B2B Distribution 101
A breakdown of the $8 Trillion Industry You've Never Heard Of
Happy October! 🎃 — This week we’ve decided to take a step back and get a macro look at how big B2B distribution actually is. With suppliers increasingly experimenting with going direct to customers, Amazon getting handsy with the supply chain, and a never ending slew of new technology companies entering into the world of B2B, we’re looking to answer three big questions: What is wholesale-distribution? How big is it? And how is it doing?
B2B Distribution Basics: Over $8 Trillion in Size
B2B wholesalers-distributors are companies that facilitate the movement of products and goods from manufacturers to retailers, businesses, construction contractors, and other end customers within the business sector. Wholesale-distribution is $8 trillion in size and cuts across just about every industry in the modern day economy.
Distribution Growing Revenue and Profit Faster than Manufacturing📊
US Manufacturing is growing slower than both distribution and retail. We are comparing just US distributors and manufacturers however and we are not factoring in foreign manufacturers in the below graph. The retail category includes both eCommerce and physical retail.
Profits overall have grown for distributors 3.1% over the past 5 years while manufacturers have seen a 0.9% decline. It’s not all rosy for distribution however. Profit grew for distributors compared to manufacturers due to strong revenue growth, but margin is a different story. Distribution lost (0.2%) margin while manufacturing remained flat.
Distribution is an Inflation Hedge
Distributors can employ the Last-In, First-Out (LIFO) inventory valuation method as a strategic approach to mitigate the impact of inflation and actually benefit from inflation. Here's how the growth rate of B2B Distribution compares to that of the logistics industry when analyzed against the inflation rate.
LIFO Accounting for COGS:
Mitigating Rising Costs: Inflation typically leads to higher costs for inventory. By using LIFO, distributors allocate the most recent inventory costs to the cost of goods sold (COGS). This means that the cost of goods sold reflects the current, higher replacement prices, which more accurately matches the rising cost of inventory with the revenue generated from selling those goods.
Tax Benefits: LIFO leads to a lower taxable income, as higher COGS reduces net income, and subsequently, income tax liabilities. This can provide a cash flow advantage during inflationary periods, as distributors have more funds available for other operational needs.
Cost Structure Weighted to Cost of Product:
Revenue Growth: Inflation results in increased prices for products, which can lead to higher revenue for distributors. When a distributor's cost structure is primarily comprised of the cost of the product being sold (variable costs), their operating expenses typically remain relatively stable. This means that as product prices rise due to inflation, distributors can enjoy higher revenue without a proportional increase in operating costs.
Profit Margin Enhancement: The combination of rising product prices and a relatively stable cost structure can lead to improved profit margins. Distributors can benefit from higher gross margins as a result of selling products at inflated prices while their fixed costs remain unchanged.
We have analysis and graphs broken down by each B2B vertical in the premium subscriber version below:
Vertical Breakdown with CAGR and Industry Size
Profit and Growth Comparisons by Vertical
Vertical Breakdown 🪓
The US B2B distribution market size is between $8-9T as of 2022, making it one of the largest business segments in the world. This is broken down into several industries highlighted below:
Industrial ⚙ - $1.6T (+1.8% CAGR, ‘18-’23): Distribution is critical in manufacturing industries, as it facilitates the movement of raw materials, MRO components, and finished products within the supply chain. Manufacturers rely on wholesalers-distributors to source materials, keep their machines and factories running and drive cost savings & efficiencies at the same time.