Fecc holds up a mirror to the sector

FACTS, FIGURES AND THE FUTURE

CONFERENCE REPORT • FECC’S ANNUAL CONGRESS THIS YEAR LOOKED CLOSELY AT THE POTENTIAL IMPACT OF DIGITALISATION BUT ALSO AT WHAT IT IS THAT DISTRIBUTORS ACTUALLY DO

WHAT IS THE point of a chemical distributor? It is a question that has been asked by many over the years but the sector thrives, finding a way of offering a cost-effective service both up and down the supply chain.

It is a question that the European Association of Chemical Distributors (Fecc) had on its mind at its Annual Congress in Warsaw this year, where Dr Udo Jung, senior partner and managing director of the Boston Consulting Group (BCG) in Frankfurt, gave delegates some interesting perspectives on the business.

Historically, chemical producers viewed distributors as “necessary evils”, Dr Jung, began. Their mantra used to by “only use them if it can’t be avoided”. That, however, has all changed. Many chemical producers now view distributors as an integrated element of their overall channel strategy and channel management. Leading chemical companies, he continued, employ differentiated models to select and monitor distributors, including using distributors to operate a ‘lean model’ for their sales activities or as ‘growth engines’.

Moreover, chemical producers are increasingly building regional centres of excellence for distributor management and to professionalise their approach to selecting and monitoring distributors, although “at most chemical companies the individual business units remain ‘lead’”. That said, “process optimisation between chemical companies and distributors is often still a neglected area of value”, Dr Jung said. And when it comes to creating value for both the supplier and the customers, distributors can have an important role to play. Among other things, this includes their ability to offer efficient supply chain and logistics management; the provision of knowhow and resources for product development and own-brand formulations; and “efficient, best-cost sourcing of non-contract products”.

CHEMICAL CONSUMPTION Moving on, Dr Jung explained that overall chemical industry consumption has grown significantly since 2009, increasing by 5.4 per cent to 2015. This is expected to continue into the future albeit at a slightly lower rate of 4.5 per cent between 2016 and 2022. Western Europe, though, will continue to lag behind other regions, growing over the forecast period by around 1.7 per cent compared to 2.7 per cent in North America, 6.4 per cent in China, 4.7 per cent in the rest of Asia Pacific and 4.1 per cent for the rest of the world. Importantly, the third-party chemical distribution sector “is outpacing overall chemical industry growth” by about 2.2 percentage points per annum.

Indeed, the share of third-party distributors is expected to increase to about 12 to13 per cent in 2022, he said. In terms of overall market compound annual growth rates (CAGRs), Jung revealed that between 2008 and 2009 the figure fell to -12.5 per cent, but during 2010 and 2015 it bounced back to 5.4 per cent and should be around 4.5 per cent during the period 2015-22. This compares to respective figures for direct distribution by suppliers of -11.8 per cent, 5.2 per cent and 4.3 per cent, and -13.3 per

cent, 7.4 per cent and 6.7 per cent for distribution undertaken by third parties.

As might be expected, there are significant regional differences within all this. In western Europe, the market for third-party chemical distribution has been slowed by “lower economic development”, although the rate of outsourcing is still increasing. In North America, the market is already highly developed with overall limited growth moving forward, Dr Jung said. The Chinese market, meanwhile, is supported by strong economic development, with the use of distributors “mandatory to serve a fragmented market with long distances”.

Elsewhere in the Asia-Pacific region there have been traditionally fewer distributors active in the market, although this has been changing in recent years and Dr Jung expected this trend to continue apace as the industry there matures. In the rest of the world, the third-party distribution market is being “fuelled by the growing economies of emerging markets”, thanks primarily to growth in South America.

Breaking this down further, Dr Jung explained that, within third-party distribution as a whole, the market for speciality chemicals accounts for about 48 per cent of the total and looks set to outgrow the commodity distribution sector by about 1.4 percentage points per annum over the period 2015 to 2022.

MARKET TRENDS These market trends are being driven by end-industry specifics and market developments, Dr Jung continued, which has numerous implications for chemical distributors. First of all, both suppliers and customers alike are looking to streamline their relationship with distributors. To prosper, distributors must have provable capabilities in specific verticals and/or end industries. They must also build up a regional or multi-regional footprint backed by a broad product portfolio “to become attractive for preferred partnerships”.

Principals, he said, often employ a two-layered distributor model to optimise their activities or encourage business units to centralise their distribution. Meanwhile, market consolidation is seeing international distributors expanding via mergers and acquisitions (M&As), “creating a sub-set of players with wide geographical knowledge”.

Distributors, Dr Jung continued, are increasingly seen by producers as strengthening the value chain position via value-added services. This means that “end-industry specific value added services [are] of growing relevance”. As such, the onus is on distributors to develop their technical capabilities and build application labs; increase the value they offer; and continuously broaden their range of services. Concurrent with this, increasing regulatory burdens are further driving the growth of large distributors. To survive, distributors must therefore ensure they have “strong regulatory capabilities” and “take advantage of M&A opportunities with smaller players”.

Despite ongoing consolidation, the thirdparty distribution market is still highly fragmented. For example, the top five players in Europe – Brenntag, Univar, Helm, IMCD and Biesterfeld – controlled just 21 per cent of market in 2010, rising to 26 per cent five years later. In North America, a fairly similar picture emerges. There, the top five firms – Brenntag, Univar, Helm, Nexeo Solutions and Azelis – held a 32 per cent share of the pie in 2015, up from 30 per cent in 2010 (when Pimova held the number five spot instead of Azelis). In terms of figures, Dr Jung told delegates that between 2010 and 2015 the number of acquisitions per annum doubled from 11 to 22. Geographically, the bulk of these were completed in Europe, which racked up 33 acquisitions during the period out of a worldwide total of 98.

BUSINESS MODELS There are three “archetypal business models” in chemical distribution, Dr Jung reported. In the first category, such companies as Barentz, IMCD and Azelis can be seen as espousing a model focused on speciality chemicals, which requires them to maintain “high-quality product baskets targeting specific segments’ needs”. This model also sees them “going deep in focus areas” and offering numerous formulations and value added services to customers. They are also highly flexible in terms of delivery and drop sizes.

Companies such as Helm, Nexeo and Solvadis, meanwhile, pursue a model that has a greater focus on commodity chemicals. As such, they generally distribute “bulk products with less variation” and have a “high focus on trading due to high price transparency”. Consequently, such models are “less flexible in delivery and drop size”, with such companies often utilising their own assets for storage and bulk-breaking.

A third group, typified by Brenntag and Univar, can be termed ‘full liners’, he said, as they maintain a “broad offering of »

THERE IS ROOM IN THE MARKET FOR BOTH DISTRIBUTORS

WITH THE EXPERTISE TO OFFER VALUE-ADDING SERVICES

AND THOSE THAT JUST CONSOLIDATE AND DELIVER

speciality and commodity/base chemicals”. This requires “critical size in storage and logistics” as well as “pan-regional and partially global sourcing for non-contract products”, with their speciality products often grouped by industry vertical. At the same time, full liners employ sophisticated operating models as their speciality chemical operations need greater flexibility than the “more industrialised standard processes” for their commodity businesses.

SUCCESS FACTORS In terms of success factors, Dr Jung told delegates that the “table stakes and overarching requirements” do not differ greatly from one business model to the other. All players, he said, require financial stability and a solid track record; clear health, safety, environmental and quality (HSEQ) standards; a local organisation coupled with entrepreneurship and fast decisions; excellence in supply chain management, process quality and systems; and a strategic mix of organic and non-organic growth.

However, if speciality distributors are to succeed, they also need “anchor products from flagship producers”; a deep knowledge in technical applications; strong and frequent access to local clients; supplier collaboration to shape their offering and development; and “pan-regional consistency versus local entrepreneurship”. For commodity distributors the vital elements include highly cost-efficient and scalable supply chain management and infrastructure and storage at prime locations. They also require a high network density in key regions; “global purchasing excellence”; and product-specific market and pricing intelligence. Globally leading full liners, on the other hand, have to be able to “manage differentiated business models for specialities and commodities”.

Most chemical producers, Dr Jung continued, “are defining clear and purposespecific business cases for the deployment of distributors”. One clear driver for continued outsourcing he highlighted was the need to manage complexity and thus reduce the effort required to service small and subcritical customers (‘cutting off the tail end’) while avoiding customers “that don’t carry their weight”. Furthermore, the use of distributors can also greatly help them in reaching new customers, entering new markets and providing a host of additional services.

GOING DIGITAL Turning to the issue of digitalisation, one of the key themes of the Fecc event, Dr Jung pondered whether digital technologies might not in time “disrupt the value chain and positioning of chemical distributors”. For instance, digitalisation could see more principals extending the economic reach of their direct sales through the opening of web shops. Similarly, there is a potential for logistics providers to move into “digital-enabled chemical distribution” coupled with the threat of “digital attackers” and aggregators, such as Amazon Business or Alibaba, entering the chemical distribution arena.

Already in the field of laboratory chemicals such disruption has arguably been realised, he said, citing for example BASF’s unveiling of an online shop aimed at small and mid-sized Chinese customers. Sigma, likewise, has “developed an industry-leading e-commerce platform, cutting off principals from key accounts”. There is, Jung said, a huge prize waiting for any “true ‘platform builder’ in third-party chemical distribution”. The winning model, though, will have to combine “digital and ‘traditional’ assets”.

To this end, leading distributors are already “in a good starting position” thanks to their principal and customer access; ability to orchestrate logistics; and their HSEQ track record. Similarly, their “end industry knowledge and value added services” and “trusted company brands” are also clear boons, although so far no ‘true platform’ approach has yet to emerged among the sector. But will established distributors, he wondered, “seize the opportunity or will it be disrupted by digital attackers” like Amazon Business or Alibaba that ultimately take the digitalised lead? HCB

UDO JUNG PONDERED WHETHER DIGITAL-ENABLED

MARKET ENTRANTS WILL DISRUPT THE CURRENT Other presentations relating to digitalisation in the chemical distribution sector can be found in the first two parts of HCB’s report on the 2017 Fecc Congress in the October and November issues. The 2018 Fecc Annual Congress will be on 4 to 6 June in Nice, France. Further information can be found at www.fecc-congress. com and www.fecc.org.