The Centralized B2B Distributor
We wanted flying cars, instead we got 140 characters
It’s hard to catch up to the Jetsons.
For all you young people, the Jetsons was a cartoon show made in 1962 about a futuristic world 100 years from its making. And, it was awesome.
As a kid growing up in the 90’s, I still remember watching the Jetsons and expecting my adult life to be something similar to the space-age, gadget fueled lifestyle of the Jetsons.
Unfortunately, as Peter Thiel says,
“We wanted flying cars, instead we got 140 characters.”
In last week’s newsletter, I opined about the future of labor. So, this week, lets talk about what the futuristic B2B distributor looks like.
In a much shorter time period than 100 years from now, we think the business model of B2B distribution will operate fundamentally differently than it does today.
The business model of B2B distribution will operate in a much more centralized way.
Centralization, the Jetsons of B2B Distribution
For over a hundred years, B2B distributors have largely been managed in a decentralized way with local & regional P&Ls. Still to this day, many of the key functions in a B2B distributor are operated locally at the branch or on a market/regional basis.
As new technologies mature, our Jetsons prediction for B2B distribution is that more and more of the key functions will happen in a centralized manner.
B2B Distributors are the epitome of fragmentation
There are tens of thousands of B2B Distributors in every vertical, and inorganic growth is one of the best ways to grow in this industry. That means a lot of M&A. Here’s a graph from Pitchbook on larger distributor M&A deal count over the past 5 years.
2024 is pacing a little behind 2023 in terms of total deal count of M&A transactions. However, we’ve already eclipsed total 2019 M&A transactions by over 50%. We don’t see this trend reversing – with more and more PE money taking an interest in B2B distribution.
Rollups are a part of life in B2B distribution. But, these rollups are still mostly operated on a local basis. A large B2B distributor is typically an amalgamation of a lot of smaller distributor P&Ls. Not one centralized P&L like you’d have in a supplier – where the P&L is broken out by product lines or industry segments.
B2B Distributor P&Ls are broken out by geographies and branches because a lot of the key functions still happen on a local level. For example:
Customers order in the branch or with a local sales rep via email or phone
Inventory for stock & flow items is kept locally, in the branch (Read more about the importance of branches from our previous newsletter)
Other supporting functions like AR, procurement, and AP are mostly executed on a market or regional level
The billion-dollar B2B distributor: a federation.
The chief executive suite sits at the top of the company hierarchy and have the most power. But, their ability to impact change throughout a localized, regional P&L business is less impactful than you might expect.
The major functions of a B2B distributor (selling, fulfilling and buying) are a dotted line to the executive team. And, instead, those functions are a solid line to the P&L owner, such as the branch manager and/or the regional president.
This system of management was actually introduced in the 1920’s and 1930’s by James McKinsey, founder of the heralded consulting firm. At the turn of the 19th century (1890-1910), there was mega-M&A in the US industrial base. 1,800 companies were merged together into 157 companies – creating mega-giant corporations like AT&T, US Steel, Heinz, Campbell Soup and GE. Just a few names you might be familiar with :)
So, how do you centralize something that has been done locally for decades?
New technology, supported by process and change management.
Not just AI – it’s also ERP, data and customers!
As we discussed last week, AI is going to be a big unlock for B2B distribution centralization. But, AI alone isn’t enough.
The AI isn’t very effective without having access to your data. Every B2B distributor roll-up also has a myriad of ERPs and data silos. This data needs to be unlocked and there are new technologies allowing for read and write between various data silos. We’ve predominantly seen this technology in other industries with similar data silo problems, like in financial services or Palantir’s work in the DoD. The technology is capable and proven – it just hasn’t been applied to solve the specific needs of B2B distribution.
As that changes and more tech innovators focus on B2B distribution, we will we see more open access to data. New AI models can be trained on that data to create more holistic solutions. And, the cycle will start to accelerate quickly thereafter.
That said, just because the tech exists, doesn’t mean any of it will be used and adopted. At the end of the day, people will still be the core part of any B2B distributor’s success. And, the technology needs to be tailored to the specific needs of a B2B distributor’s personnel.
And, not just the distributor’s personnel, but the distributor’s customers. As more customers transact digitally, a regional P&L becomes more in conflict. Most distributors assign digital commerce revenues to the branch P&Ls. Whereas, if you look at retailers, they have a store P&L and a “digital P&L”. Both line items have different types of cost and margin profiles and are run as separate, but related business units.