Fecc: Speculate to accumulate

18 May 2012 11:05  [Source: ICB]

Investment in service provision has never been more important for distributors keen to strengthen their position in a highly competitive sector

Chemical distributors are evolving; gone are the days when the business was solely about managing logistics. As chemical companies focus more on what they see as their core competencies, they are increasingly relying on distributors to take over other key functions, whether it's regulatory and technical services, or sales.

Warehouse and service facilities are becoming more adn more important Copyright: Brenntag

This outsourcing trend means there is a clear competitive advantage in expanding the service portfolio rather than just selling products.

"Distribution has changed dramatically over the last 20 years and in a very pronounced way in the past five years," says David Jukes, president of Univar Europe. "The idea of just having a big warehouse, getting material and sending it out in smaller packages is long dead. It's now really about market insight, technical expertise and knowledge of products, and their application.

"Customers want reliability, visibility, performance and great logistics in the fulfilment chain. Geographical reach has also become very important," adds Jukes. "Part of our responsibility to customers is keeping them in business. The most important thing is working out what customers want and then giving it to them."

"If you go back a decade there were hardly any distributors having their own formulation laboratories," adds Mario Preissler, head business unit Performance Materials at Switzerland-headquartered DKSH.

"From our point of view, the physical distribution of product is becoming very much a basic service without a lot of differentiation possibilities," he says.

"What we focus on is really a highly technically skilled sales force supported by innovation centers and formulation laboratories in all the markets where we operate."

To achieve this requires significant capital expenditure and a commitment to continually optimizing customer service - often among the fastest-growing areas of a company's business.

"Customers are very clearly the starting point of all our activities - our maxim is if it doesn't make us easier to buy from then why would you do it," says Jukes.

"Whether it's about managing stock, ­providing technical expertise to lower the cost of formulation, or process improvement, customers only buy from you if they're going to save money. You have to consistently invest, you can't turn it on or off - you must invest in the downturn; it's important not to turn off the tap or you won't feel the rewards in the upturn."

INVESTMENT REQUIRED
This means the development of technical laboratories, formulation centers and warehouses, as well as the addition of sales offices and information systems to facilitate each transaction. The rationale behind such an outlay is improved efficiency, reduced costs, enhanced technical support and better relationships with customers.

"Distributors have to make investments to be able to offer additional services. So investments in the field of application support, laboratory and filling/compounding are significant. In this context, also investments in technically and chemically trained personnel, safety and technical equipment are of importance," says Edgar Nordmann, chairman of German-headquartered Nordmann, Rassmann and president of the European Association of Chemical Distributors (Fecc).

"It will definitely improve the efficiency and help growth, but most importantly improve relationships with customers and suppliers. As a distributor we want to serve their needs," says Nordmann.

With the chemical industry impacted by the global downturn and funding limited, it's never been more important that distributors invest in new facilities and expand to strengthen their position. Most players are therefore looking to diversify their business models, and expand their presence globally while consolidating their position in core markets.

Players that have historically been more focused on bulk commodities are now enhancing their specialty chemicals portfolio, particularly as the latter is less susceptible to the financial doldrums like those faced since late 2008.

"There's a clear trend towards specialties," says Preissler. "Bulk commodities are normally more affected by a downturn but it is a very different business model. Specialties are now seeing the most significant growth. We're active in pharma, food and cosmetics - all of which are typically more resilient against tough economic development."

Whereas commodities require significant outlay on infrastructure and facilities, the specialties business places the emphasis on qualified chemists and skilled staff.

"Thirty years ago it was all about having a price list, a stock list and a warehouse, and going out and selling. Today, it's absolutely not," says Jukes. "Today, we've got over 450 PhDs and chemists within our organization. There's no way we needed them years ago. We now have much better technically qualified people because that's what customers demand and expect. Attracting high caliber people and investing in them is very important."

Regulatory compliance is another big issue; the pharma, healthcare and nutrition sectors, for example, all have stringent regulations.

The distributors of industrial chemicals have been through several waves of investment - mainly triggered by environmental legislation, suggests Guenther Eberhard, managing director of Switzerland-based DistriConsult. The review of Seveso II may make things even more strict and could force out some of the smaller players because of the unrecoverable costs, he says.

REGULATORY ISSUES
Robert Spaeth, managing partner of CSC Jaeklechemie, and vice president and treasurer of VCH, the German federation of chemical distributors, says his 125-year-old commodity business in Nuremberg in the north of Bavaria has remained focused around this region largely because of the demanding requirements from legislation and large capital expenditure needed to comply.

"With the Seveso II Directive, there are many more regulations on sites regarding security, anti-terror measures and safety. We're obliged to secure the whole site and we always work to meet all these regulations. At least every 10 years we need a lot of work and investment in these sites to meet the standards with new tanks and infrastructure," he says.

"This is one reason why we concentrate on only one region. If we ever wanted to expand in the commodity business, we would have to set up another filling site and this is really very expensive. On the other hand, in the specialty business you don't have all these costs; you need excellent suppliers, good stock and most importantly, the knowhow and the people," says Spaeth.

"If you look at the new Seveso III, and the Classification, Labelling and Packaging regulations, there will inevitably be some change among certain product groups that could mean new investment is needed," he says.

Spaeth also points out that the industry faces more environmental pressures than ever before, requiring producers to use fewer chemicals - although this can be a boon for distributors.

"On the commodities side you can do more to offer services to help customers reduce the amount of chemical used - we can reduce stock for the customer, help with recycling with closed loop delivery and offer more sophisticated products. Specialties allow us to differentiate ourselves," he says.

"If you reduce commodity chemical usage you often need specialties as a substitute or an add on. For example, our customers face regulations where they have to use less solvents, so we can offer water-based materials as an alternative but these are more sophisticated and require specialties. On the other hand, we can also offer them a closed loop system, so they don't have emissions. The used solvent is returned to us and we forward it to recycling. There are many opportunities."

MATURE MARKET
There is still a lot of competition among chemical distributors, especially in Europe - making it all the more important for them to invest to provide a more comprehensive offering.

"In specialty chemicals, the recent wave of investment in laboratories by distributors has perhaps been triggered by the fact producers are investing in emerging markets rather than Europe. They are not expanding in the region, and are instead perhaps streamlining and downsizing. Forward looking distributors are using this as a way to differentiate their offering to the market," says DistriConsult's Eberhard.

"Europe is a mature market for many chemical products but there's still large volume and it's still attractive. It needs skilled staff and the infrastructure to blend, fill and drum, as well as packaging, refilling and bulk breaking, and distributors are there to provide just that," he says.

Despite the downturn, spending has not stopped. Last September, Germany's Brenntag, for example, bought UK-based specialty distributor Multisol Group, further expanding its product portfolio into lubricant additives and base oils as well as its mixing and blending capabilities.

In March 2011, Univar had concluded a deal to buy Turkish chemical distributor Eral-Protek. This acquisition, along with the Istanbul and Izmir operations of Basic Chemical Solutions, which it bought in December 2010, enhanced Univar's presence in the region and is an important link between its European activity and growing Middle East and African business.

Besides establishing new distribution agreements, the major has invested in various projects including a sales office in Greece, a €600,000 ($788 000) White Room to expand its white oils handling, as well as around €1.5m in its lubricants depot in Gothenburg, Sweden, to increase storage capacity and add a new laboratory.

Depending on the product and requirements, a laboratory could be very basic or very extensive, costing only $100,000 or several million dollars. Partnerships are also often established, says Spaeth. "Costs vary," he says. "Some specialty fields do need laboratories and innovation centres but if you have a good relationship with suppliers you can perhaps use their facilities so it's not necessary to have all equipment at your own site."

Although chemical distributors still hold a fundamental position between suppliers and customers, their role has changed significantly to become more specialized and provide a comprehensive range of services. They are turning their attention to niche markets and providing bespoke services, while consolidating their position as the prime source of technical information. For distributors willing to increase funding in these important areas, growth and success appear ensured.

By: Andy Brice
+44 20 8652 3214

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