Research Shows What Best-in-Class Distribution Company Growth Looks Like

How does your business growth compare to your wholesale distribution peers? To help answer that question we captured this industry data as part of The Business Growth Report.

Here's how we applied that data.

First, we measured survey participants revenue and profit growth figures. We then ranked the respondents into three performance-based archetypes of Best-in-Class (the top 15%), Medians (the middle 50%) and Laggards (the lower 35%.)

We then measured and analyzed the respondents business expansion methods and results. That allowed us to correlate business growth methods with performance results.

So, consider the below data findings to understand what Best-in-Class distribution growth looks like.

Revenue Growth

Based on the most recent three-year average, the Best-in-Class distribution companies achieved an average 10.6 percent annual revenue growth rate. That was 94 percent higher than the combined average of the Laggards and Medians.

Wholesale Distributor Growth Rates

One variable stood out when analyzing the data.

We found a significant performance difference based on whether participants applied organic or inorganic strategies. As shown in the bar chart below, wholesale distributors with inorganic strategies achieved higher growth rates than their organic peers.

Wholesale Distributor Revenue Growth Rates

For wholesale distributors with inorganic strategies, acquisitions accounted for an average of 22 percent of their annual revenue.

EBITDA Growth

Growing the top line is a sustainable path to growing the company. But wholesale distributors know their business health is not just about how much they bring in, but how much they keep. So for that, we measured EBITDA increases among performance-based archetypes.

Also based on a three-year average, the Best in Class leaders achieved an 11.2 percent annual EBITDA increase. That was an impressive 107 percent higher than the combined average of the Laggards and Medians.

Wholesale Distributor Profit Growth

Across all respondents, the average gross margin was of 23.1 percent, the average operating margin was 6.1 percent, and the average EBITDA was 6.8 percent.

EBITDA margin and growth are key metrics because they demonstrate operational efficiency. They also reveal how much of the company's earnings are attributed to operations.

The data found that the EBITDA growth rate highly correlated with technology effectiveness. That suggests better use of technology increases productivity, decreases business process cycles, and ultimately lowers cost of sales and SG&A expenses.

How to Achieve Best-in-Class Distributor Growth

Now you know what Best-in-Class wholesale distribution company growth looks like. The next question may be how to achieve that level of performance to grow your distribution company.

The research answered that question by correlating data that measured corporate strategies, operational processes and technology effectiveness with revenue and profit performance.

This analysis identified what the Best-in-Class distributors do differently than their lower performing peers.

Nine strategic initiatives stood above all others. These 9 development programs are referred to as evidence-based best practices and often organized into a Distribution Growth Engine. They are shown below.

1

Growth Strategy

Your growth strategy is singularly focused on the actions that drive revenue improvements. It defines the roadmap to achieve targeted revenue results in the shortest time and least cost.

For example, the research found that top performers go far beyond providing a standardized product catalogue. Their strategies include things like the following:

  • More significant value-added services. And not the services that are easy, but the services that customers most want. That may include things like pre-assembly or kitting. Implementing a Voice of the Customer program is often the best way to understand what each customer segment most wants and is willing to pay for.
  • Digital engagement. Customers want the flexibility and transparency of 24x7 asynchronous engagement. This may include customer portals for billing and other transactions, e-commerce or customer self-service help.
  • Sustainability is the newest market maker. Many customers are demanding supply chain partners show their environmental impact, and how they are lowering that impact.

Top performers recognize capitalizing on this movement need not be just an incremental expense. Their strategy shows how to do good (lower carbon impact) and do well (increase business) at the same time.

For many top performers, their growth strategy has been a shift from the traditional inventory-based revenue model to a value-added services model.

2

RevOps

Only 9% of respondents had a centralized group with enterprise-wide revenue accountability. However, 82% of that small cohort was made up of the Best in Class archetype. Also, 76% of this cohort used Revenue Operations (RevOps) as their centralized revenue management program.

3

Price Optimization

16% of respondents managed an active price optimization program. While that represents a small group, 96 percent of this group achieved best in class performance. That's a remarkable correlation that should not go unnoticed.

Price optimization is achieved using price and demand elasticity models. These visual models show how price changes impact the quantity sold. Because of the high volume of SKUs for most distributors, it's nearly impossible to calculate optimal product prices without using technology that measures item elasticity.

Price optimization is no easy task, especially when considering the implications of item promotions, negotiated trade agreements and supplier rebates with bill backs, chargebacks and SPAs. But the research clearly shows the payback is significant and sustained.

4

Technology

The top performers used more technologies, including tools such as e-commerce, Customer Relationship management (CRM) and Configure-Price-Quote (CPQ). About a quarter of the participants advised that e-commerce now accounts for about 30 percent of their revenues.

However, the biggest technology-related disparity among performance archetypes was the effectiveness of their AI program. Performance leaders advised they are using AI to increase marketing and sales conversions, design greater efficiency into their supply chain, optimize inventory movement and carrying costs, and deliver more personalized customer engagement.

The leaders ranked AI effectiveness 57% higher than the combined average of the Median and Laggard cohorts. That's in part because many Laggards and Medians continue to sit on the sidelines. For various reasons, they are unable to capitalize on a technology that replaces labor with automation.

5

Services Innovation

D2C & B2B marketplaces are disrupting the wholesale distribution industry.

D2C often puts distributors in direct competition with their suppliers. And B2B marketplaces are growing even faster than D2C and overall e-commerce. These two trends will continue to accelerate.

The top performers don't ignore these trends, they face them head on. They lead with innovation that finds services to make them more relevant and valuable to their customers. They find differentiation that cannot be matched with DC2 or B2B marketplaces.

The research found that very few participants, just under 9 percent, applied concepts such as Design Thinking and services innovation methods. But those that did achieved both the highest revenue and EBITDA increases.

6

Company Culture

Wholesale distributors that cited an active and measured corporate culture as part of their business strategy achieved an average of 28% higher revenue growth than those who did not. These companies recognize that company culture directly impacts staff engagement and productivity.

7

Customer Affinity

A majority of the top performers applied a specific customer strategy to build customer affinity. They also measured the ROI of their program. The majority of lower performers did not.

Customer relationships are a bedrock of business expansion. Distributors can improve customer relationships by engaging on the customers preferred channels; offering customized pricing, discounts and rebates; delivering personalized customer experiences; delivering value beyond the sale; and improving customer support. Whatever techniques are chosen, they should be integrated into a customer strategy.

8

Performance Analytics

The majority of industry leaders cited more advanced business intelligence tools. They used predictive analytics about two times more frequently than their lower performing peers.

They also share that predictive analytics enable them to be more resilient. This technology provides data-driven decision making that can help quickly and confidently adapt to things like shifting customer demands, fluid inventory movement, changes in logistics, and industry disruption.

9

Mergers and Acquisitions

45 percent of the top performers cited M&A as part of their expansion strategy. That was 53 percent more than the combined average of the Median and Laggard cohorts.

For the top performers, acquisitions were the top method to leapfrog competitors, access new markets, and gain essential economies to improve tight margins.

Make This Trend Your Friend

Successfully replicating any one of the above best practices will achieve an incremental financial uplift. That may be sufficient for some executives.

Others may seek more significant company growth. That requires a more holistic approach that can be achieved by repeating a mix of the evidence-based best practices.

The research was conclusive in showing the industry leaders excelled in at least five, and on average, seven or more of the nine best practices.

Wholesale Distributor Best Practices

The More You Know the Faster You Grow

Most wholesale distributors apply cost of sale and SG&A expense benchmarks to ensure their costs are managed. However, most don't apply revenue and growth benchmarks. Mostly because they don't have them. Now you do.

Company growth recommendations without supporting data are just opinions. The 9 evidence-based best practices herein are born from field research and show what the highest growth companies do differently than their peers.

When you start with these findings, learn from industry peers that have achieved the greatest success and replicate their methods to repeat that performance, you eliminate guesswork and pursue the straightest and shortest route to improved outcomes.

One more thing.

Most respondents suggested they adopted all or most of the 9 best practices. However, survey questions that drilled into operational processes suggested otherwise. The research found there is a big difference between adoption, which is often a casual participation and dedication which creates expertise.

Dedication requires focused programs with executive sponsorship, budgeted resources, supporting technology, performance analytics and continuous process improvements. Dedication advances from being a generalist to becoming a specialist.

And when the criteria for dedicated programs were considered, only the Best in Class archetype engaged in 7 or more of the best practices.

Wholesale Distribution Consultant

If you are looking to grow your company, or achieve Best-in-Class performance, we have some options to help.