This is the third in a series of articles that analyzed why the packaging distribution industry is an attractive choice for M&A exploration. This article discusses how distributors can utilize digital tools to drive customer acquisition and strengthen customer stickiness.
Packaging distributors are generally underinvested in their digital offerings, with <10% of distributors offering a distinct ecommerce service. Investing in digital capabilities is a low-cost way to add differentiation to a distribution business, with typically a faster ROI than hard assets such as new warehouses and equipment. Buyers have an opportunity to drive added value in their packaging distribution platforms by targeting assets with existing digital capabilities and performance or investing in digital solutions that enhance the customer experience, grow share of wallet and improve efficiency and operations. Understanding an asset’s underlying digital capabilities informs the value creation opportunities across a suite of digital tools to drive cost savings and strengthen customer relationships, and L.E.K. Consulting has the tools to help investors identify companies with value-add digital capabilities in the packaging distribution space.
Digital scorecard capability assessment
Digital scorecarding is a valuable initial step for packaging distributors to take to identify the current set of digital solutions and assets and how best to position them for value creation. Further, an important aspect of assessing digital priorities is benchmarking existing capabilities relative to other market participants. Tools such as L.E.K.’s IDEA Survey and Digital Customer Lifecycle Assessment can provide packaging distributors with a personalized scorecard that benchmarks digital capabilities relative to other companies in similar positions in the value chain.
Many packaging distributors are in the early stages of their digital journey, which makes setting objectives and priorities all the more important. An effective digital scorecarding exercise can identify strategic gaps that can limit a distributor’s ability to effectively serve existing accounts or to be sought out by potential new customers. Combining an internal assessment relative to competitors and market leaders can highlight areas of over/underperformance to develop a digital roadmap that aligns to strategic priorities. For example, when developing a roll-up of multiple distributors, it is critical to take inventory of the digital assets and solutions each utilizes and map those against both industry and organizational goals to ensure that the new platform is positioned to meet future business needs.
Potential buyers can conduct digital scorecarding exercises across user engagement, brand management, user experience and digital performance metrics to gain a clear, data-driven understanding of the target’s competitive positioning, identify and quantify areas of improvement, and design strategic initiatives to optimize the target’s performance. Further digital scorecarding can assess the potential a given company has for differentiation and/or to signal areas in which to invest in order to achieve it.
Digital tools to augment existing operations
As digital scorecarding highlights potential areas of investment, packaging distributors can look to build a portfolio of digital tools and capabilities that strengthen existing operations. Digital investment can take several forms (e.g., inventory management/logistics, customer engagement and acquisition, self-service portal, ecommerce platform). Successful digital investment requires alignment to strategic priorities. For example, a primary packaging distributor may look to invest in an ecommerce platform in order to better serve the micro-customer segment whose order values do not necessitate a dedicated sales rep and/or to enable existing customers to be more efficient by offering self-service for product reorders or recommended products through digital commerce.
Investing in digital capabilities ultimately drives business results. Advanced systems related to inventory optimization, logistics management and improved customer applications provide packaging distributors a cost efficiency edge that can enable more competitive pricing or elevated margin. Digital tools and strategies can drive customer acquisition through increased demand generation and customer conversion at a fraction of the cost relative to traditional customer acquisition methods. A dedicated ecommerce platform can facilitate easier customer ordering, which reduces the cost to serve and can appeal to a younger cohort of decision makers who prefer to purchase online. While each digital tool offers potential benefits, phasing investment and prioritization can enable the effective integration into a distributor’s existing business practices.
Customer relationship management (CRM) platforms unlock distributor value
Digital’s biggest impact is the ability to scale enhanced customer engagement consistently and efficiently. Understanding customers is core to scaling effectively and begins with CRM solutions. However, CRM adoption among packaging distributors is limited, which leaves companies unable to capture the full benefit of existing and future salesforce engagement. Rather than replace the need for traditional sales calls and customer engagement, CRM platforms provide distributor sales teams opportunities for increased efficiency and elevated customer service. By investing in CRM platforms, distributors free up their salesforce to focus on high-value tasks without increased hiring. For example, a packaging distribution rep focused on healthcare applications could spend more time understanding unique cold chain packaging requirements and multi-component solution design (e.g., temperature stability requirements, shipping journey/weather constraints, etc.), while leveraging CRM capabilities to manage time-consuming administrative and activity types. CRM solutions provide distributors with increased visibility to the sales process, establish sales team effectiveness metrics through data analysis and recommendations, and identify process redundancy and errors.
Many CRM solutions can be implemented relatively quickly, meaning a potential buyer can both reduce costs and drive new revenue following an acquisition, yielding a more attractive go-forward asset. CRM tools can be used to assess customer purchasing habits to better identify when a customer is likely to purchase as well as drive larger order sizes through product recommendations based on historical behavior. Further, CRM platforms provide process automation and efficiency in customer engagement throughout the sales cycle, which can reduce operating costs.
M&A implications
As discussed in the first article of this series, the fragmented nature of the packaging distribution landscape is attractive and presents numerous opportunities to drive value. Buyers interested in the packaging distribution market can prioritize targets that are ahead of the curve in terms of digital capabilities, which can accelerate new customer acquisition, existing customer performance, and operating efficiency/cost savings. If digital capabilities are limited, consolidators can look to invest in assets that can provide foundational digital solutions for the broader distribution platform. Companies that are at the forefront of digital outperform their peers (see Figures 1 and 2 below), further emphasizing the need to incorporate a digital plan as part of an acquisition strategy.
L.E.K.’s Digital practice is optimally suited to help potential buyers as well as existing packaging distributors improve their digital strategy through our set of proprietary tools, extensive experience serving the industry and end-to-end implementation capabilities. We have also developed a proprietary tool that helps quickly identify a long list of potential acquisition targets based on a thorough selection of metrics, including specific products and industries. Please contact us at industrials@lek.com for more information.
Up Next in Article 4: A look at how buyers can utilize a roll-up strategy, given the fragmentation in the market and potential for incremental value from consolidation.
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