Through our Distribution Industry Group’s work with numerous distribution and wholesaling organizations, we have learned that no one is alone. The end products may be diverse, but the challenges these organizations face tend to be the same.
Here are the challenges we see most often in the industry:
- Increasing Competition from Manufacturers – Increasingly efficient logistics systems allow manufacturers to sell more goods directly to end users, bypassing distributors. Plus, consolidation in many manufacturing sectors has produced large manufacturers with national distribution systems.
- Retailers Demanding Faster Delivery – As big-box retailers such as Walmart and Target expand their product offerings, they are tightening delivery deadlines and imposing stiffer penalties on distributors for late shipments. Wholesalers may also be fined for providing inaccurate product information. Many companies have invested in technology upgrades and additional employee training to meet the new standards.
- Dependence on Fuel Prices – Wholesaling is the business of transporting products, and fuel prices play an important role in a company’s overall profitability. The cost of diesel fuel can represent a significant portion of total wholesale operating costs. Many distributors pass this cost to suppliers in the form of fuel surcharges, but some smaller companies may not have this leverage.
- Vulnerability to Changing Prices – Rapid changes in costs leave distributors vulnerable to changes in inventory values. Although distributors try to limit their cost exposure by pricing products according to a percentage markup on costs, competition may make it impossible to mark up expensive inventory when prices are falling.
- Worker Safety Concerns – There are significant hazards associated with the storage, handling, and transportation of many products. Companies must implement tight safety standards to avoid system failures and maintain preparedness for potential issues that can arise.
- Supplier and Retailer Consolidation – Wholesalers are losing buying power due to increasing consolidation among manufacturers. Regional distributors have become easy acquisition targets as they struggle to compete with national players. The top chains are increasing their market share and continuing to take advantage of manufacturer discounts for large purchases, giving them additional leverage with distributors that are unable to offer similar terms.
- Centralized Buying by Large Customers – Instead of letting stores buy regionally, most purchasing is now handled through company headquarters, giving them greater leverage with suppliers and potentially streamlining the entire delivery process. Centralized buying is likely to eliminate many regional distributors in favor of large distributors that can deal in large volume and accept a lower price.
During your strategic planning sessions, it’s important to pay attention to these issues. These issues are not unique to any specific type of distributor; they are consistently being encountered by the industry.
Robert S. Olszewski can be reached at Email or 215.441.4600.
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