How Distributors Can Gain a Strategic Advantage During an Economic Slowdown

How Distributors Can Gain a Strategic Advantage During an Economic Slowdown

The COVID-19 pandemic and Russia’s invasion of Ukraine have both introduced significant uncertainty in the economy both in the US and worldwide. In light of this, McKinsey and Co recently published an article on how distributors can build momentum in a slowdown.  In their article, McKinsey explains how distributors don’t have to simply sit back and ride out the slowdown. In fact, we can look at the Great Recession of 2007-2009 to explore how distributors can actually use times of economic slowdown to gain a strategic advantage.

Here are the main takeaways from McKinsey’s article.

Learning From the Last Major Economic Slowdown

Based on what happened to the distribution industry during the Great Recession, it’s expected that there will also be significant impacts on distributors during another economic slowdown.

McKinsey identifies two types of distributors who came out of the Great Recession: “resilient” and “nonresilient” distributors. Resilient distributors are those who outperformed 80% of all other distributors during the economic slowdown and recovery. They are the companies that had the flexibility to adapt quickly to changing conditions. Nonresilients are the remaining distributors who did not outperform.

Reviewing investor presentations, financial metrics and reports, and executive interviews from 2007 to 2011 (downturn through recovery), here are the strengths that the resilient distributors shared. 

  1. An unrelenting focus on profitable growth during the slowdown which helped set the stage for significant acceleration during the recovery
  2. Heavy emphasis on margin management through disciplined pricing and category management
  3. Careful control of selling, general, and administrative (SG&A) expenses
  4. Willingness to invest in priority growth opportunities and programmatic mergers and acquisitions (M&A) with a through-cycle view

a subset of resilient distributors data graph from 2007 recession and recovery

One interesting trend to note is that the outperformers achieved slightly lower margin growth than nonresilient companies during recovery. This trend can be explained by the fact that outperformers experienced lower drops in margin during the economic slowdown than nonresilient companies.

McKinsey adds that key to the strategic advantage of resilient distributors was pulling back on unnecessary costs while spending more on “commercial excellence” to outperform during the economic slowdown and come out stronger during the recovery. Unnecessary costs are things like lower-performance locations and low-turning inventory. Meanwhile, investing more heavily in commercial excellence meant that resilient distributors were using their cost savings to improve customer service, increase high-value inventory, and enhance service to all customers, but especially high-value customers.

Finally, perhaps the most important improvement resilient companies made during the Great Recession to gain a strategic advantage was accelerating investment in digital.

What can distributors do now to gain a strategic advantage during an economic slowdown?

According to McKinsey, what distributors should do right now completely depends on the unique challenges they’re facing. Every economic downturn will affect distributors differently, and there’s no one-size-fits-all strategy for all distributors to take.

In their article, McKinsey provides three different profiles with unique challenges that distributors may face during economic slowdowns.

  1. Poised to thrive. These are companies that are largely unaffected by the conditions of uncertainty. Inflation, pricing, and labor cost pressures don’t seem to stifle their business because of the strength in their core markets, expansion road map, balance sheets, and cash reserves. For distributors in this camp, possible moves to gain a strategic advantage include implementing pricing optimization technology and enhancing or building value-add services to their offering.
  2. Resolve to reform. These are companies that are facing pressure but have opportunities available to sustain or expand their market share so long as they plan and invest carefully. Their balance sheets are strong enough to give them some options for investment. For distributors in this camp, possible moves to gain a strategic advantage include setting up transformational programs to build core capabilities and equip their sales reps with technology that will offer better insights and support.
  3. Fight to survive. These companies are already facing margin pressures and may already be unprofitable. Their balance sheets are probably constrained, and they need to act immediately to be more efficient, faster at execution, and financially stable.  For distributors in this camp, possible moves to gain a strategic advantage are fewer and further between. Their first step is to do an honest assessment of the main challenges to their profit-and-loss (P&L) and balance sheets. From there, they can explore ways to improve their cash positions by managing long-term liabilities, freeing up cash, and divesting in less profitable business.

All Distributors Need to Act Now

 Economic slowdowns are inevitable, and everyone possesses a unique set of challenges for distributors. McKinsey’s research shows that there is no one-size-fits-all approach to surviving or gaining a strategic advantage.

One way to ensure a losing strategy is continuing through an economic slowdown business as usual. Nowadays, the distribution industry is highly competitive and more complex than ever. For those lucky enough to be positioned favorably, economic downturns are the time to cement their place ahead of the pack. For those with the potential to grow, economic downturns are the time to make smart investments for a future of sustainable growth. And for those facing major economic pressure, before they can think about gaining a strategic advantage, they first need to understand their shortcomings and defend their business from even worse decline.

Economic slowdowns are an opportunity to drive change, no matter your situation. If you’re ready to get in the driver’s seat and influence change for your business, White Cup is here to help.

White Cup turns distributor sales pains into profit gains. Our CRM, Business Intelligence (BI), and Pricing software make it easier for you to sell more, keep more profit, and beat the competition. With over 20 years of experience, White Cup is trusted by more than 1,000 customers globally.

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