Distribution Market Report 2009-2014

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This applications market sizing report examines the 2009 performance of the top 10 applications vendors in the distribution vertical, which continues to assume a major role in directing the flow of goods and essential supplies to warehouses and retail outlets around the world.

Despite the economic downturn, distributors have been investing in applications projects in order to create a holistic view of their far-flung operators, while strengthening relationships with their customers.

Another big driver behind their IT projects is after years of consolidation, distributors are aiming to transform their business processes through a systematic overhaul of their applications backbone.

Top Line and Bottom Line

On the top line, the distribution vertical remains the linchpin of economy activities that often go undetected. If not for the work for major and minor distributors involved in shipping and handling billions of dollars of goods every day, the entire business world could come to a screeching halt. That’s why distributors, like most living organisms, have thrived on continuous growth to sustain themselves. A good example is Ingram Micro, the technology product distributor that first reached $1 billion in revenues in 1989. By 1999 its sales had zoomed past $28 billion and the figure then zigzagged over the next 10 years cresting at $35 billion in 2007. Last year its revenues topped $29 billion. The volatility underscores the rapid changes within the vertical as well as how macroeconomic factors would propel or stall individual distributors.

Regardless of their size, these distributors have become increasingly dependent on new applications to give them an extra edge by taking advantage of any improvement in their business process in order to achieve a slight boost to their razor-thin margins.

The bottom line is that the distribution vertical is likely to go through another round of consolidation spurred by the often divergent demands for global trade and real-time inventory management. On one hand, customers and consumers want to have ready access to inventory and supplies preferably from sources at the local level. On the other hand, distributors are diversifying in order to offset softness in any part of their operations by expanding around the globe and potentially distancing themselves from some of their customers. In order to mitigate the risks in such expansion moves, distributors need to establish a common system equivalent to having a fully automated central warehouse that provides an up-to-the-minute view of their inventory.

Market Overview

The market for applications for the distribution vertical declined 4% in 2009 as the economic downturn took its toll forcing some distributors into insolvency. Vendors began to see renewed interest in their products as the market improved at the end of 2009. For instance, Activant started showing signs of growth in the first quarter of 2010, reporting a 10% rise in system revenues after a dismal 2009 when it saw a 22% drop in its system sales.

With few exceptions, most applications vendors had a lackluster year because of the recession. However, many have taken the opportunity to recast themselves in the most favorable position to address the long-term needs of their customers. Infor has created a dedicated business unit focusing on the distribution vertical since January 2010. Exact and IBS have gone through the rebranding opportunity to align their products and value proposition with the best interests of their core customers. Last year Exact invested in its brand equity reaffirming its commitment to SMB distributors, while IBS has positioned squarely as the premier vendor for the wholesale and distribution market.

The advent of Web services has also made it easier for distributors to offer real-time pricing and product availability information to their customers. Vendors have become the key enabler of the delivery of such crucial information through seamless integration and online tools.

The network effect is another key reason that distributors are joining forces with applications vendors. ArrowStream, for example, has built an electronic network of food service distributors and their customers primarily restaurant chains that share supply chain and logistics information with one another in order to reduce transportation costs, while improving their ability to secure better pricing and rebates from food producers. Already more than 4,000 manufacturers, distributors and restaurant chains have signed on as active participants of the ArrowStream network that encompasses 200 distribution centers, 8,800 shipping locations, 32,000 lanes of freight, and more than $15 billion worth of products shipped in a given year.

Implications Of The Great Recession of 2008-2009

Resiliency may well be one of the lasting legacies of the distribution vertical. While the distribution industry as a whole has not fully recovered, there are signs that some distributors have begun to regain their momentum faster than the time they endured following the Dot Com bust in the early 2000s. In the first quarter of 2010 Ingram Micro’s 20% sales growth was its strongest since 1999. Other major distributors anticipate a quick rebound in 2010 as well.

One of the reasons behind the optimism has to do with the incremental technology investments that these distributors have put into their operations, creating centers of excellence that have come to redefine how these companies can rebound once favorable economic conditions return. While the fixed costs of their operations may seem prohibitive at first, any sales growth will help easily defray such expenses thus resulting in greater profitability.

Their IT infrastructure is no different. Large and small distributors have spared no expenses in using new technologies to automate as many processes as possible in order to free up their employees to improve relationship with customers. Hence distributors were among the first users of electronic commerce when it became all the rage in the early 2000s. Some of these projects flamed out quickly and others learned from their e-commerce mistakes.

Similarly the last recession was a defining moment for those that prevailed because of their stable customer count as well as the IT decisions that they had made years earlier allowing them to plan and execute better than ever. Rather than resting on their laurels, many of these distributors pressed on with their investment plans in order to take full advantage of such technology trends from social media to mobile computing.

It is possible that the last recession will serve as a wakeup call for distributors to ratchet up their IT investment plans in order to better compete with the majors such as Ingram Micro in technology products, McKesson in healthcare and Sysco in food service. As the majors are bracing for another round of consolidation by  acquiring weaker players especially those that have been under financial strain during the last recession, the line that separates winners from losers now appears to be based on how and where do they invest in new technologies in order to give them a clear differentiation.

Customers

While few companies would contemplate following the example of Sysco, the $900 million business transformation project including a new SAP ERP implementation under way at the $37-billion food service distributor may well be the wave of the future for the vertical.

In fact more of these ambitious and transformative applications projects could be coming from the distribution vertical in the coming years because of the increasing concentration of power within segments that are beginning to converge. In addition to selling to restaurant chains, Sysco also serves hospitals, schools and hotels. And it may make strategic sense for Sysco to not just ship them food and consumer products, but also hard goods like furniture or soft goods like uniforms. Many distributors are adding product lines not just to meet their customer requirements, but also the results of proliferation of SKUs and assortments from the suppliers.

All these line extensions will mean an explosion of data, creating a greater demand for role-based information with a specific set of buyers and users in mind, something that cannot be easily reproduced or presented using an inflexible legacy system.

At a time when retailers and restaurant chains are hunting for the next big concept or new ways to differentiate themselves, the mega distributors that serve them will also need to assume a bigger burden of becoming more versatile in how they package their products and the associated information to meet the evolving needs of their customers.

Top 10 Applications Vendors In Vertical

The following table lists the 2009 shares of the top 10 applications vendors in the distribution vertical and their 2008 to 2009 applications revenues(license, maintenance and subscription) from the vertical.

Vendor2009 Share(%)2009 Applications Revenues From  Distribution($M)2008 Applications Revenues From Distribution ($M)
SAP11.8%306300
Infor8.8%229254
Sage5.6%145150
Activant4.2%110120
Oracle3.9%100110
Microsoft3.7%95100
ArrowStream1.5%4035
HighJump Software1.3%3532
Exact1.3%3336
IBS AB1.2%3030
Subtotal43.3%11231167
Other56.7%14701521
Total100.0%25932688

Vendors To Watch

In the ondemand space, NetSuite has become one of the major applications vendors that cater to the needs of the distribution vertical because of the growing adoptions of its integrated offerings for customer relationship management, eCommerce and back-office ERP solutions.

The rebound in the construction industry could give Spruce Computer Systems a lift as the vendor is remaking itself with a subscription software pricing that requires no upfront licensing fees. The flexible pricing scheme could become the standard practice in the distribution vertical as more customers are clamoring for the ease and predictability of paying a monthly subscription fee.

In selling distribution-specific applications to the automotive after-market, Autologue Computer Systems and WHI Solutions have become the shining stars as they continue to enhance their offerings in business intelligence, electronic catalogs with the help of content providers and suppliers, supply chain visibility as well as network connectivity.

Outlook

On the upside, the distribution vertical is expected to see an onslaught of consolidation both at the customer and vendor levels. As the recovery begins to manifest itself fully with capital becoming more readily, M&A activities among distributors will follow. At the same time, Infor and Sage, along with other apps vendors, are poised to pull the trigger for a large number of acquisitions and distribution has been one of their strategic verticals allowing them to become more entrenched among their target midmarket customers. That in turn could lead to share gains for these customers and vendors, giving them more leverage and perhaps a greater chance to boost their profitability.

On the downside, the distribution vertical is a game that awards those that chase volume and there is little room for participants to grow organically without resorting to mergers and acquisitions. The issue for both distributors and the vendors that cater to them is whether they can master the game of volume through increased efficiency without sacrificing quality service as well as corporate social responsibility. In fact the future of the distribution vertical could ride on who can distribute goods efficiently to the point of consumption with the least amount of environmental impact because of the extensive use of reverse logistics as well as green technology.

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Distribution Market Report 2009-2014

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