INSIGHT: Smaller distributors specialise and innovate to grow

By Heidi Finch

LONDON (ICIS)–Some European small- to mid-sized family-owned distributors have been in business for several decades, if not more than 100 years, but what is the secret of their success and longevity in such a highly competitive environment?

The ability to adapt and review its chemical distribution portfolio, to make changes where necessary and to “stay true to specialties” are key ingredients, says managing director of C H Erbsloeh, Christopher Erbsloeh.

C H Erbsloeh is a mid-sized family-owned company in its fifth generation and 139th year, dealing with the sales and marketing of specialty chemicals, raw materials and minerals.

“Specialty distributors have a chance to grow and survive, quite different than commodities,” says general director of Lavollee Chimie, Herve Ory-Lavollee. “To be more small- or medium-sized is an asset in specialty distribution.”

Founded in 1963, Lavollee Chimie is a family-owned business, focused on the distribution of chemical and mineral specialties.

While distributors of any size or scale might be involved with specialties, certain small- and medium-sized enterprises (SMEs) consider themselves to be best suited to this type of business.

They can be flexible in terms of stocks and cash management and are less bound by red tape, say Erbsloeh and Lavollee. 

The distribution of commodities, or simple industrial chemicals, may provide quicker returns, but does involve the storage and movement of large volumes of lower value products. This side of the business requires investment in hardware such as storage capacity, tanks and trucks and, some believe, is better suited to the larger players.

Specialties, on the other hand, normally involve smaller volumes, higher value, more application development and longer-term paybacks and strategy, which fits the small-to mid-sized family-business model.

It is particularly important to have a few months of buffer stocks for specialties, for instance, because they are bespoke products with a limited supply base, says Lavollee. SMEs are seen to be more flexible in terms of stock and cash management policy due to their company structure, according to some players.

Smaller-scale distribution companies can be more streamlined and can focus more easily on a limited number of products and principals, i.e. their suppliers.

Smaller players are also more focused on customer service and laboratory-based customer support, according to the chairman of Cornelius Group and Cornelius Specialities, Neville Prior. He is also president of the European Association of Chemical Distributors (FECC).

Cornelius is an independent European distributor of specialty chemicals and ingredients. Sister company Cornelius Specialities researches, manufactures and exports high quality specialty monomers, oligomers and polymers.

Smaller distributors are often more in tune with smaller or medium-sized customers, said Prior and this view was mentioned by others in the industry as well.

A focus on applications development and reformulation is a key feature of specialty distributors, particularly small-to-mid-sized distributors, according to some players. But the larger companies believe they have the resources and investment potential to continue to innovate.

Univar Europe’s president for Europe, the Middle East and Africa, David Jukes, made this point at the annual FECC Congress in Athens in early May.

“Distributors of scale are needed for investment and innovation,” he said, adding that smaller players are also highly valued with their local and entrepreneurial business, geographical and niche market experience.

The laboratory development process helps distributors of any scale to add customer value.

Erbsloeh mentions new food fillings with less sugar but the same density and taste profile that customers require as an example of this type of customer-focused development project.

His company has worked with paints and coatings players to find more environmentally-friendly product solutions and with automotive players to help them innovate in the plastics and rubbers sectors.

Lavollee Chimie has worked on development projects to help improve the taste and shelf life of baked food products.

Suppliers often outsource this type of work to distributors while they focus on larger-scale research and development (R&D).

While focusing on specialty distribution has enabled smaller to medium-sized players to add value and meet the bespoke needs of their customers, it is not clear-cut to say that the success of smaller distributors only lies in specialty distribution, says managing director of Districonsult, Gunther Eberhard.

There are also some successful smaller-scale industrial chemical distributors, for instance, Eberhard said, adding that their success lies in re-investing in the businesses and “being ahead of the game” in terms of regulations, among other factors.

Developing own-label production to complement an existing distribution portfolio is another means of growing the business and a step further in innovation and versatility for certain small- to medium-sized distributors.

The R2 Group, along with some others, is a prime example of this, creating its own label production in the food sector to add to its traditional distribution business.

“To create, differentiate, innovate”, is the motto of the R2 Group, according to the firm’s CEO, Peter Skou, who is also the president of the International Council of Chemical Trade Associations (ICCTA).

The R2 Group has expanded its portfolio and gone global from its regional base in Scandinavia. The company was established in 1884. It sells raw materials and ingredients to various industries. Moreover, the R2 Group also manufactures ready solutions and functional blends for the food industry.

Skou says that the company wanted to have its own products and to sell outside Europe, in emerging markets such as Turkey, for example, where there is potentially more growth and less competition.

Now, it is selling its own products in other emerging markets in Asia and Africa and working with local distributors, benefiting from their regional know-how and understanding.  

Own-label production for the food sector started in 2005 when the company acquired its own powder operations. The R2 Group’s own-label in liquid/paste production began in 2011. The move has helped lift turnover to €100m and provided a different kind of margin to distribution, says Skou. Profits have doubled, he adds.

The R2 Group distributes products such as milk powders for one principal and sells it on to an ice cream manufacturer. Separately, it manufactures chocolate-fudge filling to complement this customer’s product.

Due to the success of its own label production in the food sector, the company is now also rolling out its own-label production for biocides, called Rodical, in its material science division.

The Cornelius Group is another independent distributor which incorporates both distribution and manufacturing in its business,

It created its manufacturing division 15 years ago, when geographical limitations had been reached for its traditional distribution business.

“We wanted to be a leader in the industry for added value,” says Prior.

Now, the company’s manufacturing capabilities involve niche medical applications, while its chemical specialty distribution business is in the personal care and food sectors. The businesses are run separately.

“You need a different mindset to be a distributor versus a manufacturer: need to invest in fixed assets, [that could be a] barrier to entry; need to manage any possible conflicts of interest,” says Prior. I don’t see [it as] a wholesale trend. For some it has value.”

Aside from own-label production, belonging to an alliance of other similarly-sized distributors has helped small- to mid-sized distributors extend their geographical reach beyond their locality and region.

The LEL Group is an alliance of family-owned specialty chemical and ingredient distributors and has six members. It says it can deliver “unrivalled technical sales and services” and is committed to the long-term, sustainable growth of its principals and customers.

Erbsloeh, one of LEL’s founders, said at the FECC congress “the LEL Group provides a geographical service but is not designed as an alliance just for its members to become big”.

“By combining the best of local presence and identity with multi-country co-ordination, the LEL group achieves the best in synergies and sales development in Europe, Northern Africa and Latin America for its partners,” two of its founders say.

Lavollee, one of these, says that it has been benefited from double-digit growth by being part of the LEL Group, with around 80% of its business opportunities over the past 15 years having come either directly or indirectly from LEL.

The mindset among distributors is not simply to survive, but to thrive,” Prior said in Athens.

Some of Europe’s smaller distributors are indeed thriving by innovating, extending their geographical reach and pushing into own-label production.

Their ability to innovate will define their success in the years to come.