The pace of acquisitions will continue, as distributor or manufacturer how you plan for and react to change is critical to your success.
Early in my distribution career if you worked in a channel like HVAC, Electrical, and Plumbing the distributors and manufacturers who you worked with primarily served that channel. This “stay in your lane” channel culture was often driven by your entire organization having deep knowledge of the customers that depended on you to get them products. Your team knew the products, solutions, customers and manufacturers that served the channel intimately.
I remember being in acquisition target meetings early in my career where if you would have brought up the idea of buying a distributor in another channel, you would be laughed out of the room. It just didn’t occur to us, that we could be successful running a distributor in a parallel channel.
So, distributors primarily expanded through acquisition and green fields (building a branch in a neighboring city) and for the most part stayed in their channel swim lane. Those stay in your lane days are long gone my friends. There has been a lot of the big getting bigger through acquisition in distribution for decades, and that trend looks like it will continue.
Last week Ferguson announced its 3rd HVAC acquisition in the calendar year with the addition of Airefco, Inc., a HVAC equipment, parts, and supplies distributor in the Pacific Northwest. In the last year Ferguson added Guarino Distributing Company, LLC, an HVAC distributor in Louisiana and Mississippi; and Aaron & Company, a plumbing and HVAC distributor in New Jersey.
Ferguson is one of North America’s leading construction and industrial distributors with $28.6 Billion in sales in Fiscal Year 2022. Ferguson’s latest annual report estimates they have a 5% share of the North American HVAC $70 Billion Market at the end of September 2022 (this share estimate was prior to the Airefco acquisition on Dec. 6, 2022).
Ferguson has diversified their business from primarily serving plumbing and waterworks decades ago to now serving 9 different markets. The HVACR Channel is obviously a growth channel for Ferguson and they are growing in the channel and are distributor that is diversified across many market segments and channels.
Channel Implications for Manufacturers and Distributors
For every acquisition there is an equal and opposite reaction. I know that is not exactly the way Issac Newton wrote it, but change does create opportunity.
Manufacturers
Today change is constant and it’s like playing chess where you have to think many moves ahead.
What is your desired mix of business with the nationals (Ferguson types), regionals, and local distributors? To manage risk you need detailed intelligence on each distributor and channel partner and be ready for change. For example- If one of your regional distributors in Ohio decides it’s time to sell – whom might they sell to, what does that mean to your business, and what are your plans to react? If you have a distributor strategy, playbook, and contingency plans you can react quickly to any changes that occur.
Distributors
When an acquisition happens in your market. How can you benefit from the change? Market uncertainty creates an opportunity to act, and speed is a weapon.
Which Manufacturers may be looking to partner with you because they have a poor relationship or product presence with the new acquiring company?
Which manufacturers have the most risk with the changes? Smaller manufacturers tend to have the highest risk when acquisitions occur and often are the most concerned about losing share.
I’ve unfortunately been on distribution teams and caught unprepared when we were acquired by a national distributor, and also not being prepared to take advantage of competitors being acquired. In both cases we were not as prepared as we should have been, and we did not have a strategy or plan in place before the change happened.
Channel Drift is here to stay
As a distributor it might be time to consider leaving your comfortable swim lane. Where can you add products and drift over to find product opportunities? Pipe Values & Fittings, Mechanical, Jobsite Safety, and Refrigeration are areas where you might be able to get strong manufacturer support and enter new market segments.
As a manufacturer expanding your offering is a proven way of drifting into new channels, and being smart about where you can channel drift with the right distributors in new channels can be a winning formula.
It’s reasonable to assume that in 2023 large national distributors will continue to acquire regional and local distributors. I suggest you plan for it to happen and have a detailed playbook and strategy in place to react the moment it is announced.
As always, we would love to get your feedback, so please feel free to comment below or reach out to me at john.gunderson@dorngroup.com
