By Bridget McCrea
“Two of your top suppliers have merged into a single entity,” is the kind of news that no electrical distributor wants to hear, yet they’re getting more of these news flashes lately as manufacturers either decide to pool their efforts with other producers or add new lines of business through acquisitions. This type of industry consolidation typically comes in waves and 2013 could be a year marked by an upswing in merger and acquisition activity.
One of the first things that distributors are told when Manufacturer A merges with Manufacturer B is generally always an untruth, according to Mike Marks, managing partner with the Indian River Consulting Group in Melbourne, Fla. “They tell you that nothing is going to change,” says Marks. “However, when two distributors that were previously selling two different lines both wind up with a full line from Manufacturer A-B, they’ll clearly be competing with one another for the existing customer base.”
The Race to the Bottom
In many cases, market shifts brought on by consolidation create a “race to the bottom” scenario where both distributors rush to grab market share through discounting. “In the end, both distribution firms’ margins decline,” says Marks, who adds that the scenarios associated with consolidation all come down to basic distribution concepts. When establishing selling networks, manufacturers choose among single distribution (one distributor for a specific geographical area); selective distribution (more than one distributor – but not all – will carry the line); or open distribution (all distributors can carry the line).
Selective is the most popular choice because it allows for maximum product exposure and encourages distributors to create markets, find customers, and close deals. “Distributors will invest to grow a brand with selective distribution,” says Marks, “whereas with open distribution – as with the case of Manufacturer A-B now having two distributors competing with one another – distributors all become fast followers and order takers rather than getting out there and making a market.”
Knowing this, many manufacturers stick with the “nothing is going to change” motto when addressing distributor questions during the transition phase. In the end, many switch from selective to open formats in order to retain their distribution networks and top sales reps. But early in the game, most manufacturers “don’t really know what’s going to happen until they actually fold the companies into one and chew on it for a while,” says Marks. “The manufacturers aren’t lying. They are just challenged and they don’t really know what the right thing to do is.”
The paralysis caused by mergers and acquisitions often opens doors for smaller manufacturers that are not involved in their own consolidation activities. With Manufacturers A and B busy in the boardroom trying to sort out the details of their deal, for example, Manufacturers C, D and E have the opportunity to fill in where the top two suppliers are leaving off.
“The electrical distributor that isn’t sure if it will still be carrying a particular line in six months will be looking around at other companies that make those products,” says Marks. “Suddenly the smaller supplier who steps in and says, ‘I’m not even involved in this game – all I want to do is sell you stuff and be a reliable supplier’ starts to look more and more appealing.”
Distributors can also cash in on the consolidation trend. For example, Marks sees private labeling as one area where such firms can leverage that trend to their advantage. Through private labeling, distributors sell products or services under their own brands even though they are manufactured by another firm.
“If a brand loses some of its power, and if its products are commodities, then the door is open for distributors to get into private labeling,” says Marks, who also points to channel management and value-added services as two additional ways for distributors to benefit from supplier consolidation.
To effectively ride out the wave of industry consolidation and come out on top, Marks says electrical distributors need to brace themselves for those “We’re merging into one,” news flashes and have a plan of action for dealing with the suppliers’ resultant actions. “As soon as you get through one consolidation the process will likely repeat itself, so be prepared,” says Marks. “There’s no way in the world you’re going to be able to stop it, but there are definitely multiple approaches to capitalize on it and benefit from it.”
McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at firstname.lastname@example.org or visit her website at www.expertghostwriter.net.Tagged with tED