Over the course of my advisory career, I have been blessed by friendships with some of the most interesting people in the distribution business. The perspectives I am exposed to are truly worth their weight in gold. I was having dinner with a former client of mine last year and the subject of differentiation and small business came up. This gentleman had acquired a small industrial company and grew it into a highly-profitable entity in approximately 10 years. He then sold the company for one of the highest multiples I have seen in the distribution industry. He was a very efficient operator and a master at discovering profitable markets.
Before he acquired the company, he worked as a salesperson there. The organization was trying to compete in the overcrowded world of industrial distribution by calling the same plant maintenance companies that the larger players were going after. Since his organization clearly did not have the deepest pockets, price was not going to get it through the door. Service was the company’s differentiator. However, its unique service offerings were minimal compared to the sophistication of some of the other plant procurement companies.
After acquiring the company, my friend started thinking about how to break away from the crowded fishbowl. He identified and studied smaller niche businesses in the industrial market, such as automobile recyclers. These companies were using several of the products he stocked. He developed lists of those items, which ultimately became a market-specific catalog for the automobile recycling market.
As he travelled around the country, he discovered several other obscure industrial markets dying for attention. Once he found a niche, he learned everything he could about its consumable needs and developed a marketing campaign geared toward the organizations in that niche. He focused on underserved markets and provided them with a level of service with which they had not been accustomed. In turn, these companies provided his company with the sales volume necessary to command deeper discounts from his suppliers. He built his business on identifying more than a dozen small niche markets.
This gentleman is not the only person I know who discovered profitable business opportunities in small niche markets. A number of years ago, I visited a thread distributor that had five large regional warehouses around the country. The warehouses weren’t small 5,000-square-foot shops in an industrial park. They were 60,000-square-foot to 100,000-square-foot facilities. That’s a lot of thread!
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When I visited the company’s main facility, I saw rows of yellow thread in varying shades, thickness and spool size. When I asked who buys the thread, I learned that the company exclusively catered to the apparel industry. I realized every stitch of thread on my body came from a thread supplier like the one I visited that day. I also learned that the inventory management team kept a keen eye on the world of sports. I found it fascinating to think about all of that sports gear and its high-quality embroidery.
One of my longest-standing clients built his multi-million dollar business selling tank truck parts and accessories. You would be amazed by all of the valves, meters, hoses and signage he has in stock. After learning about the business so intimately, he diversified and started selling and leasing the rolling behemoths. By staying in his lane, no pun intended, he built a strong distribution business that will last for generations to come.
In my travels, I also met police equipment distributors dedicated to ensuring law enforcement officers look good and remain safe and distributors who exclusively serve the dental industry. In Orlando, I met a small niche distributor who built his business on selling replacement cables and sensors for the patient monitoring equipment in hospitals. All of these niche distributors are very focused and very profitable.
Discovering the myriad ways that distributors find and serve a need has been one of the greatest byproducts of my advisory career. When people say that distribution is dying and will ultimately be overrun by some prime overlord, I beg to differ. I have seen the resiliency and tenacity of these niche entrepreneurs. They look for the pain points and offer solutions. Perhaps I am an eternal optimist and a bit naïve at times, but I truly believe that there are still plenty of riches left in the niches.