As the world of product distribution is becoming ever more saturated, distributors are looking for ways to differentiate themselves from their competitors as a way to attract more customers and bolster profitability. This has sparked the emergence and success in the past few years of value added distribution or VADs, which I believe will continue to grow and become much higher in demand among private equity firms and strategic buyers in the near future.
To start off, these types of firms generally equip the conventional modern-day business model of a traditional distributor, buying in bulk from manufacturers and reselling at higher price to retailers, while also providing basic logistical and informational support. However, in addition to these services, VADs provide additional services to their customers, such as services regarding setup and assembly, product development, product modifications, repairs, etc. With the development of technology we can see these services developing further, with new technologies in regards to building automation and software enabling distributors to incorporate more abstract services such as asset usage tracking and advanced inventory management solutions into their distribution practice, helping to efficiently develop their supply chain operations and boost their customer experience. This is seen in a survey conducted by the IDC, where they found that 62% of the sampled distributors prioritized the increased adoption of modern day technology to boost the innovation and efficiency of value-added services. Pointing to their end goal of one upping their competition which will provide long term benefit regarding where they stand in the market.
This has prompted a recent surge in M&A activities, with many companies and private equity firms taking up a deep interest in VAD’s as they prove to be a hot business model. This, for example, can be seen in a recent M&A update released by a prominent middle market investment bank regarding the specialty chemical market. They found that due to the recent ESG (Environmental, social, and corporate governance) wave taking over the chemical production industry, companies are starting to put more emphasis on sustainable and environmentally friendly production, increasing demand for more localized production, which will result in increased benefit for value-added distributors as they are no longer competing against the prices of offshore distributors and could see more logistical benefits as well as overall demand as their value added services put them above other distributors in the pecking order. This is hugely responsible for the increased consolidation seen regarding VAD’s as these benefits are largely valued by not only private equity firms, but also other distributors, as they look to expand their distribution capabilities.
However, prior to executing a M&A deal, VAD’s must consider a multitude of factors as completing a merger or acquisition can’t be justified as simply forming a partnership as a way to grow your business. It is important to consider the effects the other party your merging or acquiring will have on your services, as it specifically can pose a high risk to your value added services as attention to the quality and execution of these services can be unproportionally shifted to the services provided by the other company taking part of the M&A deal. In addition, these services are at risk of being diluted or disregarded during the integration process, which is why it’s ultimately important for VADs to formulate an understanding of how their value-added services will be treated and integrated post merger or acquisition.
From experience, working as an intern at Sellside Group, the emphasis put on the desirability of VAD’s offers anecdotal evidence pointing to the markets higher demand of these types of firms. This paired with their intrinsic leg up on traditional distributors makes it fair to assume that we will see a consistent growth in the popularity and capabilities of these firms as well as increased M&A activity in the near future as these high-demand businesses weigh their pros and cons in their pursuit of maximizing their potential.
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