Trends and Challenges Impacting Paint and Coating Distributors
PCI recently reached out to a handful of distributors to find out more about their businesses, including current drivers and trends, industry consolidation and other challenges, and the value that distributors bring to the coatings industry. The following responses come from Howard Guild, President of Dowd and Guild Inc., Kyle Wendel, Sales & Marketing Director, U.S. Industrial Markets, for L.V. Lomas Inc., David Carroll, Vice President of R.E. Carroll, Inc., Mark Reichard, President and CEO of Maroon Group, and Dan Gruber, President of CASE, Azelis Americas.
PCI: What are the major drivers and trends affecting distributors today?
Guild: One of the major trends/drivers in the chemical distribution business affecting suppliers and customers is consolidation. Suppliers want fewer distributors to manage, and they want to be important to the distributor in terms of sales volume and opportunity. Consequently, we are seeing suppliers move more toward having fewer distributors; either using four or five super-regional distributors, or in some cases one national distributor. The super-regional distributor allows the manufacturer to select the strongest partner for a given geography and still manage a significant book of business with growth opportunities. Some select the national distributor model believing it is more manageable; however, they may sacrifice in areas where the national distributor may not be as strong as a super-regional distributor. We are seeing that the small, regional distributor is finding it increasingly more difficult to attract suppliers and build volume with the increased consolidation of customers.
Suppliers are requiring their sales people to focus on their top accounts and are using the specialty distributor to focus on the small and medium-sized accounts in order to grow the business. Strong partnerships are important to allow the distributor to leverage the resources of the manufacturer to enhance the selling experience and bring value to the customer.
Wendel: We see a number of trends that impact specialty chemical distributors today. One trend that is reported on nearly every issue of this publication is the consolidation of distributors in North America. The driver behind this trend is the desire on the part of suppliers to have nationwide coverage that involves only one or two distributors instead of the past models of several regional distribution partners across the country.
Another trend in the market is the development of environmentally friendly formulation solutions. The driver here starts with regulation, but also with consumer preference. Manufacturers don’t want just a token product or two, but now need products that can work together to provide a more complete solution. This is one benefit that distributors can provide - a more complete set of “green” tools from several suppliers that work together to become a solution providing compliance with little or no performance compromise.
Globalization of supply alternatives increases competitive pressures on suppliers today. The resulting impact is the need for greater efficiency. This is increasing the demands on distribution as a channel to market, requiring us to be more technically capable, and to offer more services and capabilities. Distribution is requiring more investment and greater commitment to specific markets as a result.
Carroll: Current drivers are decreasing margins, consolidation of the supply and customer base, economic pressures, competition from overseas suppliers, providing more value-added services to customers, and acquisition of independent distributors – consolidation driven by private equity purchases.
Reichard: One of the most significant drivers affecting distributors today is the ongoing consolidation of our suppliers and customers. There are several high-profile mergers and acquisitions pending in our industry that have the potential of drastically impacting the landscape. Another trend is that customers are looking to partner with suppliers that have the ability to meet their needs at multiple facilities throughout the country.
Gruber: M&A activity in the industry is constant, at the supplier and distributor level. The ability to manage this consolidation is critical for distributors. Another trend is principals are streamlining their distribution channels; opting for fewer, more strategic distributors. In return, distributors need to offer a higher degree of technical services and customer support. Lastly, in this ever-changing business environment, a need to recruit and infuse new talent into our industry is a priority.
PCI: What are some of the problems that chemical distributors face, and how have you overcome these challenges?
Guild: One of the challenges chemical distributors face is the continuing demand for information suppliers require about their business. Today, suppliers want transparency with their distributor partners. Information management systems are critical, so top-rated, integrative ERP and CRM software programs are key components to the success of the distributor. Distributors must provide great communication to both the supplier and the customer. Information management is critically important to meeting the needs and expectations of both our customers and suppliers. Today, we see changes in both the products we sell and the methods we use to grow the business. Keeping pace with these changes and utilizing the technology available is critical to managing a successful distribution business. Maintaining financial health is also very important, as this allows the distributor to invest back in the business, to keep pace with the changing needs and to be efficient in the way we do business.
Wendel: Specialty chemical distribution requires knowledgeable, experienced representation along with reliable product availability. The representation challenge requires that distributors provide continual training for sales staffs to master not only the product portfolios offered, but also understand the application benefits of the products. Matching the right product technologies and their applications allows manufacturers the ability to obtain maximum value and performance. To support this requirement, we regularly employ on-site and web conference training sessions with our sales professionals.
The supply challenge involves another set of skills that provides inventory management, forecasting and Responsible Care-based product handling to ideally have the right products in the right place at the right time.
Carroll: Consolidation in the manufacturer base, without an equal consolidation in the distributor base, leads to more competition for fewer customers among distributors. Also, as manufacturers grow in size with consolidation, their volume requirements can preclude utilizing distribution and going direct to the supplier instead. Distributors are forced to look offshore in many cases for new suppliers and technologies to bring to the market
Reichard: Hiring the right personnel can be challenging – finding the highest-caliber talent that fits our culture. There are plenty of candidates that satisfy the technical requirements of the positions, however there are few that exhibit the values that we espouse. We have developed a stringent talent acquisition strategy and have found that having a well-organized process, clearly defined roles, responsibilities and expectations, a multistep interview process, and a structured onboarding process have paid great dividends.
Gruber: Replacing an experienced sales force is a challenge for our industry. We need to continue to attract new talent. Another challenge is customer consolidation and the increasing regulatory requirements distributors now have to be responsible for.
PCI: Has industry consolidation affected the viability of distribution companies?
Guild: The consolidation on the manufacturer side of the business has brought more opportunity to the distributor, as companies are doing more with less. In the case of private equity ownership, they are looking to manage the business as cost effectively as possible and still grow the business. Distributors offer a channel to market that is efficient and cost effective, with strong market knowledge and relationships, advantages that would otherwise be expensive to obtain. We see more and more manufacturers embracing this model, even those who formerly only worked directly with the customer.
Consolidation on the customer side in some cases is problematic as there are fewer customers to deal with. We are also seeing manufacturers, particularly in the West, partner with the distributor to better serve the customer since they are so far away from the suppliers’ plants. We see the supplier looking to the distributor to maintain back-up stock for emergencies and late deliveries due to the long distances. Customers greatly appreciate and benefit from this type of partnership.
Wendel: As distribution has come to play a more important role in the supply chain for markets like paint and coatings, the impact of consolidation cannot be ignored. On the supplier side, companies are often looking for synergies to help them compete economically. As these mergers or acquisitions take place, this has an impact on the distribution channel because it may combine two previous competing supplier organizations represented by two different competing distribution organizations. The natural result is the consolidation of that representation and distribution effort.
Manufacturer consolidation, again through mergers and acquisitions, can impact the distribution role. A few of these consolidations adopt a centralized decision making model, which can change where and how supply decisions are made. Others choose a decentralized model. Often the distributor in these cases can assist by being a communication link between manufacturing sites.
As we have seen, distribution consolidation is occurring as well, driven in large part by the desire and requirement for national coverage versus the historic regional distribution model. Larger distribution organizations evolve from this consolidation, and this growth creates its own challenges. For example, as a distributor grows, the quality of representation needs to remain high, and the focus on the support of the manufacturer needs to remain sharp as well. This growth requires significant investment and commitment on the part of the distributor.
Carroll: As I previously noted, consolidation certainly makes the market challenging for distribution. It has likely led to consolidation in the distribution sector and forces distributors to find new niches to both compete and distinguish themselves from one another.
Reichard: Industry consolidation has certainly impacted and will continue to impact the long-term viability of some distributors. M&A activity in our industry is very robust, with readily available capital that needs to be put to work. We believe that the chemical distribution market in North America remains highly fragmented and the next few years will see further consolidation.
Gruber: Consolidation in our industry will continue to put increased pressure on the smaller regional distributors. They will have a difficult time going forward, in terms of scale (TL ordering requirements, technical resources/labs, etc.). Suppliers continue to require this level of financial commitment to service them and the market adequately.
PCI: What value do distributors bring to both suppliers and manufacturers?
Guild: One important value distributors provide to customers is “just-in-time inventories.” Having many stocking points in a large geography is key to providing the service both the customers and suppliers expect. The distributor who brings full truckloads of material to their warehouse can keep the freight cost down compared to less-than-truckload shipments, which are more costly. This, coupled with a highly trained technical selling staff capable of identifying sales opportunities for the supplier and bringing the technology of the supplier to the customer, provides value to all parties in a cost-effective manner.
This is particularly true in the Western United States, as freight is a big issue and selling costs for suppliers are high considering that most are located east of the Mississippi River. The two- to three-hour time difference also presents a challenge for West Coast customers. Having the local knowledge and the relationships in place allows the distributor to bring the supplier to a faster track in gaining access to the key people at the customer level and brings about quicker access to opportunities for their business.
Wendel: Distributors have increasingly become the sales and marketing face of the supplier. Distribution companies have grown in size and reach, but we maintain the local contacts and develop the local relationships with manufacturing organizations. These contacts and relationships would be expensive for every supplier to develop, which points out the value of distribution to supplier organizations.
Similarly, good, technically adept distribution assists manufacturers by simplifying their supply chain. Distributors provide the ability to consolidate product supply channels and reduce the number of supplier contacts required to stay on top of chemical offerings and market developments. The distribution model succeeds when it provides efficiency and effectiveness to both suppliers and manufacturers.
Carroll: Distributors provide suppliers and manufacturers the ability to supply and purchase less-than-truckload quantities of raw materials and formulation ingredients from locations often closer to the manufacturer. In many cases, distributors also can supply raw materials to manufacturers in a shorter time frame due to inventory on hand.
Reichard: Distributors are an extension of our suppliers’ organizations. In many cases, we are the sole sales channel for a supplier in a given market, and have the responsibility of delivering increased market share, providing access to customers, and consistently providing market information and business analytics. Distributors can offer value-added services, such as repackaging, blending, grinding and micronization, all of which enhance the “attractiveness” of the suppliers’ product offering. Regardless of what may be happening globally with port delays, transportation strikes, plant closures, etc., our customers count on us to deliver products in spec, on time and in full.
Gruber: The value distributors bring to principals is the ability to provide increased sales coverage, coupled with technical expertise and market intelligence. Distributors have the ability to effectively and efficiently service the 2nd and 3rd tier customers, while the principals focus on Tier 1 customers. Distributors act as a true extension to the suppliers’ sales and marketing departments, in many instances with complete -transparency.