INSIGHT: The attractions of chemicals distribution

13 June 2008 16:59  [Source: ICIS news]

By Will Beacham

John Phillpotts, leaving UnivarLONDON (ICIS news)--Chemical distribution has grown into a dynamic, lucrative and fairly recession-proof business and is now attracting the sort of top class entrepreneurs who will enable it to overcome future challenges, according to John Phillpotts, soon-to-retire president of Univar Europe .

After a lifetime in chemical distribution, he is in a good position to talk about the attractions of the business and the ways it has changed over the years.

Phillpotts says the industry has been transformed, making it a great place to forge a career.

“This was not a glamorous industry and no-one chose to go into it, other than for family businesses. But it’s now an attractive industry for a career.

"I would find it very easy now to go out to a group of young people and sell the industry. Even 20 years ago that would have been hard.”

Now, distribution attracts the best people, Phillpotts says, and their entrepreneurial flair is allowing the industry to adapt to the challenges of globalisation and the EU's Reach registration, evaluation and authorisation of chemicals scheme.

The growth of China and the Middle East provides big opportunities for global and local distributors, although Phillpotts does not think that the European model will necessarily fit.

“We’ll have to rethink how we do it and understand the cultural issues,” he says.

“For companies with a significant position in Europe and the US, there’s still all of that to go for,” he adds.

With low growth rates and Reach to contend with, European distributors face particularly gruelling times.

Phillpotts, though, is upbeat and believes the entrepreneurial spirit will win through.

“Clearly it’s hard to see really exciting growth rates, though these will continue in Eastern Europe, but they are relatively modest markets. And on top of that you’ve got Reach.”

The solution? “We need to continually reinvent ourselves,” he says.

“The supply chain is changing all the time. Customers have different agendas and we’re in between. We’re good at that: we’ve all shown that we’re versatile, ingenious at finding new solutions: and we’ll find one for Reach.”

Nevertheless, the biggest challenge to boost the profitability of distribution, Phillpotts says, is to get paid for the value added.

“Over the years the margins have tended to come down. Getting people to appreciate the value we add is the hard bit. We’re not profligate in terms of expenses so you can’t come in and cut a lot.”

Private equity has had its part to play in the recent success of distribution, he says, helping to create big players and give decent financial incentives to managers. But with the current turmoil in credit markets, will their role diminish, as funds dry up?

Phillpotts does not believe there is any appetite in the market for the creation of another global giant in distribution, although there are funds for smaller acquisitions.

“It’s hard to see the need for another big player: the market is well served. There are a lot of distributors out there.”

This theme was echoed at last week’s European association of chemical distributors (FECC) meeting in Budapest, where speakers pointed to the opportunities available to private equity to work with local entrepreneurs to build regional positions and then sell out to global players.

Though there may be room for smaller scale M&A activity, Phillpotts suggests the still fragmented industry will remain that way.

“The one thing that hasn’t changed is the number of distributors,” he says.

“There have always been between 1,500 and 2,000 [in Europe]. If you go back 20-30 years there was a theory that the consolidation process would see a significant reduction in the number of distributors across Europe. The reality is it hasn’t happened.”

How have these players survived?

“Rationale would probably say there is not room for all these distributors, but they play a part. One of the attractions of chemical distribution is that they seem to be pretty ingenious with the way they can cope with adversity and change.”

Phillpotts concedes that German distributor Brenntag has a strong position in Europe, whild Univar has gaps to fill, especially in Germany and eastern Europe.

“There are two big players in Europe, and clearly one is significantly ahead of the other,” he says.

“Univar does have some gaps to fill: we were never shy of recognising that we have weaknesses in certain markets. And probably the only way to do that is through some sort of M&A activity.”

But Phillpotts is proud of the way he moulded Univar from a disparate group of companies into a single business unit.

“All the companies had different names, different product portfolios, different cultures and very little communication. It’s been exciting, pulling those together into what I’d see now as a very consolidated group, sharing the same core values with a very strong team spirit.”

Distribution is in a unique position to weather an economic downturn, the former Univar CEO suggests.

“In a serious downturn, customers see a benefit from taking less product, more often, rather than taking a full load from a supplier. This helps their cashflow and allows us to take the strain on some of their working capital.”

“We are continuously looking at costs,” he adds. “But even in the current economic climate I don’t think you’ll write story about a Brenntag or Univar making huge job cuts.”

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Read the ICIS FECC special distribution supplement from ICIS custom publishing

By: Will Beacham
+44 20 8652 3214

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