©2007 DistriConsult. All rights reserved.
During our earlier studies of Economics, we learnt complex words which we never used during our business life, like Oligopsony and Monopsony. By contrast, we are familiar with other words like monopoly and oligopoly. Oligopsony and monopsony look like foreign expressions, as they are seldom used in English, although they characterize well the channel consolidation trend which is taking place in several B2B or B2C sectors.
1. Definitions
Let me extract the definitions of these hardly used words from the following web site: http://www.oligopolywatch.com/2003/04/09.html
Quote
"An oligopsony happens when there are only a few buyers in the market. An oligopoly occurs when there are only a few sellers in the market. As oligopolies grow, so do oligopsonies. We’ve already mentioned a major oligopsony, the limited number of national book chains. Basically, the success or failure of any book depends on how it does at Borders, Barnes & Noble, and Amazon. Other bookstores hardly matter. Needless to say, this puts those companies (that "buy books") in a very strong bargaining position in relation to book publishers. Those three (along with Wal-Mart) can dictate terms and determine rates.
The potato market works similarly. The biggest buyer of potatoes in the world (through middlemen) is McDonalds, followed by Burger King and Wendy’s. There are other buyers of course, but these three determine the overall demand, the type of potato wanted, the price they’ll be willing to pay, and the time of delivery. The rest of the market is, by comparison, small potatoes.
Similarly all food manufacturers are increasingly being bossed around by an “oligopsony” of supermarkets. Whatever Wal-Mart, Kroger, Safeway and a few others demand, you’d better supply, whether it is fees, onsite help, co-op advertising. This set of expectations shows up the weakness of small producers, who don’t have the resources to meet these requirements, or to go toe-to-toe with the biggest chains.
The best way to counter a “channel” oligopsony is with a supplier oligopoly. Proctor and Gamble or Unilever can, to some extent, stand up against Wal-Mart or Walgreen’s. Smaller companies haven’t a chance. And by the same token, oligopsonies are formed to fight the power of oligopolies. Safeway can interact as a peer with Nestle or Kraft, while the local grocery chains cannot"
Unquote
Let’s go back to the chemical distribution market, which is our main focus:
Quote
ICIS news 14.03.07 Comments on the acquisition of Chemcentral by Univar.
At first glance, the winnowing of players among global distribution companies might be welcomed by many on the production and supply side of the chemicals industry, according to Chris Jahn, newly appointed president of the US National Association of Chemical Distributors (NACD). “Perhaps many on the production side would welcome this,” Jahn said of the Univar-Chemcentral deal. “Producers typically want to work with a fewer number of distributors because it rationalizes their distribution and logistics operations,” he said. However, he said, at some point the dwindling number of major players in distribution could become a competition and cost problem for chemical manufacturers and suppliers.
Unquote
2. “Oligopsony” and chemical distribution
Therefore we ask ourselves the question whether we are witnessing today the formation of oligopsony or monopsony on some chemical distribution markets?
We have around 6000 distributors around the world, including the subsidiaries of the same transnational owners. The site www.chemagility.com gives a good, although incomplete, overview of their number and their presence on the main world markets and we also have around 100.000 chemical or polymer producers who are registered as members of the various chemical industry associations around the world.
We may thus say that we have far more chemical producers than there are distributors and traders in Europe and North America. Chemical and polymer distributors can be classified into five categories, namely industrial or Bulk chemicals distributors, factory packed or specialty chemical distributors, fine chemical distributors, base, engineering and technical polymers distributors. To understand the distributor markets, it is important to analyze these specific segments and within each segment to look at the geographical localization of the commodity players and the industry sectors served by the specialty distributors.
The main drivers for the on-going consolidation trend in chemical and polymer distribution are listed below:
3. Producers’ myopia
Some larger producers played in the past a direct role in Europe and in North America in reducing channel fragmentation and in sponsoring the emergence of national or European distributors like Univar, Ashland, Chemcentral or Brenntag in North America and Brenntag, Univar, Azelis and IMCD in Europe. In some instances, some producers helped their partners to identify possible M&A targets and occasionally gave them commercial support to ensure a successful and friendly take over of the companies for sale. Some producers feel that they need to maintain the control over their channel equity and do not want to see their strategic distributors fall into opportunistic, unknown or even hostile hands.
The main paradox is that producers who prefer selling more to fewer and bigger channels may find themselves in front of “oligospony” which will independently control both the end user markets and their suppliers’ selling options. Channels have a life of their own; they are like teenagers whom their genitors help to grow up and who sooner or later become fully independent from their earlier sponsors.
4. Bulk chemicals “oligopsony”
The situation is easy to understand for bulk chemicals where the number of active bulk distributors in each European country is now rarely more than ten and in most cases even below five, including some one site companies. In addition, the larger transnational bulk players hold a significant market share in most countries, with the exception of Spain and Germany where alongside Brenntag, the German company Penta and the Pentists have so far managed to survive the consolidation trends.
To better understand this specific market reality, one can measure a bulk chemical distributor market position by counting their number of sites, number/size of tanks and stock rotation, while the volume shipped in direct deliveries in bulk or in drums is separated from the warehouse business.
Brenntag has 110 sites in North America and 150 sites in Europe. It is undisputedly the number one European bulk distributor with modern sites in all European countries from Brest to Bucharest and from Oslo to Istanbul. Consequently, if a bulk chemicals manufacturer wants to serve numerous small and medium size bulk chemical customers, he has no option than to deal with Brenntag and get a share of their multi-million tons bulk volumes.
It is easier to analyze the bargaining power of an oligopsony, than the role of an oligopoly. An oligopsony selects its suppliers, influences their channel strategies policies and options, their pricing policies and tries to widen its product portfolio with more products from their suppliers.
Global or European distributors are able to attract suppliers who seek to obtain wider market coverage at the expense of national or regional players, as it was the case ten years ago when national champions were emerging in each country, at the expense of regional and niche players, before being often bought up.
Industry leaders like Dow, BASF, Exxon, Ineos or Celanese are in a better position to counteract the oligopsony strategies than their smaller competitors, exactly like Procter and Gamble or Nestle do it when they face Rewe, Ahold, Wal Mart or Carrefour.
5. Consolidation attracts investors
Investors are fond of consolidation trends as they are able to quickly increase the value of the companies they acquire by growing their revenues and EBIDTA through acquisitions rather than wait to benefit from slower to come organic growth, as we witnessed it recently for Brenntag, IMCD or Azelis. In addition, a less fragmented and simpler to understand competitive environment, in which the company they own is in an oligopsony position can facilitate a prompter and more profitable exit.
The chemical distribution market looks apparently fragmented and is served by a myriad of channels, however there are few distributors who are in a strong and consolidated position on the markets they serve. These few attractive companies are getting top offers based on historically high multipliers, like the Brenntag unsolicited bid for Chemcentral shows it. The price of acquiring distributors is going upward, as the number of good distributors available for sale is declining.
After having witnessed the almost complete consolidation of the bulk chemicals distribution market, we are now witnessing the on going consolidation of the specialty chemicals markets where the larger acquirers seek to cover their geographical and industry white spots by buying well run specialty distributors.. This is well illustrated by the number of niche players which are taken over by the larger acquisitive specialty distributors.
Conclusion
Producers who do not have yet a clear channel strategy in place will have to deal with oligospony or avoid them completely by selling to independent distributors or serving the smaller customers themselves incurring higher costs to supply them. They need to evaluate their market position and assess objectively their best channel options, in the light of these shifting market trends and the decreasing number of independent channels.
As time goes by, oligopsony is becoming a market reality to which we have to adapt ourselves in the chemical industry, just as we have done it already as customers or suppliers of other B2B or B2C markets.
Nota: This article, like the previous newsletters, is the result of the consulting work done by DistriConsult for producers, distributors and investors.
1. Definitions
Let me extract the definitions of these hardly used words from the following web site: http://www.oligopolywatch.com/2003/04/09.html
Quote
"An oligopsony happens when there are only a few buyers in the market. An oligopoly occurs when there are only a few sellers in the market. As oligopolies grow, so do oligopsonies. We’ve already mentioned a major oligopsony, the limited number of national book chains. Basically, the success or failure of any book depends on how it does at Borders, Barnes & Noble, and Amazon. Other bookstores hardly matter. Needless to say, this puts those companies (that "buy books") in a very strong bargaining position in relation to book publishers. Those three (along with Wal-Mart) can dictate terms and determine rates.
The potato market works similarly. The biggest buyer of potatoes in the world (through middlemen) is McDonalds, followed by Burger King and Wendy’s. There are other buyers of course, but these three determine the overall demand, the type of potato wanted, the price they’ll be willing to pay, and the time of delivery. The rest of the market is, by comparison, small potatoes.
Similarly all food manufacturers are increasingly being bossed around by an “oligopsony” of supermarkets. Whatever Wal-Mart, Kroger, Safeway and a few others demand, you’d better supply, whether it is fees, onsite help, co-op advertising. This set of expectations shows up the weakness of small producers, who don’t have the resources to meet these requirements, or to go toe-to-toe with the biggest chains.
The best way to counter a “channel” oligopsony is with a supplier oligopoly. Proctor and Gamble or Unilever can, to some extent, stand up against Wal-Mart or Walgreen’s. Smaller companies haven’t a chance. And by the same token, oligopsonies are formed to fight the power of oligopolies. Safeway can interact as a peer with Nestle or Kraft, while the local grocery chains cannot"
Unquote
Let’s go back to the chemical distribution market, which is our main focus:
Quote
ICIS news 14.03.07 Comments on the acquisition of Chemcentral by Univar.
At first glance, the winnowing of players among global distribution companies might be welcomed by many on the production and supply side of the chemicals industry, according to Chris Jahn, newly appointed president of the US National Association of Chemical Distributors (NACD). “Perhaps many on the production side would welcome this,” Jahn said of the Univar-Chemcentral deal. “Producers typically want to work with a fewer number of distributors because it rationalizes their distribution and logistics operations,” he said. However, he said, at some point the dwindling number of major players in distribution could become a competition and cost problem for chemical manufacturers and suppliers.
Unquote
2. “Oligopsony” and chemical distribution
Therefore we ask ourselves the question whether we are witnessing today the formation of oligopsony or monopsony on some chemical distribution markets?
We have around 6000 distributors around the world, including the subsidiaries of the same transnational owners. The site www.chemagility.com gives a good, although incomplete, overview of their number and their presence on the main world markets and we also have around 100.000 chemical or polymer producers who are registered as members of the various chemical industry associations around the world.
We may thus say that we have far more chemical producers than there are distributors and traders in Europe and North America. Chemical and polymer distributors can be classified into five categories, namely industrial or Bulk chemicals distributors, factory packed or specialty chemical distributors, fine chemical distributors, base, engineering and technical polymers distributors. To understand the distributor markets, it is important to analyze these specific segments and within each segment to look at the geographical localization of the commodity players and the industry sectors served by the specialty distributors.
The main drivers for the on-going consolidation trend in chemical and polymer distribution are listed below:
- Increasing costs to stay in business due to more complex health, safety and environmental legislation
- Unsolved succession issues in privately owned companies
- Customers’ increasing requirements for expertise, product portfolio and services
- Larger producers’ growing support to companies offering them wider geographical coverage, sufficient people resources and cost optimization opportunities
- Channel internationalization and the need for critical mass stimulate the growth of bigger distributors at the expense of smaller ones.
3. Producers’ myopia
Some larger producers played in the past a direct role in Europe and in North America in reducing channel fragmentation and in sponsoring the emergence of national or European distributors like Univar, Ashland, Chemcentral or Brenntag in North America and Brenntag, Univar, Azelis and IMCD in Europe. In some instances, some producers helped their partners to identify possible M&A targets and occasionally gave them commercial support to ensure a successful and friendly take over of the companies for sale. Some producers feel that they need to maintain the control over their channel equity and do not want to see their strategic distributors fall into opportunistic, unknown or even hostile hands.
The main paradox is that producers who prefer selling more to fewer and bigger channels may find themselves in front of “oligospony” which will independently control both the end user markets and their suppliers’ selling options. Channels have a life of their own; they are like teenagers whom their genitors help to grow up and who sooner or later become fully independent from their earlier sponsors.
4. Bulk chemicals “oligopsony”
The situation is easy to understand for bulk chemicals where the number of active bulk distributors in each European country is now rarely more than ten and in most cases even below five, including some one site companies. In addition, the larger transnational bulk players hold a significant market share in most countries, with the exception of Spain and Germany where alongside Brenntag, the German company Penta and the Pentists have so far managed to survive the consolidation trends.
To better understand this specific market reality, one can measure a bulk chemical distributor market position by counting their number of sites, number/size of tanks and stock rotation, while the volume shipped in direct deliveries in bulk or in drums is separated from the warehouse business.
Brenntag has 110 sites in North America and 150 sites in Europe. It is undisputedly the number one European bulk distributor with modern sites in all European countries from Brest to Bucharest and from Oslo to Istanbul. Consequently, if a bulk chemicals manufacturer wants to serve numerous small and medium size bulk chemical customers, he has no option than to deal with Brenntag and get a share of their multi-million tons bulk volumes.
It is easier to analyze the bargaining power of an oligopsony, than the role of an oligopoly. An oligopsony selects its suppliers, influences their channel strategies policies and options, their pricing policies and tries to widen its product portfolio with more products from their suppliers.
Global or European distributors are able to attract suppliers who seek to obtain wider market coverage at the expense of national or regional players, as it was the case ten years ago when national champions were emerging in each country, at the expense of regional and niche players, before being often bought up.
Industry leaders like Dow, BASF, Exxon, Ineos or Celanese are in a better position to counteract the oligopsony strategies than their smaller competitors, exactly like Procter and Gamble or Nestle do it when they face Rewe, Ahold, Wal Mart or Carrefour.
5. Consolidation attracts investors
Investors are fond of consolidation trends as they are able to quickly increase the value of the companies they acquire by growing their revenues and EBIDTA through acquisitions rather than wait to benefit from slower to come organic growth, as we witnessed it recently for Brenntag, IMCD or Azelis. In addition, a less fragmented and simpler to understand competitive environment, in which the company they own is in an oligopsony position can facilitate a prompter and more profitable exit.
The chemical distribution market looks apparently fragmented and is served by a myriad of channels, however there are few distributors who are in a strong and consolidated position on the markets they serve. These few attractive companies are getting top offers based on historically high multipliers, like the Brenntag unsolicited bid for Chemcentral shows it. The price of acquiring distributors is going upward, as the number of good distributors available for sale is declining.
After having witnessed the almost complete consolidation of the bulk chemicals distribution market, we are now witnessing the on going consolidation of the specialty chemicals markets where the larger acquirers seek to cover their geographical and industry white spots by buying well run specialty distributors.. This is well illustrated by the number of niche players which are taken over by the larger acquisitive specialty distributors.
Conclusion
Producers who do not have yet a clear channel strategy in place will have to deal with oligospony or avoid them completely by selling to independent distributors or serving the smaller customers themselves incurring higher costs to supply them. They need to evaluate their market position and assess objectively their best channel options, in the light of these shifting market trends and the decreasing number of independent channels.
As time goes by, oligopsony is becoming a market reality to which we have to adapt ourselves in the chemical industry, just as we have done it already as customers or suppliers of other B2B or B2C markets.
Table 1
Table 2
Table 2
Nota: This article, like the previous newsletters, is the result of the consulting work done by DistriConsult for producers, distributors and investors.