Specialty Chemical Distribution-Market Update

Specialty Chemical Distribution-Market Update

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Specialty Chemical Distribution-Market Update

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    The Distributors’ Point of View: Market Dynamics and Winning Business Models

    Specialty and commodity distribution have different market dynamics. Operating models for distributors range between two extremes: pure specialty versus pure commodity distribution, each of which has different market dynamics and strategic imperatives. Yet in practice, as noted above, there is a sizable gray zone between these two extremes. Most distributors carry products from both segments, while the largest global chemical distributors (such as Brenntag, Univar, and Nexeo Solutions) typically carry a full product line. These companies aim to offer a one-stop value proposition that meets all the chemical needs of their customers, simultaneously achieving critical mass in serving smaller customers and regions.

    The different market dynamics for commodity and specialty chemicals can be categorized along four dimensions. (See Exhibit 5.)

    • Product Characteristics. Specialty chemicals, which are highly functional, are sold in lower volumes, whereas commodity chemicals are, in many cases, sold in bulk. Price and volume volatility tend to be lower for specialty distribution.

    • Service Offering. Distribution of specialty chemicals generally requires a higher market-creation effort (contacting potential clients to turn them into interested prospects) and additional services such as technical sales support. Within commodity distribution, the focus is, in many cases, more on logistics excellence. So specialty distribution sales can require greater effort.

    • Operating Model. Go-to-market costs are usually higher for specialty distribution owing to a combination of deeper sales relationships, higher knowledge intensity, required technical sales support, and smaller drop and order sizes.

    • Contracting. As described in the previous section, mutually exclusive supplier-distributor partnerships are more typical in the specialty segment.

    Specialty distribution is a more resilient business than commodity distribution. Compared with suppliers, third-party distributors are, by nature, more sheltered from price fluctuations: the purchase and sales prices of third-party distributors fluctuate in parallel.

    Market demand volatility, measured as the uncertainty (that is, the standard deviation) of the year-on-year market growth in the period from 2004 through 2013, is lower in specialty-heavy end markets (4 percent) than in commodity-heavy end markets (8 percent). This is because production in specialty-heavy end markets such as pharmaceuticals, personal care, and food is not so strongly linked to the general economic cycle. By contrast, commodity distribution has a volatile nature: price and volume are more susceptible to macroeconomic swings.

    Distributors carrying both segments need a clearly differentiated business model. Suppliers see differentiation as a prerequisite to developing an optimally focused service model in both segments. And distributors indicate that business optimization for both segments requires a different approach.

    Winning in specialty distribution requires seven success factors. At a baseline level, all chemical distributors have must-have requirements, such as financial stability; a solid track record in health, quality, security, safety, and environment; a sales force with sufficient local coverage; and efficient logistics and supply-chain activities. However, in the current market, even all that is not enough to win. Given customers’ complex buying criteria and the increasingly sophisticated approach that suppliers now use to select and manage distributors, specialty players will need to differentiate themselves in the market. They should focus on the following success factors.

    • Strong Expertise Regarding Products and Applications to Drive Market Development. In addition to merely fulfilling orders, distributors that truly understand the product—in the context of broader formulations—can provide functions such as technical sales support, cementing a stronger relationship with customers.

    • A Product Portfolio with the Right Chemicals—Anchor Products and Brands—That Reflect Market Demands and Trends. Distributors with deep knowledge of local-market demand and trends can excel at category management. Such knowledge enables them to select the anchor products of leading suppliers in particular applications and to develop a full portfolio of the chemicals needed to dominate related market segments.

    • Strong Access to Local Clients Through High Coverage and Scale Within the Distributor’s Sales Network. For suppliers, the challenge in specialty chemical distribution is reaching customers in target markets while reducing cost and complexity to serve. Accordingly, specialty distributors can differentiate themselves with superlative sales networks that can facilitate the distribution of goods to local customers with a minimal cost to serve.

    • Close Collaboration with Suppliers to Provide Input for Product Offerings and Development. A distributor that has established a strong presence in its individual market—and deep ties to its customers—can provide critical intelligence and insights to suppliers regarding shifts in the marketplace. At a more detailed level, a specialty distributor can serve as a conduit of information on specific products and applications, helping suppliers strengthen their product development and offerings. This requires establishing platforms to provide regular feedback to suppliers.

    • A Homogeneous Approach to Support Panregional Supplier Relationships. As suppliers continue to professionalize their approach to distribution management, they increasingly aim to collaborate with a small group of select distribution counterparts in each region. Each distributor will need to work toward becoming the distributor “of choice” within a target region. For many players that have focused on localized individual markets, this entails an organizational shift to coordinate and manage projects over a larger footprint while providing suppliers with points of contact on the regional level. Distributors must manage the organization on a panregional level while preserving the entrepreneurial and flexible nature of local operations in different subregions. Given the difference in business dynamics, the optimal approach for this differs for commodity and specialty distribution.

    • Process Quality and IT Excellence. As in virtually all other industries, the right technology can streamline logistics and reduce overhead for specialty distributors, allowing them to reduce working capital and costs to create a cost advantage that differentiates them from competitors. In addition, the right processes and IT can enable distributors to share commercial and marketing data with suppliers and can improve suppliers’ ability to track the status of shipments to various customers.

    • Winning in the Consolidation Game Through a Combination of Organic and Inorganic Growth. Given current consolidation opportunities, specialty distributors should target both organic and inorganic growth to fill in regional and product gaps in their portfolios. In doing so, they will need to successfully balance the benefits (such as process quality and financial stability) of panregional scale with local-market presence and local entrepreneurship. Successful inorganic growth will require a careful approach in which the risk profiles of M&A targets are diligently assessed.

    We are confident that distributors that serve specialty chemical segments and excel in these seven areas will become winners in their markets.

    In summary, the chemical distribution market is growing, yet it offers a range of challenges and opportunities.

    For suppliers, the priority is to professionalize distribution management through a coherent approach across all direct and indirect channels. This entails developing the distribution channel strategy, selecting the right distributors and the right distributor-interaction model, and doing a better job of managing distributors’ performance.

    For distributors of specialty chemicals, the opportunity is to capture sufficient organic and inorganic growth in a fragmented landscape while securing structural relationships with suppliers. As distribution shifts to a regional model, distributors can achieve scale through both organic and inorganic growth while maintaining a strong local-market presence. Most important, they must continue to provide value to suppliers through deep knowledge of products, applications, and local markets.