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The future for chemicals distribution:
Value-added services
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The
distribution of chemicals, in general, and speciality chemicals, in
particular, comes with challenges that stem from the nature of the business,
industry structure, expectations of returns and regulations. The business is
fragmented – not surprising considering the customer base is often so –
especially in developing economies such as India, but there has been a
consolidation of sorts in the last few years. In India, despite a handful of
deals (with international buyers), the industry is dominated by small
operators. This will need to change as margins are compressed and tax reforms
cut out the middleman.
Fragmented industry structure
In
most countries, the structure of chemical distribution has a handful of
companies with a regional or international presence and a long tail of small-
and medium-sized ones that serve local needs. This is also the case in India;
about a dozen companies have a pan-India presence and about 100 play at local
opportunities. Most large distribution companies – the likes of Azelis,
Brenntag, IMCD, Univar etc. – have some at least presence here, and face
competition from some well-known local players – Anshul Life Sciences, Pure
Chemicals, Vimal Agencies, to name a few.
In
contrast to the rest of the world, wherein leading distribution companies are
publicly held, most companies here are private – with holdings often within a
small circle of family and/or friends. This business structure has pros and
cons. Private ownership aids quick decision-making, promotes dynamism and
enables greater risk-taking ability (given that publicly held companies need
to comply with strict norms and are under constant scrutiny of shareholders).
The concerns with private firms relate to transparency of operations,
especially finances, and is one reason why acquisitions have at times proven
difficult. Indeed, there have been instances of buyers having to abort deals
late in due diligence due their inability to verify the veracity of claims
made.
Credit, credit and more credit!
In
the past, chemicals distribution was all about serving small customers with
the right quantities of chemicals at the right time in the right pack sizes,
but almost always with long credit lines. Indeed, credit was the USP of the
game – the longer the period, the more likely that the distributor got the
business. This reached absurd levels in some segments – textile chemicals
come immediately to mind – and the only way for a manufacturer to insulate
itself from this was to adopt an intermediary – often a distributor. That
applies even today to some extent or the other.
Increasing professionalism
But
a few changes are apparent in the Indian distribution space today. The most
apparent is professionalism, at least amongst some of the leading companies.
While most still remain owner-driven and managed, a few have turned
day-to-day operations over to professionals, many of who have spent the
better part of their careers in the manufacturing or in trading business.
They have put in business structures and financial discipline to a business
once run on wits rather than on a strategic plan.
Widening the customer base ….
Several
companies are going beyond their traditional portfolio, addressing peripheral
opportunities, for instance. It is today not uncommon to find distributors of
speciality chemicals who initially operated in the domain of pharmaceuticals,
to have diversified their portfolio to include one or more of personal care
ingredients, food ingredients & additives, etc. Companies in the
commodity chemicals are diversifying their portfolio as well – leveraging,
for instance, infrastructure such as tank farms and storage depots.
… and employing best practices
Such
diversifications and geographical expansions have permitted a scale-up of the
business and with that an opportunity to employ best practices hitherto
unseen in this space: modern information technology systems to keep tabs on
the business and improve productivity; technical support labs, application
development centres; modern warehousing facilities; compliant logistics etc.
Nearly
all leading distributors in speciality chemicals today operate one or more
technical support and application development centres to support customers.
These enable customisation of formulations to suit performance needs and,
just as importantly, price. They help the distributor to adequately demonstrate
not just credentials, but enable new product launches by small and medium
customers who often do not have the infrastructure for innovation and trials.
Indeed, it is not uncommon for large distributors to formulate products and
have these adopted almost unchanged for commercial launch!
The challenge of scalability & growth
The
business of chemicals distribution faces significant challenges, top-most
amongst which are scalability, growth and margins. As pointed earlier, most
players are small and lack capability to scale-up. Consolidation is one way,
but aside a few deals involving mainly international companies, few M&As
have happened. This is not unlike the scenario in chemicals manufacturing,
and largely for reasons related to the psyche to retain control even at the
risk of de-growth. Growth is at times curtailed by inability to expand beyond
existing relationships due constraints posed by the supplier.
Margins
are being squeezed even in speciality chemicals as often the products are
undifferentiated and face the threat of substitution from other ingredients
from other manufacturers or distributors. In commodity chemicals, where
margins are wafer-thin (though compensated by higher volumes), the lack of
ability to scale-up is a serious constraint.
Market development challenges
Developing
markets, especially for unfamiliar speciality chemicals, is an arduous,
time-consuming exercise that does not always yield expected results.
Distributors – especially those serving international companies with no
manufacturing or other infrastructure in India – often spend a few years
developing formulations suited to the needs of the client, support product
trials and test marketing, fine-tune offering based on feedback received both
from immediate customers and the eventual marketplace, and provide samples
after samples. All this with the hope that when all goes well, orders will
flow and make it all worthwhile.
But
even after launch distributors cannot rest easy. There is always the threat
of substitution by another ingredient, which delivers a better value
proposition, or simply cheaper. There are consequences of failure of the
final product in the marketplace due several reasons ranging from poor
customer acceptance to regulatory demands. In customer-facing industries such
as personal care, for instance, there is always a possibility that choices
are fickle, needing a retooling of the formulation at best, or outright
withdrawal from the market, at worst. In pharmaceuticals, a failure of a drug
due regulatory concerns over safety or efficacy could have an impact on
several ingredients that go into the making the final dosage form.
Distributors
also face the possibility of their principal marching onto their turf once
the business gets large enough. This has been seen in the past, when
international majors, unsure of business prospects, opted to go the
distributor route, but chose to muscle in on their own once business
developed. Divorces do happen and not all are amicable.
Staying relevant through value-added services
India’s
fragmented industrial and consumer base, and its sprawling geography make it
imperative to employ distributors. But their role will have to evolve to keep
with changing times. Distributors will have to become more adept at
leveraging their most important business asset – their customer base. They
will have to go beyond their traditional role of pallet breaking, repacking
(often in smaller sizes), warehousing and logistics, and offer value-added
services that span quality control, inventory management & logistics,
regulatory compliance, and even custom blending and application development.
The idea should be to make themselves indispensible to the customer through
products and services and so enable the latter stick to their knitting.
Distributors
must aim to fully leverage their understanding of their customer base – one
built through several years of customer intimacy. They are uniquely
positioned to reduce the risk of new product development for their suppliers,
shape their innovation agenda, and even aid in the launch of new products.
They will need to build qualified teams that can do not just sales pitches to
garner new business, but include technicians, R&D personnel, and at times
even the Chief Executive to make a compelling value proposition to clients.
The feedback and feed-forward loops these teams evolve will be their best
guarantee of sustainable growth and profits.
Chemical
distribution is here to stay – but perhaps not in the form it largely is
today!
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Ravi
Raghavan
CHWKLY9MAY17
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