Considering it is a six-trillion-dollar sector that has consistently been growing nearly 20%-50% faster than the rest of the economy, Wholesale Distribution doesn’t seem to get its share of respect or attention, especially compared to other ‘more exciting’ sectors such as high tech, biotech, or even retail. Granted it is overall a relatively low margin and mature business, but boring it is not. Wholesale Distribution (WD) is a vibrant sector with a lot of innovations, changes, and competitive battles going on. Since WD spans across the whole economy (there is a WD slice in virtually all industries), it is worth understanding these dynamics.
What is Driving the Growth?
Globalization/New Markets — Manufacturers are going after more and more global markets around the world. They can’t afford to have sales and service people everywhere, so they are increasingly relying on Wholesale Distributors (WDs) to represent them and provide a presence in new markets. It is a lower-cost way to get into new markets.
Services — WDs have been aggressively building their service businesses to build differentiation, higher margins, and loyalty. As they stretch the boundaries of what they do, WDs end up clashing and competing with system integrators, service and repair businesses, 3PLs, contract manufacturers, and even software and business information companies, to name a few.
Selling Direct — WDs have figured out ways to sell direct without alienating their retail customers. The volumes of their online and retail businesses are growing.
Figure 1 – Battlegrounds Between WD and Nearby Sectors
Because of these forces, there is a lot of ‘pushing and shoving’ at the boundaries between WD and nearby sectors, as shown in Figure 1.Here we see a variety of types of business that WDs are getting into, other businesses that are encroaching on WDs’ traditional space, and sectors where both are happening simultaneously. For example:
- Systems Integration (and Installation) — Margins for installing and integrating systems and complex equipment are much higher than traditional WD margins. It is a natural fit for WDs in high tech, industrial equipment, medical, and many other sectors.
- Service and Repair — Repair is another high-margin business for which many WDs are well-equipped.In many cases, they are already holding the spare parts inventory and they may already be handling returns. Less commonly, they may also try their hand at field service, especially if they already have local installation capabilities in the end markets. (Read more about service opportunities here.)
- Software — WDs are creating procurement systems, spend analytics, and other tools that compete with pure software providers. The software tools that WDs provide to their customers can be quite sophisticated.
- 3PLs — WDs and 3PLs both serve manufacturers. As a consequence, these two types of businesses may provide some similar services, such as kitting and light assembly.
- Group Purchasing Organizations — GPOs are designed to consolidate buyers’ purchasing power. In some cases, they compete directly with a wholesaler or work in ‘coopetition’ (cooperation and competition) with/against WDs. In the current belt-tightening healthcare market, GPOs are also seeking ways to increase their value beyond just procurement to include other services, some of which compete directly with services the WD offers. The WD therefore needs to rise to this added competitive challenge.
- Retailers — This is another love/hate relationship where Wholesalers often sell direct to the end consumer and Retailers may buy direct from the manufacturer. Wholesalers with a presence on the web often have the tools and know-how to enable new e-tailers, since they can help to manage online catalogs and more importantly the back-end fulfillment, creating a potential advantage over the retailer when it comes to web-retailing.
Some sectors, such as Medical Devices, have growing, serious channel conflict issues. Buyers are more open to bypassing the GPOs or wholesalers and going direct to manufacturers. The private label sales within retail has consistently grown faster than retail as a whole, comprising an increasingly larger share of sales, which means fewer purchases from wholesalers on first run merchandise. Furthermore, retailers are building more discount malls and outlets, reducing wholesalers’ and liquidators’ opportunities — revenue that they could count on in the past. Conversely, Wholesale Distributors are selling directly to the end customer, via the internet and other means. However new types of partnership will emerge from this opportunistic environment. (Read more about Channel Management here.)
Expect these battles with adjacent types of companies to only intensify as WDs seek new sources of margin and revenue, expand their service businesses, and sell direct to end customers, and as the adjacent companies (manufacturers, retailers, brokers, GPOs) try their hand at bypassing WDs to also ‘go direct.’
Unlike vertical industry sectors, Wholesale Distribution is really a horizontal slice across almost all the industries comprising the entire economy (see Figure 2 below). There are some common threads, but also key differences between the industry sectors within WD. For example, some sectors are highly consolidated, such as Pharmaceuticals where 90% of drugs flow through the ‘big three’ wholesalers. Other segments are highly fragmented.
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