Thursday, May 18, 2017

CHEMICAL INDUSTRY INDIA SPECIAL .....The future for chemicals distribution: Value-added services

The future for chemicals distribution: Value-added services  

The distribution of chemicals, in general, and speciality chemicals, in particular, comes with challenges that stem from the nature of the business, industry structure, expectations of returns and regulations. The business is fragmented – not surprising considering the customer base is often so – especially in developing economies such as India, but there has been a consolidation of sorts in the last few years. In India, despite a handful of deals (with international buyers), the industry is dominated by small operators. This will need to change as margins are compressed and tax reforms cut out the middleman.

Fragmented industry structure
In most countries, the structure of chemical distribution has a handful of companies with a regional or international presence and a long tail of small- and medium-sized ones that serve local needs. This is also the case in India; about a dozen companies have a pan-India presence and about 100 play at local opportunities. Most large distribution companies – the likes of Azelis, Brenntag, IMCD, Univar etc. – have some at least presence here, and face competition from some well-known local players – Anshul Life Sciences, Pure Chemicals, Vimal Agencies, to name a few.
In contrast to the rest of the world, wherein leading distribution companies are publicly held, most companies here are private – with holdings often within a small circle of family and/or friends. This business structure has pros and cons. Private ownership aids quick decision-making, promotes dynamism and enables greater risk-taking ability (given that publicly held companies need to comply with strict norms and are under constant scrutiny of shareholders). The concerns with private firms relate to transparency of operations, especially finances, and is one reason why acquisitions have at times proven difficult. Indeed, there have been instances of buyers having to abort deals late in due diligence due their inability to verify the veracity of claims made.

Credit, credit and more credit!
In the past, chemicals distribution was all about serving small customers with the right quantities of chemicals at the right time in the right pack sizes, but almost always with long credit lines. Indeed, credit was the USP of the game – the longer the period, the more likely that the distributor got the business. This reached absurd levels in some segments – textile chemicals come immediately to mind – and the only way for a manufacturer to insulate itself from this was to adopt an intermediary – often a distributor. That applies even today to some extent or the other.

Increasing professionalism
But a few changes are apparent in the Indian distribution space today. The most apparent is professionalism, at least amongst some of the leading companies. While most still remain owner-driven and managed, a few have turned day-to-day operations over to professionals, many of who have spent the better part of their careers in the manufacturing or in trading business. They have put in business structures and financial discipline to a business once run on wits rather than on a strategic plan.

Widening the customer base ….
Several companies are going beyond their traditional portfolio, addressing peripheral opportunities, for instance. It is today not uncommon to find distributors of speciality chemicals who initially operated in the domain of pharmaceuticals, to have diversified their portfolio to include one or more of personal care ingredients, food ingredients & additives, etc. Companies in the commodity chemicals are diversifying their portfolio as well – leveraging, for instance, infrastructure such as tank farms and storage depots.

… and employing best practices
Such diversifications and geographical expansions have permitted a scale-up of the business and with that an opportunity to employ best practices hitherto unseen in this space: modern information technology systems to keep tabs on the business and improve productivity; technical support labs, application development centres; modern warehousing facilities; compliant logistics etc.
Nearly all leading distributors in speciality chemicals today operate one or more technical support and application development centres to support customers. These enable customisation of formulations to suit performance needs and, just as importantly, price. They help the distributor to adequately demonstrate not just credentials, but enable new product launches by small and medium customers who often do not have the infrastructure for innovation and trials. Indeed, it is not uncommon for large distributors to formulate products and have these adopted almost unchanged for commercial launch!

The challenge of scalability & growth
The business of chemicals distribution faces significant challenges, top-most amongst which are scalability, growth and margins. As pointed earlier, most players are small and lack capability to scale-up. Consolidation is one way, but aside a few deals involving mainly international companies, few M&As have happened. This is not unlike the scenario in chemicals manufacturing, and largely for reasons related to the psyche to retain control even at the risk of de-growth. Growth is at times curtailed by inability to expand beyond existing relationships due constraints posed by the supplier.
Margins are being squeezed even in speciality chemicals as often the products are undifferentiated and face the threat of substitution from other ingredients from other manufacturers or distributors. In commodity chemicals, where margins are wafer-thin (though compensated by higher volumes), the lack of ability to scale-up is a serious constraint.
Market development challenges
Developing markets, especially for unfamiliar speciality chemicals, is an arduous, time-consuming exercise that does not always yield expected results. Distributors – especially those serving international companies with no manufacturing or other infrastructure in India – often spend a few years developing formulations suited to the needs of the client, support product trials and test marketing, fine-tune offering based on feedback received both from immediate customers and the eventual marketplace, and provide samples after samples. All this with the hope that when all goes well, orders will flow and make it all worthwhile.
But even after launch distributors cannot rest easy. There is always the threat of substitution by another ingredient, which delivers a better value proposition, or simply cheaper. There are consequences of failure of the final product in the marketplace due several reasons ranging from poor customer acceptance to regulatory demands. In customer-facing industries such as personal care, for instance, there is always a possibility that choices are fickle, needing a retooling of the formulation at best, or outright withdrawal from the market, at worst. In pharmaceuticals, a failure of a drug due regulatory concerns over safety or efficacy could have an impact on several ingredients that go into the making the final dosage form.
Distributors also face the possibility of their principal marching onto their turf once the business gets large enough. This has been seen in the past, when international majors, unsure of business prospects, opted to go the distributor route, but chose to muscle in on their own once business developed. Divorces do happen and not all are amicable.

Staying relevant through value-added services
India’s fragmented industrial and consumer base, and its sprawling geography make it imperative to employ distributors. But their role will have to evolve to keep with changing times. Distributors will have to become more adept at leveraging their most important business asset – their customer base. They will have to go beyond their traditional role of pallet breaking, repacking (often in smaller sizes), warehousing and logistics, and offer value-added services that span quality control, inventory management & logistics, regulatory compliance, and even custom blending and application development. The idea should be to make themselves indispensible to the customer through products and services and so enable the latter stick to their knitting.
Distributors must aim to fully leverage their understanding of their customer base – one built through several years of customer intimacy. They are uniquely positioned to reduce the risk of new product development for their suppliers, shape their innovation agenda, and even aid in the launch of new products. They will need to build qualified teams that can do not just sales pitches to garner new business, but include technicians, R&D personnel, and at times even the Chief Executive to make a compelling value proposition to clients. The feedback and feed-forward loops these teams evolve will be their best guarantee of sustainable growth and profits.
Chemical distribution is here to stay – but perhaps not in the form it largely is today!

Ravi Raghavan

CHWKLY9MAY17 

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