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Until recently, conventional wisdom held that wholesale distributors had little future in the Internet era. The widespread trend of disintermediation, the process of cutting out the middleman and going directly to the source of supply, seemed to put the future of wholesale distributors in jeopardy. It was a brutal business even before the Internet era: only 20 percent of all wholesale distributors managed to beat the S&P 500 over the last five years, while more than 50 percent consistently destroyed shareholder value (Exhibit 1).
Yet a few wholesale distributors have surprising success stories to tell. To understand what drove a 1,000 percent difference in returns between the best and worst distribution performer, we interviewed the managers of those firms that have consistently out performed the market. One counterintuitive insight we gained from these conversations distribution must focus on local business. Local, not national, market share drives profitability. In the interviews we also learned the ingenious tactics the most successful companies have adopted to capture higher gross margins than their competitors, and how these leading companies have reduced operating expenses. Indeed the best distributors share a three-legged strategy: focus investments to gain local market share, select their service offering carefully to pump up gross margins and slice operating expenses to the bone. The contrasting fortunes of two food distributors, Sysco and AmeriServe, illustrate what can happen when you either employ or ignore this multi-faceted strategy. Sysco successfully implemented all three legs of the strategy and generated exceptional shareholder returns, while AmeriServe exclusively pursued national market share, with disastrous results (see sidebar 1). Our model of this strategy is called the "Bain Path to Profitability Framework."
The Sysco story
In 1969, Sysco was a $116 million regional wholesale food distributor operating in a highly fragmented segment. Today, the company is the leader in its segment, with $20 billion of revenues. How has Sysco posted 18 percent annual average revenue growth in a segment with only 3 percent end market growth? It accomplished all aspects of the three-pronged strategy - it gained high local market share, reduced operating expenses and increased gross margin.
The components of Sysco's strategy, when taken individually, are not unique. However, their combination, and their tactics, drove the company's remarkable success. Sysco's tactics included...