The Future Of Small Distribution

Steps for sustained viability

Some experts have long predicted the demise of the small distribution business in the United States. Several magazine articles and even some books have been written on the subject. It has been said that only large companies can meet the demands of national and regional customers, fulfill the needs of large equipment manufacturers, and compete effectively due to economies of scale.

Small distributors were advised to get big, get specialized, or get out. The specialization route has led some distributors to become “boutique” distributors, offering niche services that others couldn't provide profitably or just weren't interested in. The petroleum equipment industry is full of examples of boutique distributors who have discovered a way to make their businesses successful, year in and year out.

These distributors in our industry are here to stay. I say that with much confidence because I believe they have built companies that differentiate themselves from larger competitors by providing something unique that is valuable to their customers beyond simply offering a lower price.

Smaller distributors make up the lion's share of our association's distributor division membership. Seventy-two percent of all PEI distributor members have sales less than $3 million per year. These smaller distributors look a lot like the larger PEI distributors in many respects. Sales by product category (i.e., equipment/parts, installation/construction, service, etc.) are almost identical. Sales by type of customer are also similar.

The niches smaller distributors occupy in our industry vary company to company. Some are heavily involved in serving the industrial and commercial accounts. A few focus on aircraft refueling or tank truck equipment and service. Some have built relationships with a few key customers over the years that continue to keep products moving off the shelves. And there is another strong group of smaller distributors that serve geographic areas that the competition has, thus far, avoided.

If I have a concern for the smaller distributor, it would be for their sustained financial performance. Last year was not a particularly good one for them. PEI's 2007 Distributor Profitability Report (using 2006 figures) showed distributors with sales of $3 million or less posted a net profit of 1.5 percent, return on assets of 4.2 percent, and return on net worth of 8.0 percent. These figures are dangerously close to the minimum amount necessary to ensure survival. And sales growth (2006 vs. 2005) was slightly negative for distributors under $3 million, while the typical PEI distributor was up 7.2 percent.

This group of distributors has experienced troughs like this before, most recently back in 1997 and 2002. Both times they came out of it and posted respectable numbers within a year or two. Distribution experts like Al Bates and Abe WalkingBear Sanchez agree that many smaller distributors have been able to achieve a healthy and profitable business by doing what they can to raise prices, sell a little bit more, reduce inventory costs, diversify their business, and keep a lid on expenses, particularly payroll costs. It might be easier said than done, but it's something that must happen.

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The PEI Journal • Fourth Quarter 2007 • Volume 1, No. 4 • Contents are Copyright © Data Key Communications, Inc.
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