Dealer Consolidation, Buying Groups, And The Prognosis For The Golden Goose

One of the reasons we started a dealer/distributor-only e-newsletter in 2010 was so we could discuss buying groups and other issues we’d prefer not to air in front of our operator friends. A convergence of events leads us to discuss some things that are just between us’uns: dealer consolidation, the undeniable impact of internet sales and the future of buying groups.

One of the things we noted in this year’s FER Top Dealers Report analysis was how quiet mergers and acquisitions have been the past year and a half. But suddenly in the past two weeks, three big dealer combinations have been announced. TriMark bought Adams-Burch, a big smallwares and tabletop player in the mid-Atlantic and Washington, D.C. area. Sam Tell Cos. picked up Long Island-based Premium Supply. And late last week, the Boelter Cos. announced it has acquired Minneapolis-based Premier Restaurant Equipment & Design. These are Top 20 dealers picking up three companies, all with sales in excess of $20 million. This isn’t the big fish eating little fish, it’s big fish swallowing biggish fish.

Last week, we also received an interersting note from our friend David Wasserman, principal at SGP, a consulting firm. Many of you know David from his stints at DuraWare, Vollrath and Focus Foodservice. Let me share some of his thoughts:

“I have watched from the side for a few years now the growth of new players, and the overall growth of the internet.  In consulting with different companies, I have seen the explosive growth of Clark firsthand and the numbers are huge.  Add that to what Katom, Foodservice Warehouse (now basically defunct), Ace Mart, Wasserstrom and others are doing on the web and the numbers are substantial.  I have also seen the growth of Amazon.  These are also very significant, but it is not 100% clear all of this volume is going to the commercial market.  Plenty could be going to consumers who want commercial-quality products.

“So my quandary is this: The volume of all of the above is substantial and growing.  Why are we not seeing more bankruptcies, business closures, or mergers?  When you look at your top 100 volume and look at the growth of the top players in these areas, the volume has to be killing quite a few businesses, but the number of dealers shutting down, selling, or merging is miniscule.  I know many dealers have existed as lifestyle businesses for years, living on the profits, having buildings that are completely paid for, and employing a variety of family members.  I would think they could take some hits, but how long can this continue? 

“I have long predicted the mass consolidation of the industry.  It is ripe for much greater efficiencies in combining entities for so many reasons, but getting small family-owned businesses to make this move is very difficult.  I understand why it has not happened, but this redistribution of volume has to facilitate some of these natural market movements. Will be curious to see how things progress over the coming 24 months.”   

We all know another major reason smaller dealers have stayed in business was the proliferation of dealer buying groups in the 1980s and ’90s. The buying group model—combining volume to enhance negotiating leverage on prices—has without question helped level the playing field. But many argue, as outgoing NAFEM Pres. Mike Whiteley of Hatco did at the NAFEM annual meeting in Puerto Rico in February, that it has skewed the normal business model for many dealers: Many don’t make any money on regular margin; they just live off the volume rebates.

But we are beginning to see cracks in the model, too. NISSCO and Excell, two groups serving mostly smaller dealers, “combined,” a few months ago, though they continue to operate separately. Most of you know the challenges PRIDE faces in the wake of the FoodService Warehouse bankruptcy.

But it’s not just this that augers changes among the groups. Some of the really big dealers may begin to question the advantages of staying in groups and continuing to “lend” their volumes to major competitors.

Like Wasserman, we’ll be curious to see how all this plays out in the next few years. As I learned the first year I started covering the E&S market in 1982, “distribution always finds its most efficient means.” But we’ve also learned not to be surprised that change comes slowly in this highly fragmented, mind-bogglingly complex market.

Cheers,

Robin Ashton

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