Who is the Future “Chemazon”?
Business Models of Chemical Distributors Are Digitally Challenged
The traditional business model of chemical distributors is currently fundamentally challenged on one side by digitally enabled activities from principals, logistics providers, customers, start-ups, larger chemical distributors or combinations of smaller players, who try their own online channels, and on the other side by general e-retailers like Alibaba or Amazon, who explore to enter also into chemical & material categories. A big driver for those trends and ambitions are unmet customer needs, like the wish to be provided the opportunity to buy chemicals and materials as conveniently as buying books or other goods from Amazon. But who will be the future “Chemazon”? And what will be the impact on chemical distributors?
Principals experiment with new e-channels that could ultimately reduce the share of business with chemical distributors. But at the same time, they are limited by their own product portfolio and do not have the breadth and depth of product applications beyond their offerings. At the same time, they are using Alibaba, AmazonBusiness or other online retailers or one of the many new e-market platforms, to grow their business and to reach more customers. This is especially true in China where those partnerships drive a lot of the overall business growth. It will be seen if principals are able to maintain the customer contact and intimacy over the long run or if the new e-retailers will simply take, learn and optimize the customer relationship and make the principal more and more exchangeable and dependent, as we have seen in other categories outside chemicals and materials.
In addition, many start-ups are trying to establish online marketplaces. Will they have the same fate as ChemConnect, CheMatch, Fob.com and others 20 years ago? When going beyond searchable catalogues into trading, auctioning, negotiating and thus pricing, the principals woke up and created their own trading formats, like Elemica, Envera and Omnexus, which have been more resilient. What´s different now? Will the higher global interconnectivity and new suppliers allow the current start-ups to become successful and reliable market platforms this time? Are they able to enter into specialized segments, or will those that survive function as limited online agents and traders for standard, bulk chemicals, especially for spot volumes?
And will logistics providers be able to expand their business model beyond transport, logistics and storage into distribution? Or will chemical distributors and/or principals continue to use them as physical supply chain partners?
Standard Chemicals & Materials Are at a Higher Substitution Risk
Standard chemicals & materials distribution is more at risk to be substituted by principals, logistics providers, customers, new start-ups and general e-retailers like Alibaba and Amazon. Principals create their own offerings, as the example of DowDuPont with standard silicones sold under the Xiameter and specialized silicones under the Dow Corning brand names show. Furthermore, principals team up with Amazon or Alibaba, like BASF and Henkel in China.
Logistics providers fulfill local distribution services for bulk liquids, like acids, lyes and solvents, but also fillers, fertilizers and other solids. New start-ups “uber” themselves as aggregator platforms, between principals and/or distributors and customers. This is not only limited to large-volume bulk chemicals and materials. The term “standard” applies also to millions of low-volume fine chemicals, which are “standard” in terms of chemical structure (CAS-#), purity (technical, chemical, polymer, FDA/cGMP grade, etc.) and often delivery form and packaging. Providing supplier transparency, providing technical data and recommendations, sampling, ordering and re-ordering can be designed as standard processes and automated. Companies like Molbase in China show a very successful approach to this target segment.
With specialized offerings the substitution risk of chemical distributors is much lower. Specialized does not only mean “physically specialized” products, applications, formulations, blends, delivery forms, sampling, packaging as well as proprietary and exclusive principal relationships. Specialized offerings also means customer specific deliveries, order and inventory management, financing, regulatory, technical, commercial or other relevant services.
However, it would be too easy to believe that specialized chemical distributors can relax and continue their business model “as is”. On the one hand commoditization towards standards is faster and stronger than innovation. Thus, more and more product-market segments are commoditizing, asking for quicker, faster and especially cheaper logistics and sales functions. That´s why we believe that the indirect sales share via chemical distributors will continue to grow over-proportionately, also and especially in a digital world. On the other hand, customers are increasingly asking for online information, track-and-trace and other online services to provide more transparency, service and convenience.
Working on customer centricity and better fulfillment of customers´ obvious or hidden needs should be a primary task for all chemical distributors, irrespective of the standard or specialized offerings.
Protecting principal and customer data is another important aspect that should not be overlooked. However, this is necessary, but not sufficient to succeed in a Chemistry 4.0 environment.
Chemical Distribution 4.0 - New Collaborative Partnership Models
Chemical Distribution 4.0 is a new, collaborative partnership model that bundles the specific strengths and skills of principals and chemical distributors. When principals and chemical distributors bundle their complementary skills they can match customer expectations better than they could by themselves.
In standard chemicals & materials chemical distributors can offer state-of-the art local transportation, storage, logistics services, often in a more cost efficient and convenient manner than principals, by bundling and using economies of scale and scope.
In specialized chemicals & materials chemical distributors can bundle multiple products from different principals and tailor the range for customer specific applications. They can provide the sample management, application technology, technical and other services often more efficiently than principals, especially those with a limited, narrow product portfolio.
That´s not really new, is it? That´s the prime reason why chemical distributors are used by principals in general, and more in specialized than in standard chemicals & materials. The new, collaborative partnership is about joint web-shops, online services, collaborative planning and reporting, open book policy and supply chain and/or marketing & sales partnerships, rather than the principals treating chemical distributors as re-sellers to reach indirect customers and the chemical distributors treating the principals as more or less exclusive suppliers.
In North America chemical distributors have traditionally had a more collaborative role than in Western Europe and the comparison of the two regions shows that the indirect Chemical Distribution market share and profitability are higher in North America than in Western Europe. There might be other factors leading to this more attractive market structure, but we strongly believe that a collaborative approach pays off for principals and chemical distributors.
The purpose to prevent a third party to “uber” into the customer relationship and to improve customer centricity is shared in the partnership. Roles and responsibilities of the partners are well defined. The chemical distributors act as a protective partner, outsourced supply chain and/or marketing & sales function towards their principals in the selected markets. Principals provide attractive and innovative products and selected services. Costs and risks for digital, circular or other offerings and services as well as the benefits and expected additional growth opportunities are shared. Planning, investing, budgeting and reporting – except for product prices – is done in a collaborative way. It´s a local-regional win-win partnership model. Isn´t it worth to explore, if this traditional partnership model can be transferred into the digital age?