Dealer Consolidation, A Mature Market And Customer Service
I had four encounters last week that have me thinking about dealer consolidation. I had e-mail exchanges with Jerry Hyman of TriMark USA and Paul Roy of the merged Hendrix Russell. We got the release from Edward Don about their selling a stake to a private equity company, which mentioned the probability of acquisitions. And at the end of the week, I spoke with an executive from a private equity company about the paths of E&S distribution consolidation.
One of the charts I’ve been using in my forecast presentations is one that shows consolidated growth rates of our verified Top Dealers versus the market as a whole. In 2015 that gap was 13.5% compared with our estimated market growth of 4.8%. And the gap has run from six to 12 percentage points every year since the end of the Great Recession. The Top 100 Manufacturers have seen nowhere near that differential and, in fact, underperformed the market in 2015 and 2016 mostly because of the effects of offshore sales.
Private equity sees a major opportunity in consolidating distribution in this market. Just look at the food side of foodservice distribution. It is already much more consolidated than the E&S side. One reason for that is that the margins on food distribution are so much lower than on E&S. But I believe the maturing of the foodservice market in the U.S. and the dramatic slowing of new-unit construction undercuts the margins in E&S and puts a greater premium on efficiency in distribution. When you are a small- or mid-tier chain putting up a lot of units, hands-on customer service is an advantage. When one is simply replacing existing equipment or making sure salad bar containers get to units efficiently, it’s a different deal.
And the consolidation is also related to something I’ve talked about for several years: the nationalizing of the dealer market. Whether it’s internet infrastructure for smaller operators, or resupply activities for chains, there are advantages now in being bad and nationwide. It’s one of the factors that drove consolidation of the broadliners in the first place: Can you serve me nationally?
This doesn’t mean I think smaller or highly niched dealers are going to go away. This is still too much a people business. But it does mean customer service, in all its manifestations, is the key to prosperity and survivial, for the big folks as well as their smaller brethren.