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How private equity can add value in industrial wholesale distribution

Advancements in e-commerce and logistics offer value creation opportunities for PE investors in the wholesale distribution industry.

In brief

  • Results from a recent EY-Parthenon survey illustrate how the COVID-19 pandemic has pushed the industry to finally engage with technology.
  • Explore three areas where PE investments are likely to create value for specialty industrial distributors.

Private equity investors can find attractive opportunities in the enormous wholesale distribution industry due to advancements in e-commerce and tech-enabled logistics that many distributors have not fully adopted.

The sector is made up of the logistics, shipping and wholesaling companies that move every physical product under the sun from farms and factories to store shelves and supply rooms. Comprising industrial businesses of all sizes, and at roughly $7t in revenue, it is one of the biggest pieces of the US economy. After shrinking by 5% in 2020 from the initial shock of the COVID-19 pandemic, sector revenue jumped 22% in 2021, according to MDM Distribution Intelligence.[¹]

Leading distributors are making capital investments required to stay competitive in the wake of digital disruption, lingering COVID-19 supply chain woes and rising customer expectations for short turnaround times. While the pandemic has wreaked havoc on supply chains, specialty industrial distributors have remained fundamentally relevant because of their stable niche connecting customers to a broad array of products across a complex value chain.

Particularly considering supply and demand constraints, companies that are able to fulfill their core purpose of providing access to essential products are leaving behind those that cannot.

Amid the developing shakeout, opportunities abound for private equity investors ready to help traditional distributors transform into modern supply chain partners in today’s “digital-first” economy.

There are three areas where investments are likely to create value for specialty industrial distributors.

1. Enhance e-commerce and digital tools to attract high-margin customer transactions

The pandemic prodded B2B customers who were once reticent to engage with technology to adopt online buying as a core ordering method. Now, both B2B and B2C industrial customers are expecting more convenient e-commerce transactions.

Many distributors are still developing their e-commerce capabilities as online ordering grows and they find themselves increasingly competing with pure-play e-commerce platforms. A specialty distributor’s commitment and available capital to invest in digital infrastructure may soon determine if it can win in a frontier focused on e-commerce.

A recent EY-Parthenon survey of 101 specialty contractors shows 54% of consumable supply orders were made online in 2021, vs. 24% during 2016 to 2018. The jump illustrates how the COVID-19 pandemic has pushed the entire industry to finally engage with technology.

The challenge is that many companies that have set up websites to take orders have not invested in an accompanying technology infrastructure to support a digitalized and automated customer experience.

An example of a company that is getting it right is a PE-sponsored distributor to specialty contractors that has grown its business by investing in e-commerce to be more responsive to customers. The new online customer interface supports high-margin, unplanned spot buys and the growth of specialty trade segments that are rapidly transitioning to online buying and product research. The site features digital materials for industry certification, including training videos that are attracting customers seeking the specialized industry products and information that e-commerce generalists cannot provide.

2. Expand logistics infrastructure and omnichannel sales to support increasingly complex customer preferences 

Another huge opportunity is emerging as distributors adopt new service models, including omnichannel sales, to meet evolving customer needs. Companies that emulate this strategy stand to differentiate themselves from the competition.

Changing customer behaviors are evident in the shift to online sales from in-person purchases and phone orders.

But many customers still require physical value-added services or enhanced services that support other changing customer business needs.

For example, B2B buyers interviewed by EY-Parthenon professionals note the high costs associated with using skilled employees to serve as couriers between product suppliers and jobsites. Increasingly, such customers favor distribution partners that can provide last-mile logistics and same-day delivery, whether via third-party logistics (3PL) supply chain solutions, including third-party warehousing, or urgent-need “hotshot” delivery services performed by the wholesaler.

There are also opportunities in the in-person buying experience. A leading PE-backed electrical distributor recently opened its first “open concept” branch location, adding a counter at a 12,000-square-foot warehouse to allow customers to select their own materials.

Such innovations may enable industrial distributors to capture the significant, albeit declining, share of products purchased in store, while reducing costs associated with branch merchandizing, shelf stocking and full-time counter employees.

Shifts toward omnichannel models incorporating all types of customer preferences, particularly inside sales powered by unified contact centers and e-commerce, can help distributors regain the profitability they once experienced with asset-intensive outside sales and retail branches.

3. Redefine the customer “service-value” equation

Distributors that earn a high share of industry profits are increasingly capable of fulfilling customer needs beyond the multifaceted sales and logistics infrastructure.

Another area that presents potential opportunity for PE investors is in augmenting the most valuable services a company offers to customers. This is the service-value equation, and it refers to the gross profit dollars customers pay in exchange for solutions consisting of both products and service. While the definition of value varies by customer cohort, optimal service-value equations are meaningful to customers and profitable for distributors.

For distributors, this means identifying profitable niches within a distributor’s total addressable market, and the opportunities span from sales and marketing in the front end, to operations and logistics in the back end. Examples of areas where industrial distributors can add value to outperform the competition include a broad array of support activities, such as diverse sales channels; showroom consultancy; product information and after-sales support; pickup and delivery options; sourcing; and customized solutions such as packaging, fabrication, training and service centers.

Examples of areas where PEs can invest in value-added specialty distribution opportunities include:

Virtual manufacturing or hybrid model distribution

Distributors can drive manufacturing process and product improvements by providing computer models to simulate operations. By doing so, they can participate directly in sales, drive supply chain efficiencies, capture a share of the product margin, and provide end users with high quality and economical alternatives to brand names. This can simultaneously improve the distributor’s reputation as a leading product innovator among end users.

Differentiated logistics offerings

Distributors can offer a unique logistical service model by solving a challenge in delivering products to an end customer. Increasingly, such capabilities are enabled by technology platforms such as customized web portals, jobsite vending devices and unique mobile applications.

Tailored services

A wide range of tailored services that are not easily replicated by undercapitalized competition or online-only sellers can further enhance the service-value equation. Aftermarket repair and maintenance services, equipment rentals, technical training and accreditation, vendor-managed inventory (VMI), and credit or financing services are all customer-facing capabilities among leading wholesale distributors. Moreover, service value accruing to manufacturers and other vendors may exist in the form of sales and marketing support, digital sales channel development and packaging.  Such vendor-facing services can translate into increased gross margin dollars, particularly net of rebates.


Specialty distributors will continue to hold a stable role in many B2B value chains, providing critical links between customers and supplier bases, and they are an attractive target sector for private investment. Private equity ownership of distributors may be particularly compelling when it can help distributors thrive in an increasingly competitive, technology-driven environment. Specialist distributors that can develop meaningful service-value equations for profitable customer segments will have a competitive edge that generalist online retailers cannot match.

Thanks to Ryan P. McDuff, EY-Parthenon Senior Director, who contributed to this article.

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