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Counter Points: Coping With Distributor Consolidation

Posted: November 25, 2013, 10:35 a.m. EDT


By Barry Berman

It keeps happening—one after the other, privately owned pet supplies distributors are gobbled up in the wave of consolidation sweeping the country. These new agglomerations are built around companies, and people, who have been in the industry; by arranging things this way, the equity investors behind these alliances hope to avoid operational errors and keep customers comfortable. Many independent retailers are anxious about this trend. The question is, should they be? Is there anything they should do?

A Result of Success
One reason this is happening is that most of the distributors that have been acquired have been doing well. An owner doesn’t give up control of a large company that has been providing a nice income without receiving a healthy price; a buyer won’t pay such a price in most cases unless there are current profits from strong sales.

Distributor sales are up because many of their customers are expanding, because new stores are opening, and because individual stores are holding their own or growing. This means there is plenty of business out there, and if you are not getting more of it every year there are probably steps you can take—whether or not you know what they are yet—to do so.

There are some ways in which these buyouts might be good for the industry. It is better for one of your long-time suppliers to be acquired by an investor with equity that will back the business than for that company to be turned over to family members who lack the talent to run it.

The investors provide an outside board of directors who can offer important guidance and are a resource most family-owned companies do not have. And, combining multiple successful companies, if done skillfully, will lead to spreading the best practices of each company to all of them.

As for distributors selling to big-box retailers and supermarkets as well as to independents, I don’t share the discomfort some retailers feel about this. You might not want to carry the same brands as grocery stores or as a 1,000-store chain, but your customers don’t care which truck your products travel on. That truck might not be coming to your town at all if that other store were not there to deliver to.

What to Do
First, understand that some of these companies could become more bureaucratic and difficult to deal with. They might have policies designed to protect the supplier from stores that might owe them money they cannot pay.

If they make a mistake and owe you a credit, be patient while they investigate the matter. Don’t expect the instant satisfaction you would get when dealing, for example, with another retailer. Never make a deduction; this is likely to be seen as bad faith. Don’t shift business away from a distributor that has been acquired just because it has new owners. Do make sure your supplier lineup is diverse, so that your store’s assortment is not dominated by one or two distributors if you can help it. If you operate your business that way, you are vulnerable to possible risks, such as service reduction in your market or new owners who might pile up debt and extract fees at the expense of supporting operations. Your manufacturer lineup should be diverse too, as the past years’ round of pet food recalls demonstrated.

Extra Efforts to Find Innovation
As they consolidate, distributors are standardizing their assortments across the different parts of the country they serve. This means that if there is an empty shelf anywhere it is more likely to be filled with a product carried by your distributor’s new affiliate than by something new and innovative. This means it is even more important now for you to attend national trade shows such as Global Pet Expo or SuperZoo, as they might be the only way for you to see what’s new.

The Money Train
The current round of distributor consolidation is part of a larger trend in which investment groups have been buying, or investing in, pet supplies companies of all kinds, including manufacturers and retailers. Investors see value and growth in our field and are paying high prices to get in.

In addition to buyouts, numerous "private placements” have taken place, in which pet companies, including retailers, have sold equity stakes to raise capital. Depending on how strong a business plan you can create, you might be able to raise outside money to expand or strengthen your business by selling between 10 and 50 percent of your ownership stake.

Ask your accountant or contact the business programs of local universities for help. A business school might be able to lend you one or more MBA candidates to work on a plan as a school project. In some areas, the Small Business Administration provides free consultation performed by retired professionals.

Even if you are currently doing very well, you should raise your game by learning what other retailers are doing and getting involved in organizations that aim to improve your performance, even if you have to spend money to do so. Also, develop as many exclusive products as you can.

The trend of big money flowing into our industry is not stopping, and it’s also leading to ever more competition for us retailers. The money train is one we have to learn to ride, or else it will run us over.

Barry Berman is president and cofounder of NexPet, a co-op for independent retailers, and Grandma Mae’s Country Naturals, a pet food company. He has served in executive positions for Central Pet and Brinks, and entrepreneurial positions in the home furnishings industry. A graduate of Harvard Business School, he is a member of the World Pet Association board of directors. Contact him at 888-653-8021 or barry@nexpet.com.

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