What Is the Impact of Consolidation on Wholesale Distributors?
Consolidation provides many advantages to distributors which is a major factor contributing to the sharp increase in consolidations in recent years.
Economies of Scale
It basically comes down to economies of scale since the consolidated companies will now be able to combine operations and reduce the overall workload. Since the overall amount of goods being distributed will now be greater, this will bring down the fixed costs per unit delivered. Hence, the profit margin per unit will be greater leading to increased profitability.
Consolidation means that a distributor is basically getting a stake in the market share which was previously denied to them. Together, the consolidated distributors will definitely possess a greater share of the wholesale market.
Two or more distributors can combine together to give rise to a synergy that will lead to better services and improved service quality. Since the consolidated firms are now partners rather than competitors, they can make joint use of each other’s expertise, experience and insights. This will lead to more efficient operations and an increase in the amount of aggregate goods distributed.
Tames Cut Throat Competition
Since we live in a highly competitive business environment, it makes sense to reduce the competition. While a certain level of competition is good, too much can be stifling and therefore harmful. The big distributors can easily use their economies of scale to lower service charges to very low thresholds and still remain somewhat profitable. They can do this because they enjoy much lower fixed costs per unit delivered thanks to their economies of scale.
This unfortunately will prove to be detrimental to the small distributors since they do not enjoy the same economies of scale and therefore have much higher fixed costs per unit. Due to this, they have very thin profit margin per unit. They do not have room to reduce revenues by lowering service charges. The end result is that the small distributors will go bankrupt if the big distributors bring down service charges substantially.
Strength in Unity
But there is one way that the cut throat competition can be quelled and the small distributors rescued. “If you can’t beat them, join them” – or so goes the saying. That’s what consolidation can do and this is why we are seeing them happening more often. This development is not just limited to the wholesale distribution industry but can also be seen across a wide range of verticals and sectors.
Since consolidated distributors are more powerful, they can bargain for improved service charges from their customers.
Small distributors will gain big advantages if they consolidate with larger companies because they are more profitable and have greater market share.
Together, distributors can make greater service offerings especially if they were operating in different niches. Instead of just operating in one niche, the combined firms can diversify into two niches. They can make better value proposition to their customers and expand their portfolio.
One Major Pitfall
But one major problem with consolidations is that it can reduce employment. Smaller and disparate distributors tend to be more labor-intensive, whereas consolidated distributors will not need as many employees that the two firms possessed when they were separate.
If there are too many consolidations, this can lead to the creation of oligopolies with all of their inherent disadvantages.
As with everything else, consolidation has its share of advantages and pitfalls. Companies need to asses these before consolidating in order to make this business decision fruitful.
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