply programs as well as national account contracts serviced by multiple distributors.
Simply striving for growth is too difficult for most distributors. Rapid growth requires a great deal of capital, management capacity, patience and tolerance for risk. Distributors have other options to provide the advantages of scale.
Get Specialized
Historically, the driving force for distributors has been customer intimacy. The hallmarks of customer intimacy are either a close understanding of the customer’s business needs or a highly specialized knowledge of how products are used.
- Either way, the customer-intimate distributor is in position to solve customer problems quickly. Thedistributor can often help regular customers to anticipate and avoid problems.
- By combining both their knowledge of their customers’ operations with product expertise, a strong distributor can get the first opportunity to provide solutions and win more business.
- At best, great distributors help their customers earn more profits through growing sales, reducing costs and lowering asset levels.
- These protected niches tend to be exposed more readily by technology (Internet, for example) and by financially motivated customers who place less value on long term problem-solving and more emphasis on immediate cost reduction.
Distributors realize that it’s getting harder to harder to just “move boxes.” Larger customers are looking to concentrate their purchasing power by buying multiple product lines from the same distributor.
Get Out
Evergreen Consulting has advised many distributors on buying and selling companies. We urge “acquisitive distributors” to be cautious about buying damaged companies, and we implore would-be sellers to make sure their business is as attractive to as many buyers as possible:
- Buyers look for a dependable stream of future earnings and will pay accordingly.
- Buyers try to avoid integration risks and will dig for them in due diligence. They will reduce the amount they are willing to pay, or walk away if they foresee too many problems.
- Some sellers tend to value their company based mostly on how much they will need to support themselves after they retire. They must concentrate instead on the value perceived by the prospective buyers.
- Sellers usually need help to find the right buyer and to structure and close the deal. Also, the company’s regular accounting and legal advisors may not have the experience needed to assist the seller on a large transaction.
Preparing a business for sale at a good price is a long-term process often spreading over
three years or more. For most distributors quite a few gaps require major repairs before the company is ready to be shown to a prospective buyer.
These three options for distributors: get big, get specialized or get out, aren’t necessarily mutually exclusive. Some companies work on growth and specialization at the same time. Many distributors are quietly planning for the upcoming sale of their company. As an outside advisor, I have the greatest confidence in companies who are trying to do one of those things well rather than all three halfheartedly. I worry about those who are doing nothing. CS
Brent R. Grover is a nationally recognized distribution industry consultant, speaker and writer. He is an NAW Institute Fellow and has written eight books including Strategic Pricing for Distributors. Brent founded Evergreen Consulting, LLC in 2001 exclusively to advise companies in the distribution channel. In Search of the Perfect Customer: Cost to Serve for Distributors was published by NAW in 2011. His newest book, The Little Black Book of Strategic Planning for Distributors was published by MDM in 2012. Brent can be reached at brent@evergreen-consulting.com or 216-360-4600.
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