Increased acquisition activity in wholesale distribution should be making owners and executives at distribution companies reconsider their strategies for industry consolidation. Distributors need a strategic plan for their business that recognizes the reality of consolidation yet maintains a focus on profitable growth.

Our research and consulting from the last major consolidation cycle of the 1990s provides insight into the three basic strategic options for independent distributors in today’s environment: get big, get focused or get out. All other strategies are ultimately variations on these three options.

Get big

One option is to become the consolidator. Distributors that pursue this option are likely to either establish a roll-up with similar companies or to be a platform company in a private equity buildup.

Distribution consolidators have been most successful when targeting opportunities that are unavailable to smaller companies, such as the ability to service larger customers or the financial strength to access public capital markets. The few successful distribution consolidators all made substantial investments in building solid IT infrastructures, allowing rapid integration of an acquired company’s customer records, orders, inventory, warehouse operations, transportation and finances.

Unfortunately, few distribution consolidators from the 1990s were able to integrate and operate their acquisitions. Typically, these consolidators overemphasized acquisitions at the expense of building an integrated business with a strong operating vision and the discipline to impose that vision on the entire organization. Many consolidators, in the quest for scale through standardization, were unable to combine the benefits of a large, well-capitalized, professionally managed corporation with the service and mindset of a wholesale distribution entrepreneur.

Given the risks and costs of becoming a consolidator, a distributor can also opt to appear bigger by participating in an alliance. For example, consolidations and alliances both provide broad geographic reach and create opportunities for volume purchasing from suppliers. The best distributor alliances today require member distributors to use up-to-date technology systems, as well as common vendor and customer information, and have the ability to share inventory records within the alliance network.

Get focused

Well-run independent distributors continue to thrive, even in consolidating industries, due to their great skill in maintaining high levels of customer service and generating customer loyalty. Data from The 2006 Wholesale Distribution Economic Factbook documents that less than one percent of the country’s 270,000 wholesaler-distributors have annual revenues above $100 million.

A modern, scalable IT system should be an essential element of a distributor’s focus strategy. Today’s technology allows even small companies to have the best of both worlds — local attention and personal visits combined with online services that are comparable to larger competitors. For example, sophisticated options that allow customers to place orders and handle routine inquiries themselves are affordable to almost every distributor.

Technology can also help local and regional companies make good decisions about the best opportunities to pursue. A distributor’s technology system provides the raw data to understand how your company really makes money and figure out which services are profitable on a fully allocated cost basis.

Get out

The courage to face the future honestly often leads owners to look for a profitable exit strategy. Naturally, the best time to sell a company is when there is no financial pressure to repay creditors or create an instant retirement nest egg. But consolidation dynamics should play a role in the decision because industries do not consolidate forever, as evidenced by the sharp slowdown in acquisition activity after the 2000 peak.

Today appears to be a favorable time to get a premium valuation given the accelerating level of acquisition activity. The accelerating pace of consolidation, along with the money flowing into the wholesale distribution industry, offers an opportunity to smart sellers who understand their options. Selling early also provides more strategic flexibility because the best companies have the opportunity to create an auction among potential buyers.

Financial buyers are displaying a far greater ability and willingness to pay premium prices for leading distribution companies. They are attracted by the ongoing need for wholesale distribution to end-markets insulated from global competition, such as facilities maintenance, construction, or health care services.

Regardless of a company’s strategic choice, forward-looking business owners should combine a strategic view of how their industry is evolving with an understanding of how technology investments can alter the value of the business.