THE WHOLESAILING PARADOX

David Merrefield

The average compound sales-growth rate of the nation's five largest wholesalers increased at the quite respectable rate of just under 8% during the five-year period of 1992 to 1996.

Yet, during that same period, the market share possessed by independent supermarkets -- traditionally the chief clients of wholesalers -- declined from 21.4% to 16.8%. Store count declined to 11,000, a drop of 1,700 or so. And, during the five-year period, the average stock-price appreciation of wholesalers' was a slim 3.3% as compared with chain retailers' 11.6% and manufacturers' 9.8%. Clearly, Wall Street doesn't attach much value to wholesalers' equity.

What's going on here, and what do these facts say about the future of conventional wholesaling? That question, and its answer, formed the substance of an excellent presentation given at last week's Food Industry Productivity convention in Philadelphia by Victor J. Orler, an Andersen Consulting partner.

The paradox of wholesalers maintaining impressive growth in the face of a declining core market is explained simply: Wholesalers have grown by moving beyond their core market. In recent years, they have been supplying outlets such as chain retailers, supercenters and other alternate formats. Moreover, and perhaps just as important, growth concentrated in the largest wholesalers because of acquisitions and market expansions.

The fact that wholesalers' growth is premised on noncore activities such as these bodes poorly for wholesaling since many of these activities can't be sustained. Here's why: Products supplied by wholesalers to chains are generally of the fill-in type and little growth will be experienced, supercenters and other alternate formats will develop their own supply capacity, and acquisition targets will vanish.

And, pointing toward additional declines in the traditional side of the business is a drop in the wholesale portion of strong independent markets such as Pittsburgh, Philadelphia, Kansas City, Houston and others. Meanwhile, the wholesale share of the nation's largest markets, such as New York and Los Angeles, is falling, as are shares in markets such as Memphis, Atlanta and Tampa, which will experience strong population growth in the future.

In the face of this inauspicious news about wholesaling, Vic proffered a two-part formula that could lead to much higher growth than the auguries allow. One involves growth through integration -- by improving overall system efficiency. The other involves growth through exploration -- by looking even further from traditional business venues.

The challenge of integration is that independent retailers and wholesalers are long-time antagonists and, while all agree on the necessity of creating a chain-like system, actually cooperating enough to do so is an "unnatural act," as Vic says. The current spate of retailer vs. wholesaler litigation only exacerbates an already doleful situation.

Perhaps more promising is the idea of expanding horizons for wholesaler growth by looking at supplying consumer-direct depots, or by the direct entrance of wholesalers into consumer-direct selling. Wholesalers can also grow by market expansion, by becoming full-service logistics providers, by becoming full-line suppliers to robust chains and so on.

At the bottom of it all, Vic's view is that wholesaling simply won't grow much by depending on the traditional design of supplying products to independents. And Vic is right.