Customer immersion has become a buzzword in the marketing world, but does it have a place in distribution? One advisor says it can be particularly useful for developing innovative products and services for distribution.

Innovation can mean many different things to different people, but to wholesale distribution consultant Brent Grover of merger and acquisition advisory firm Brent Grover & Co. it means developing breakthrough products and understanding customer pain points.

“An innovation blocker to me is when a distributor leaves it to their suppliers to try and understand their customer’s needs and develop products,” Grover told Tom Gale the latest MDM’s Podcast episode. “And I know most distributors don’t make anything …  I’m suggesting that you could go to a supplier or maybe your current supplier … and say, ‘I found a pain point with the customer and I don’t see it being available on the market. This is what it is, would you make it for me?’ Why is that not something companies would consider?” 

Grover is a serial entrepreneur that started as an owner and CEO of his family paper and packaging distribution company in Cleveland until he sold it in 2001. For more than 20 years he has been a consultant to distribution executives and leadership teams. 

He says to start understanding, and meeting, a customer’s needs distributors need continuous engagement and customer collaboration, which isn’t as common as some would think. Field observation is often left up to the sales force, while new product development should really be the “responsibility of everybody, including the salespeople, but it’s not exempting the leadership of the company.”

To truly immerse with decision-making customers, Grovers says one company’s leadership team, along with its salespeople, attends industry shows and conferences where customers are present and have time to spend time.

Case Study: A Very Different Business Model 

To look for and address the pain points in customers and then find partners to build it out, is a new model of distribution that can be hard to achieve. Grover gives an example of a distribution business that is able to achieve this cultural shift. It’s one founded by a 31-year-old Millennial and managed by a team of Gen Z employees. 

Businesses often hire people who are smart, have good values, and are hardworking. But one important quality for innovation that can be overlooked, Grover says, is enthusiasm.

“The company I’m talking about would not hire a prospective employee who is not enthusiastic about their job, about the industry, about the company’s mission and what they’re trying to do for their customers,” Grover explains. “If the enthusiasm isn’t there, they’re not going to get past the first interview. So that’s a how-you-hire question. It’s also how they lead.”

This enthusiasm leads to a company that doesn’t “see boundaries,” Grover said. It’s led the company to open international offices, stock products in Europe, and sell products on its website in euros as well as dollars. 

“They don’t see the international boundaries,” Grover said. “They don’t see the state line. They don’t see the things that hold so many distributors back: narrow thinking. So I’m very excited about that company and how they’re doing it. And I think there’s a lot there for people like me and my cohorts to learn. And also to understand that we can’t do it ourselves.”

Grover points to several practices the team applies to be successful, including: 

• Employing an Entrepreneurial Operating System method in which top leaders meet weekly to go through individual KPIs and discuss anything that is “in the red” compared to expectations. Through this discussion, leaders are able to identify issues, brainstorm the problem and devise a path toward a solution.
• Publishing an employee newsletter, sent by the marketing director, that explains what’s going on in the industry and how it relates to the company.
• Offering direct communication from the CEO about what the company is doing.
• Training employees on 300 glossary words of terminology and jargon their customers and suppliers know and use.

Grover has been a generous contributor to MDM in many ways for more than two decades, including as an author of The Little Black Book of Strategic Planning for Distributors, which is available in MDM’s online store.

In his work, Grover focuses on mergers and acquisitions advisory to help distributors sell their companies.

What to Know About M&A Activity 

In February, there was a consensus that debt markets had slowed activity off from a previous record-year pace, and during MDM’s 2023 Virtual M&A Summit, Grover said valuations were lower based on market compared to those conditions. 

As the end of the second quarter approaches, Grover says not much has changed.

Multiples of EBITA as a proxy for cash flow are lower.

“There are fewer buyers, and at least half are strategic buyers … When I talk about strategic buyers, I’m talking about companies that have a lot of cash, whether they’re a private equity company or not, and they’re able to borrow a little and make an acquisition maybe entirely in cash out of their out of their own resources.” 

Now, they have “a great deal less leverage” because the lenders will not lend them as high of a multiple on the earnings of the company they’re buying, he said. 

“It’s hard to make it work if you’re paying a high multiple of earnings for your target company, but you can’t borrow a high multiple of earnings,” he said. “So I think we’re stalled a little bit. We still are.”

Grover referenced MDM’s quarterly report, which summarizes recent wholesale distribution transactions, saying he’s noticed a pattern with the same buyers again and again.

“What’s going on there is some buyers are out there with deep pockets, and they have a desire, an urge, to expand —  usually geographically — by acquiring more companies,” he said. “In the janitorial supplies industry or in the packaging supplies industry, there’s been a sort of a feeding frenzy with three or four buyers really out there and competing for the same companies that they want to buy. And of course, that pushed multiples up.”

He added: “I’m glad to say I represented a number of companies in sales in the last two or three years who really benefited from that. But you know, not to be a Debbie Downer, but if somebody called me today, you’d have to face the reality. It’s not as easy to move the merchandise at premium prices right now.”

Listen to the full podcast episode via the audio player above, and check out our full library of MDM Podcasts here.