By Magnus Meier, Global Vice President, Wholesale Distribution, SAP
Merger and acquisition (M&A) activity continues to shake up the wholesale distribution industry. To date, the top three pharmaceutical distributors in the United States gained a majority of market share, while megamergers form multibillion-dollar firms serving every sector from industrial manufacturing and high tech to food service and chemicals.
Although the average value of M&A deals has more than doubled in recent years, the decision to merge with another company or become acquired is not necessarily a forgone conclusion. Midsize distributors must focus on efforts that strengthen their capacity and value to offset the risk of being commoditized and pushed out by larger competitors and industry-adjacent players.
One area distributors are reconsidering to remain competitive is their digital transformation strategy. According to research conducted by IDC, sponsored by SAP, 62% of surveyed distributors prioritize the accelerated adoption of modern technology to innovate and capitalize on new value-added services.*
Knowing when to stay and when to play
Midsize distributors have various options to consider in the current market environment. For example, they can sell their business to an acquirer; merge with larger, smaller, or similarly sized peers; or eschew M&A strategies altogether and realize economies of scale on their own for ongoing growth.
Although multiple factors must be considered, the opportunity to create a mutually complementary partnership is not enough to justify a merger or acquisition. Distributors must also assess impacts on their extended portfolio of products and value-added services, level of personalization to address specific business needs, and ease of doing business to add value to the overall B2B experience.
Safeguarding supply chain operations from disruptions is another area that midsize distributors should think about. When an M&A deal improves the regional coverage of stock across a key range of their product catalogue, organizations can specifically focus on inventory health and buffers to bolster their overall resiliency.
Scaling operations to drive profitable growth
For midsize distributors that outperform, the secret to their success is taking a holistic view of their overall business growth. Concentrating on core processes enables strategic investment in adjacent and breakthrough ideas that can help the business move past their competing peers. In return, top performers can grow faster and more profitably while expanding gross margins and earnings before interest, taxes, depreciation, and amortization.
Such a disciplined approach requires organizations to adapt existing business models and adopt new ones quickly and flexibly. This capability often results from technology investments – such as cloud-based ERP and predictive analytics – that improve demand forecasting accuracy and speed and integrate business planning with inventory policies and working capital management.
One of the many significant benefits of this digital backbone is scalability. Organizations can build on top of existing systems, solutions, and applications and bring more efficiency through automation and analytics. Distributors, such as Topcon Positioning Systems Inc., are better equipped with 42% automation of sales orders and nearly 30% faster month-end financial closings – even when their subsidiaries are scattered worldwide.
Top-performing distributors also rely on these advanced technologies to further enhance their customer experience. For instance, organizations can view a behind-the-scenes look into their markets and operations to address buyer pain points and increase stickiness with recurring and value-added services that resonate well with customers. Additionally, efforts in unifying buying experiences across the entirety of their channels can mirror what customers regularly expect when shopping in B2C settings.
Thinking differently leads to an outperforming advantage
Contrary to current M&A activity, bigger is not always better in the wholesale distribution industry. In many sectors, such as industrial equipment, specialized midsize distributors outperform larger competitors with personalized interactions and optimized operations across channels and supplier networks.
What matters most is having departments scale operations and product and service offerings in unison. So instead of expanding at the expense of profit and customer loyalty, midsize distributors should accelerate and fuel ongoing growth with a complete blueprint of higher aspirations for their business. And with that mindset, distributors can act boldly – whether or not they agree to an M&A opportunity.
Discover how midsize wholesale distribution companies grow and increase margins with more personalized services. Read the IDC info snapshot, “Driving Growth for Midsize Wholesale Distributors: The Role of Technology and Digitalization in Propelling Differentiation.”
This article was previously posted on Forbes.com