Wholesale Distribution M amp A Moving from transactional to

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Table of contents,6 Setting the stage M A in wholesale distribution. 8 Obstacles to transformational WD M A,9 Drivers favoring transformational WD M A. 10 Diagnostic framework should transformational M A. be part of your growth strategy, The U S Wholesale Distribution WD industry appears to Mergers and acquisitions M A may help shift the WD. be stuck in neutral Top players in many lines of trade suffer industry out of neutral and into drive Certain segments. from low margins and stagnant or slipping market share are beginning to take advantage of its potential as. a result of limited domestic expansion opportunities evident from increasing WD M A activity Yet few top. regulatory constraints structural impediments and other players are making meaningful large scale acquisitions. obstacles that could provide impetus to their market growth and. help strengthen distributors position with upstream and. The industry subset as represented by the seven lines downstream partners According to the 2013 Mergerstat. of trade Deloitte used for this study Figure 1 grew Review a yearly publication on mergers acquisitions and. at approximately five percent annually between 1997 divestitures Wholesale Distribution ranked among the top. and 2007 to 2 2 trillion 1 United States GDP grew at a five seller industries U S in 2012 3 However the average. CAGR of 3 72 percent during the same period 2 Of note deal value was only 55 million Fortunately the number. a considerable part of this growth was contributed by a of transactions above 100 million is increasing there. large number of industry players For the seven lines of were 136 in Wholesale Distribution between 2008 and. trade shown in Figure 1 41 percent of the WD industry 2012 To realize true transformational change distributors. growth was contributed by the top four players However likely need to approach the M A process very differently. in four of these seven lines of trade Industrial Machinery than they traditionally have moving from a focus on small. Beer Wines Spirits Chemical and Electronic Parts the or niche transactions to larger more strategic deals that. top four players contributed only about 20 percent of the bring scale advantages and strengthen channel position In. total industry growth addition companies need to plan and execute transactions. such that their investments are justified from an economic. One exception to this trend is Food Service wholesalers and strategic perspective. where the top four players have contributed a majority 73. percent of the industry growth This may be attributed to In this paper Deloitte outlines the obstacles and drivers. a higher market share concentration and transformative for strategic M A in the WD industry with references to. business strategies of these top players select lines of trade and outlines frameworks to determine. if transformational M A is the right approach for an. organization,In this paper Deloitte outlines the,obstacles and drivers for strategic M A. in the WD industry with references to,select lines of trade and outlines.
frameworks to determine if,transformational M A is the right. approach for an organization,1 Deloitte Consulting analysis U S Department. of Commerce Census data, 2 U S Department of Commerce Bureau of Economic Analysis 3 References 2013 Mergerstat Review. Figure 1 U S wholesale distribution industry,U S Revenues B Growth. Select line of trade,Segment 1997 2002 2007 10 Year CAGR 5 Year CAGR.
Industry 589 655 667 1 3 0 4,Grocery and food service wholesaling. Top 4 52 72 87 5 3 3 9,Industry 126 144 175 3 3 4 0. Food service wholesaling,Top 4 36 49 72 7 2 8 0,Industry 203 387 562 10 7 7 7. Pharmaceutical wholesaling,Top 4 53 165 247 16 7 8 4. Industry 224 276 397 5 9 7 5,Industrial machinery and equipment wholesaling.
Top 4 18 32 52 11 2 10 2,Industry 70 87 116 5 2 5 9. Beer wine and spirits wholesaling,Top 4 8 11 21 9 6 13 8. Industry 129 115 182 3 5 9 6,Chemical wholesaling,Top 4 17 21 25 4 1 3 5. Industry 217 180 242 1 1 6 1,Electronic parts and equipment wholesaling. Top 4 48 42 50 0 5 3 5,Total for select lines of trade B 1432 1700 2166.
Total US wholesale distribution B 4060 4635 6516 4 8 7 0. wholesale revenue only,Source US Department of Commerce Census Data 2007. Wholesale Distribution M A Moving from transactional to transformational 5. Setting the stage,M A in wholesale distribution, The U S Wholesale Distribution industry is large 6 5 Figure 3 plots the relative market strength of WD. trillion in 20074 and quite fragmented Many of the seven companies against suppliers and customers in their. researched lines of trade are characterized by a low level respective industries based on the Herfindahl Hirschman. of concentration market share for the top four players Index HHI HHI is a widely accepted indicator of the level. grew only two percentage points between 2002 and 2007 of industry competition market strength and is used to. compared to six percentage points between 1997 and assess level of competition by regulatory bodies in the U S. 2002 Figure 2 and abroad The industry lines of trade that appear above. the balanced frontier are those where WD players are. More recent data from IBIS suggests that market share typically larger and more concentrated than their channel. for the four largest players in Wine Spirits wholesaling partners This gives them a stronger market position. increased from 25 percent to 29 percent between 2004 against suppliers and large customers On the other hand. and 2012 In Foodservice the market share of the four industry lines of trade that appear below the balanced. largest wholesalers increased from 34 percent to 41 frontier are those where suppliers or customers are more. percent A low level of market concentration and stagnant concentrated than the WD players. low industry expansion shows that M A may present a. significant opportunity for growth and value creation for The U S Wine Spirits industry is an interesting case. these large companies to analyze Distribution is highly regulated and most. legislation favors the WD players However large suppliers. For WD players the reasons to engage in M A may which have a disproportionate market share and size are. be more pressing than simply tapping into growth able to dictate high service levels push excess inventory to. opportunities An imbalance in market concentration the distributors and influence product category selection. compared to other channel partners may result in higher Yet Wine Spirits distributors have mostly limited their. inventory levels lower pricing and margins and loss of M A activities to small one off transactions Southern. autonomy for WD players These considerations may drive Wine Spirits is an exception it has a national footprint. the need for higher value transformational M A among and therefore stronger positioning with suppliers and. WD companies retailers, WD companies in poultry and dairy products however. 4 U S Department of Commerce Census data, have long demonstrated their strength by running private. label brands in competition with some of the largest. suppliers The soft drinks category is an exception that. does not fit well in this framework due to owned captive. distribution networks until recently for suppliers such as. Coca Cola and Pepsi,Figure 2 Average WD market share.
Average market share,across the seven selected lines of trade. Top 50 Firms,20 22 Top 4 Firms,1997 2002 2007, Source Deloitte Consulting analysis U S Census data. Figure 3 Relative market strength between wholesale distributors and suppliers customers. distributors,Soft drinks,Balanced strength,frontier Pharmacy and. products Electronic,1 000 processing,Food and Distilleries. 4 000 Suppliers and,Increased market concentration.
Monopoly HHI 10 000, Source U S Department of Commerce Deloitte Consulting analysis. Wholesale Distribution M A Moving from transactional to transformational 7. Obstacles to transformational, M A seems to be a necessary part of the strategy for For smaller distributors the dimensions of pre deal. both protecting and creating value however a number of sourcing evaluation due diligence and post deal. factors have thus far inhibited transformational M A in execution may also appear overly complex and. the WD industry and if not addressed may continue to prohibitive. contribute to the sector s poor track record These include 4 Regulatory restrictions Current federal state and or. international regulations may create structural barriers. 1 Dubious synergies Sub par outcomes likely from to transformational M A In the Wine Spirits industry. a failure to capture post integration synergies or the for example franchise law mandates one distributor per. inability to create sustainable competitive advantage state for a product brand If a large national distributor. may have deterred many distributors from engaging has a dominant presence in a certain state it is unlikely. in M A Acquisitions by distributors accounted for that another may seek to acquire assets there. about 18 percent of WD transactions between 2003 5 Fragmented seller base Rolling up a fragmented. and 2012 5 indicating low appetite due possibly to line of trade involves lining up a series of motivated. unrealized revenue cost synergy targets Approximately sellers In 2012 over 60 percent of the WD transactions. 74 percent of the deals involved non WD strategic involved private sellers with an average deal value of. buyers mostly upstream downstream channel players 11 million 10 Therefore the lack of sizeable targets. who may be looking to vertically integrate Only seven may be a deterrent for transformative M A in the WD. percent of the deals involved PE buyers 6 Among industry. common post deal reasons for failure are cultural, differences between the acquirer and the target Although daunting some of these obstacles have been. family ownership and lack of management discipline easing in recent years while others may be overcome with. disparate IT systems loss of local on the ground carefully planned strategies. relationships post merger and lack of product service. differentiation,2 Funding issues Private companies have dominated. WD M A driving over 80 percent of deal volumes in, the last 10 years 7 These companies have traditionally.
leveraged internal funding sources e g surplus cash. for M A Debt accounts for less than five percent, of funding sources 8 suggesting inability or general. reluctance to assume a high leverage position The, result is limited access to low risk capital for large. scale M A especially for cash constrained smaller,3 Lack of M A expertise Many distributors do. not have appropriate organizational capabilities to. engage in M A infrequent and small sized M A,does not justify such investments Furthermore. prevailing levels of transaction termination fees9 may. be counterproductive to sustained M A in the sector. 5 Factset 10 yr WD M A 2003 2012 data,6 Factset 10 yr WD M A 2003 2012 data.
7 2013 MergerStat Review,8 2013 MergerStat Review, 9 Factset M A data on disclosed public deals indicate. average termination fee was 3 9 of deal size in 2012 10 2013 MergerStat Review. Drivers favoring transformational, While distributors in general have been slow in embracing 40 percent 14 underscoring the bets foreign buyers. transformational M A numerous drivers seem to favor its are placing on domestic growth opportunities U S. advancement These include distributors cannot ignore this trend and should. strengthen their market position in order to raise entry. 1 Differentiation To succeed in the current marketplace barriers for foreign players. distributors may need to break away from the 4 Industry disruption Industry disruption on either. traditional WD archetype and differentiate themselves end of the value chain may prompt M A among. through innovation scale and an ability to uniquely distributors Hospitals for example are forming large. align with their channel partners Engaging in health systems with centralized purchasing operations. transformational M A deals that may drive efficiencies These organizations prefer to buy supplies from a. across the WD value chain e g through joint strategic single distributor that can offer regional national. planning with suppliers or one stop solutions for distribution and economies of scale In response the. large chain customers will likely form the basis for Pharmaceutical WD sector has undergone large scale. differentiation Illustrative of this trend in July 2013 consolidation the top three distributors will command. U S food distributor Nash Finch Company announced an estimated 44 3 percent market share in 2013 15 In. its merger with Spartan Stores Inc a leading regional other lines of trade including Foodservice Wine. grocery distributor and retailer in a 1 3 billion all stock Spirits and Industrials manufacturer consolidation is. merger to create a combined entity with annual sales spurring similar responses among distributors. of 7 5 billion and significant scale and geographic Increasing M A deals across adjacent lines of. reach across Grocery Wholesale Retail and Military trade also creates disruptive trends For instance. Commissary and Exchange channels 11 This merger some foodservice distributors are acquiring alcohol. is expected to help Nash Finch close the gap with distributors as well as exploring greenfield entry into. were 136 in Wholesale Distribution between 2008 and 2012 To realize true transformational change distributors likely need to approach the M amp A process very differently than they traditionally have moving from a focus on small or niche transactions to larger more strategic deals that bring scale advantages and strengthen channel position In addition companies need to plan and execute

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