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Distribution: Capturing growth opportunities
5:25 PM MST | November 11, 2013 | —Lindsay Frost
Chemical distribution continues to outpace chemical industry growth. Between 2008 and 2012, the worldwide chemical distribution market grew 9% annually, to €165 billion ($218 billion)—more than 1 percentage point higher than overall industry growth, according to the Boston Consulting Group (BCG; Boston).
“If we look at what are the most promising segments in terms of revenue and profit growth, then, clearly, the North American oil and gas market is currently a big source of dynamic demand for products and services offered by distributors in [the continent],” says Steven Holland, CEO of Brenntag. “On the other hand, when 60% of advanced economies’ GDP comes from household consumption, and private spending is also a driving force in emerging markets, the consumer goods industry and its supplying manufacturers represent the backbone of chemical distributors’ revenue.”
In addition to energy, personal care, agricultural chemicals, and markets related to housing are bright spots in distribution, producers say. Most sectors—with the exception of automotive and paint and coatings, which have started to recover over the past 12–18 months— have grown slowly but steadily.
Distributors continue to see strong opportunities in specialty chemical markets. “In commodities, there is a certain level of scale. It is generally more asset-intense, and they also tend to have their own warehouses and storage—heavier than specialties,” says Udo Jung, senior partner and managing director of BCG. “Specialties are very segment specific. Other areas which keep growing and are supported by megatrends are health and personal care. Those are businesses which tend to be quite profitable. Above average [margin] segments include health and personal care, food ingredients, and oilfield and mining chemicals.”
Basic chemical markets have seen a surge thanks to shale in the United States—which is an advantage for larger distributors working with commodities, but has had little-to-no effect on the smaller distributors, which mostly work with specialty producers. Distributors expect demand for specialties to improve, however, as US producers and manufacturers become more competitive because of lower energy and input costs. “The energy market is changing things dramatically. Manufacturing may be growing [by] double digits in the next 5–10 years,” says Douglas Brown, president and CEO of Brown Chemical (Oakland, NJ) and treasurer of the National Association of Chemical Distributors (NACD; Washington).
Erik Fyrwald, president and CEO of Univar, said at an industry event in September that natural gas in the United States has been weaker on lower prices but that the situation will likely change, and manufacturing will continue gaining momentum. The company recently made two large acquisitions in North America—Magnablend (Waxahachie, TX), a provider of chemical manufacturing, blending, and packaging solutions in the United States; and Quimicompuestos (Monterrey, Mexico), a distributor of commodity chemicals. “In the US, we are doing very well on the oil side of oil and gas,” Fyrwald says. “I believe that... demand for low-price natural gas in the US will pick up within the next few years.”
Matthew Brainerd, CEO of Brainerd Chemical (Tulsa, OK) and vice chairman of NACD, says products such as surfactants used in energy and oilfield applications are doing well because of fracking and oil recovery.
BCG says it expects the real growth rate in the global chemical distribution market to slow from 7%/year to 6%/year within the next five years, mainly because of a weaker, underlying economic situation that will reduce chemical consumption. The intensity of competition within the distribution industry will also increase. “This is driven specifically because of producers, but also because its an opportunity for those distributors that have become strategic partners for producers and in certain geographies. They certainly have further opportunities to grow,” Jung says.
Distributors, however, will continue to gain overall share as manufacturers reduce complexity by outsourcing distribution to small customers and subcritical markets. However about 90% of total industry volume is still distributed directly by producers to end customers. When a company makes the decision to outsource, the choice whether to choose a larger or smaller distributor depends on the products and service offerings. “Complexity drives the decision on whether to outsource distribution; market expertise and value-added services drive the decision on which distributor to use,” the BCG report says.
BCG says “distributors with the greatest reach … can stand out from the competition. In mature markets, such as the United States, by comparison, the customer base is more consolidated, and it is easier for all distributors to achieve a respectable marketplace.”
The distribution market remains highly fragmented (table). As of 2011, BCG says, the three largest global distributors held a combined global market share of 12.5%—with Brenntag at 5.9%, Univar at 4.7%, and Nexeo Solutions at 1.9%.
There is still opportunity for more consolidation, says Frank Bergonzi, president and CEO of Koda Distribution Group (Stamford, CT). “There has, however, always been room for regionals and independents because of their technical capabilities, supplier focus, and expertise in the markets. We tend to uncover things that others cannot.”
One advantage of regional and smaller companies is their ability to personalize services for customers and understand regional needs on a micro level, Brown says. “When it comes to local market knowledge, we are closer [to customers] because their [larger companies] focus is larger,” Brown says. “We are more micro-focused than they would be. We don’t slug it out on commodity markets—what we can do is develop a tighter relationship with our customers and are more flexible to change direction.”
Value-added services—which include blending, product formulation, technical experts, and lab support—are increasingly becoming key to distributors’ offerings. These services account for 1.2%/year of growth for distribution, according to BCG’s survey. According to the survey, nearly half of distributors are getting requests for additional services and 69% expect that this will grow in importance.
Other additional services that distributors are beginning to offer include next-day service, off-hour delivery times, and smaller quantities, since customers are keeping inventories at a very low level to manage cash, Brad Hilleary, CEO of Webb Chemical (Muskegon Heights, MI), says. The belief is that pricing will go down or stay flat on chemicals, he adds.
Meanwhile, suppliers continued to consolidate the number of partners they want to do business with, Bergonzi says. “Suppliers want a more focused and concerted effort.” Koda’s strategy focuses on maintaining its regional model and expanding exclusive arrangements with suppliers in specialty chemicals. “We are an extension of their selling efforts,” Bergonzi says. That effort includes extensive information sharing and true transparency. “We are not just reporting numbers,” Bergonzi adds. “We also provide market intelligence and application knowledge that our suppliers are seeking.”
“Supplier communities have rationalized things that don’t make sense for them to do,” Brown adds. “Manufacturing is not good at some areas that, for distributors with solid skills and logistics, are pretty basic,” he adds.
Chemical manufacturers seeking to reduce complexity and cost are outsourcing costlier B- and C-customers to distributors, Holland says. “Distributors having market and product expertise as well as capabilities in value-added services clearly are in an advantage to sign distribution agreements,” Holland says. “On the demand side, customers—when looking to reduce cost—seek to outsource inventory on one hand and to reduce the number of chemical distributors on the other hand.”
Cost pressures continue to drive consolidation in distributor relationships, BCG says. “Fifty percent of producers are either currently reducing or plan to reduce the number of their distributor relationships.” By cutting back from several distributors for each product in the past, to using one or two distributors with a variety of functions, costs are reduced greatly, Jung says.
“The bar keeps rising; expectations and requirements of producers are constantly going up. This has resulted in rise of geography-specific expertise,” says Christian Hoffmann, expert principal for the chemical industry at BCG. “Chemical distributors also have to be cost conscious on the sourcing side. With products that are exchangeable in a sense, here they start to invest in global sourcing and systematic approach, of which price has the best cost position.”
Koda has a strong presence in the coatings, adhesives, sealants and elastomers (CASE) market as well as construction, personal care, lubricants, inks and plastics. It is comprised of five regional companies serving those markets in the United States. “We will maintain each of our company’s autonomy and we value their brand equity,” Bergonzi says. The company has 5 application labs to boost value-added service offerings, a key differentiation and driver of growth. “These are true application labs, not just quality control,” he says.
Koda recently established an agricultural chemical business segment with the acquisition of Specialty Professional Products (SPP). SPP subsidiaries include Adapco, a leading distributor of mosquito control products, and Red River Specialties, a leading supplier of products to the forestry, vegetation management, and range and pasture markets. Koda will continue to maintain separate branding and management at SPP. Bergonzi sees opportunities for growth within existing areas but also continues to seek broader presence in ag, nutrition and pharma, and the energy sector. “We are looking for more diversification but remain clearly focused on specialties,” Bergonzi says.
Distributors also see growth opportunities in South America. In September, IMCD Group acquired a majority stake in Makeni Chemicals, which marked the former’s entry into the Americas. “Makeni’s market position, reputation, supplier, and product portfolio and logistic capabilities are excellent and closely mirror those of IMCD,” says Piet van der Slikke, CEO of IMCD. “Business cultures are similar, and we have set up working groups to exploit synergies and to fully integrate Makeni into the IMCD Group. We expect to rename Makeni to IMCD Brasil early next year. IMCD will further explore opportunities in other Latin American economies, with a focus on the larger countries in the region. We are also open for add-on acquisitions in selected markets in Brazil.”
The macroeconomic conditions in Europe have put a damper on some distributors there, but generally, companies have coped with the troubles well, Holland says. Brenntag has adjusted its business model in Europe. The company implemented efficiency measures in 2012 and has had positive results in 2013.
Hilleary says the European situation has created a surplus of chemicals and an oversupply situation, though demand has started to rise again. While southern Europe has been weak, high-growth markets in Eastern Europe and mature markets in northern Europe are growing—particularly in Germany. “German distributors have done very well. They have taken advantage of the economy getting better,” Hilleary adds.
There has been some pick-up in Asian economies, Holland says. “We continue to seek acquisition opportunities that support our overall growth strategy, and our strategic focus is on expanding our presence in emerging markets, particularly in the Asia/Pacific region, in Latin America, and Eastern Europe,” he adds.
Regulatory issues—such as the EPA’s General Duty Clause, the US Department of Transportation’s Compliance, Safety, Accountability program to regulate the safe transport of chemicals, and the EU Registration, Evaluation, Authorisation and Restriction of Chemicals program—are challenges for small and large distributors alike. Brainerd says trying to get the Toxic Substances Control Act moving forward and the Department of Homeland Security’s Chemical Facility Safety Standards passed and understood by all have been difficult. “[Regulatory standards] favor the larger distributors because they already have competence in-house and can cope with those standards more easily—which they have turned into business opportunities. And, they partially advise clients on those matters,” Hoffman says.
Distributors are still looking for ways to move forward successfully and profitably through organic growth and global, national, and regional acquisitions. In 2013 alone, small and large companies made several aquisitions. IMCD acquired Chemimpo South Africa (Johannesburg) in January and formed a partnership with Australian distributor Network Nutrition (Sydney) in September. Brenntag acquired Texas water treatment distributor Altivia (Houston) in January, Lubrication Services (Oklahoma City) in March, Blue Sky Environment (Brisbane, Australia) in May, and the chemical distribution division of the Zytex Group (Mumbai) in September. Nexeo Solutions acquired Chemical Specialists and Development (Conroe, TX) in October, and Koda Distribution acquired EW Kaufmann (Bristol, PA) in May.