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Can A Small Distributor Survive?

The recent economic downturn has been an extremely trying time for the material handling industry. Many companies were forced to shut their doors for good, or else forced to merge with or be bought out by competitors. Since the 4th Quarter of 2008 there have been more than 45 reported mergers or acquisitions reported in The MHEDA Journal. Small distributors were especially impacted by the tumultuous economic climate. As the country and the industry enter recovery mode, can the “mom and pop” business model survive in an industry that is increasingly dominated by large distributors companies?

There is no set definition for a small business. According to the National Federation of Independent Businesses (NFIB), of which many MHEDA members are part of, the typical size of a small distributorship is 10 employees. According to some government programs a small business must have 50 or fewer employees. The Small Business Administration sets the standard at $7 million annual revenue for non-manufacturers to qualify as a small business. For the purposes of this article a small business is any business that has 25 or fewer employees.

When talking to MHEDA distributors for the 2011 Industry Forecast in The MHEDA Journal, one common refrain about the industry was “survival of the fittest.” The rash of M&A activity has, in many areas, widened the chasm between the large and small distributor. “Ten years ago, there were several major players in the conveyor business,” says Gary Ashley, CEO of Conveyors & Drives (Atlanta, GA). “We’ve now shrunk down to four or five major players. It’s an evolution of how things are happening.”

President Loren Swakow of Scott Lift Truck (Elk Grove Village, IL), agrees with Ashley. “Long term there are going to be fewer players. It’s all economy-driven.” Robert Kehley, general manager of Key Material Handling Equipment (Brooklyn, NY), also sees the big distributor as the dominant force going forward. “I think it’s going to revert to the large companies taking over. Small distributors may still have viability in urban pockets, but in the major metropolitan areas and basic heartland, the small dealer’s days are numbered.”

Some distributors identified the trend toward the large distributorship as a long-standing trend, exacerbated, but not caused by the bad economy. To that end, many felt that the recovering economy would not slow that trend down. “It’s been going on for the past ten years. We’ve seen the dealers getting bigger and bigger, and that will continue to be the tendency. There are going to be fewer dealers and larger dealers,” says Doug Ward, president of Hooper Handling (Hamburg, NY). Jefferds Corporation (St. Albans, WV) President and CEO Richard Sinclair speculates that the trend may not only hurt existing small distributors, but may also keep new competition from entering the industry. “It takes such a capital investment to get into this business that you just can’t be effective if you’re a small dealer always up against the nut in terms of bank financing and everything else.”

Other distributors disagree, however. They argue that while “survival of the fittest” may have applied during the recession, with the industry poised to recover, they reason that the fittest have survived. “If you can tread water long enough to get through this very tumultuous economic time, those who come out the other end will end up stronger. There will be fewer companies, and the companies that are left will be better off for it,” says Mike Wall, president of CSI Materials Handling (Westmont, IL).

Smaller companies have some distinct advantages over larger companies. Many large distributors scrambled during the recession to cut services and streamline operations. In essence, many large companies were trying to become more like small companies. Speed is a major advantage that a small distributor has. In an article by Tom Reilly titled “Do Small Companies Fare Better Than Big Companies in Tough Times?” Reilly lists several factors that will help small distributors withstand the trend toward large distributorships. Aside from the speed of service afforded by close proximity to the customer, the owners of these small companies are often very hands-on. Many deal with the customer and end-user directly. That close proximity gives the owner clear channels of communication, which is very important. Ron Ferrara Sr., president of Century Conveyor Service (Youngstown, OH), echoes Reilly’s sentiments. “Consolidation is making it tougher for independents on larger projects. However, they cannot afford the attention to detail that we can offer our clients on smaller projects. That’s where we can excel.”

Barry Asmus, Ph.D, who will speak at MHEDA’s Annual Convention in May, offers hope for the mom and pop. “It’s the small, local, labor-intensive areas that have been hit the hardest. They probably think life will never be the same again, and they’ve had to make enormous adjustments, but 2011 will start to look better.”

What do other MHEDA members think? Will the small distributorship be able to persevere in this new economy or will the trend toward larger distributorships make the mom and pop model a thing of the past? Weigh in using the comments section and let me know.

Material Handling Equipment Distributors Association

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