It’s a tumultuous time for the wholesale and distribution sectors – and for innovative players, potentially an auspicious one.
On the one hand, the global economy is reeling from supply chain dislocations wrought by the Covid-19 pandemic.
On the other, technological changes are simplifying some aspects of doing business, while regulatory changes in some markets and regions are adding complexity.
This article offers some thoughts on how to run a wholesale or distribution business amid these industry trends.
Improving the business
Once your business is acquired or established, your growth strategy should be framed by the opportunities and threats to be seized and mitigated respectively.
But given the fine margins involved in replenishing inventories and fulfilling orders, you mustn’t lose focus on daily operations when eyeing the future horizon.
Agility, turning inventory over quickly, and continuous innovation are key to addressing many challenges and realizing these qualities requires investment in the right skills, technology and methodologies.
To give one example of changes this approach could yield, you might emulate ecommerce exemplars by offering order tracking and streamlining the ordering process.
Researching your market
Let’s say you distribute drinks to the hospitality sector. Your market research should encompass direct and indirect competitors, nearby drinks manufacturers and untapped areas of potential custom.
Imagine you conclude that one rival within your state is closer to a much broader swath of hotels, bars and restaurants, making it difficult to compete at scale.
But you might also discover an opportunity to strike a distribution deal with a fashionable drinks manufacturing startup, only half a mile away, whose brand chimes with the demographic of nearby conurbations.
Also consider the regulatory environment – including in states or countries you want to expand into – and other industry trends, such as the personalized services offered by new technologies.
Useful research sources include Statista, The State of the Wholesale Distribution Industry report from the National Association of Wholesale Distributors (NAW), and MarketResearch.com’s Wholesale Global Market Report 2021.
Acquiring equipment
This can be an expensive business, with forklift trucks, for instance, costing in the region of $20,000-$45,000, and, depending on your regulatory obligations, sophisticated systems potentially needed to provide product traceability throughout the supply chain.
Let’s say you need an industrial temperature monitoring platform for warehousing food or pharmaceuticals: TempGenius, for example, costs roughly $2,000-$5,000 depending on the size of the installation.
Managing inventories
Covid-19 has forced wholesalers and distributors to rethink the just-in-time inventory model.
The supply chain has been affected by border delays, personnel shortages and both soaring demand for certain goods (think hand gel or home office equipment) and plummeting demand for others (for instance formal clothing).
To make their businesses more resilient, distributors can diversify their supply base, sales channels and inventory range, and focus more on domestic than overseas markets, or otherwise decentralize their distribution network.
Funding and maintaining your premises
California-based real estate investment trust Prologis says understanding the monthly cost of leasing warehouse space is complicated by landlords and brokers describing rates and fees with mystifying acronyms.
You should therefore quiz them on who will be responsible for maintenance, repair and replacement costs, paying for common areas, and covering the cost of any improvements you implement.
Prologis provides an example of calculating monthly rental rates for a warehouse offering 5,000 square feet of storage space, where the average base rental rate and estimated operating expenses per square foot per month totals $1.10, making total monthly rent $5,500 (5,000 x $1.10).
Per square foot rents are influenced, among other things, by proximity to key roads and major cities, with warehouse space in New York obviously more expensive per square foot, typically, than in rural Idaho.
For distributors it’s invaluable to be close to your suppliers and customers, whether they’re retailers, restaurants or building contractors, while some companies will ship goods directly from the manufacturer to the retailer – eliminating the need for warehouse space altogether.
Industry facts
- $5.8 trillion worth of goods were distributed in 2020, down 4.3% from $6 trillion in 2019, according to the NAW.
- 90% of senior industry executives expected to regionalize operations to at least some degree over the next three years after Covid-19 exposed the flaws of centralized distribution, according to a 2021 McKinsey survey
- 59% also told McKinsey they had adopted new supply-chain risk management-practices over the past 12 months
Setting revenue and development goals
Secure your business model against various threats and you can set revenue, profit and growth goals with a greater degree of confidence.
The renewed focus on risk surfaced by the industry surveys above reflects rising concern about the supply chain disruptions threatened by pandemics, geopolitical turmoil and adverse weather events.
Like 93% of distributors in the McKinsey report, you too might make agility, flexibility and resilience cornerstones of your business development.
To this end, you could set goals around increasing inventories of critical products, components, and materials, diversifying inventory and supply bases, and regionalizing operations.
Marketing your business
While there’s plenty of repeat business in this sector, you cannot be complacent when the sudden loss of a major customer can leave a gaping hole in your balance sheet.
Fruitful ways to find new business include both email and direct mail, industry directory listings, tempting prospective customers with product samples, and rewarding customers who send leads your way.
A live chat feature on your website can also help shift retailers through the procurement process.
And special offers, such as bulk discounts, time-limited offers and first-time customer discounts, are effective in both customer retention and attraction.
Funding business growth
There are funding options tailored to alleviating cash flow pressures or powering growth, that leverage invoices or inventory as collateral, and for funding equipment, premises or working capital.
Trade finance, for instance, plugs the gap between paying suppliers and receiving payment from customers, while inventory financing means you can use your likely most valuable asset – the goods within your warehouse – as security for lines of credit.
Leasing may be the most cost-effective short-term option, but it might be worth at least assessing the commercial mortgages on offer, since owning your premises gives you full control in customizing the site for your needs.
Hiring and training employees
If it doesn’t apply to you, it’s wise to have at least one or two people with deep experience of the finely calibrated art of sourcing, warehousing and distributing goods.
In terms of training, the American Supply Association provides a range of inexpensive online courses on various areas of the wholesale and distribution sector.
For instance, the ‘Essentials of Profitable Wholesale Distribution’ course costs just $210, while for $495 apiece there are courses focused on sales, business, management, warehouse operations, procurement and inventory, and leadership and management mostly.
Staff benefits
Employee recruitment and retention are major concerns in the distribution industry, according to the NetPlus Alliance Industry Outlook report.
And hiring and training workers is expensive, making subpar salaries a false economy if they result in a high staff turnover rate.
Paul Byrnes, VP of distributor development at NetPlus Alliance, a New York industrial buying group, recommends offering employees flexible working options, a recognition and rewards system, professional development opportunities, and bonuses for meeting accuracy, inventory turns or sales goals.
Considerations for exiting your business
Wholesalers and distributors must run like clockwork, with little margin for error, so a disruptive business sales process can be particularly damaging.
This risk can be mitigated by drafting an exit strategy months or years ahead of eventually selling a business.
Mike Marks of Indian River Consulting Group, a business consultancy for distributors and manufacturers, offers some exit strategy tips, including:
- If you intend to transfer ownership to your son or daughter but they lack the requisite experience, formulate plans for interim management and a board of directors to manage the transition
- Consider the merits of negotiating a business sale with private equity or other distributors – ie, ‘strategic buyers’ – in what is a comparatively slow growth market
- Building a ‘platform company’ in the meantime could be the best way to maximize your likely returns when you value a business