Perspectives

Case Study

Growth and the Two-Step Distribution Strategy

Industry & Client situation

Leader in high-end consumer durable goods market, owned by a private equity firm, needed to prioritize initiatives to hit “double-digit top-line and bottom-line growth”. The company was particularly focused on addressing:

  • Distribution: Client used two-step distribution while much of the industry volume had switched to direct-to-retail. In addition, several high-end competitors had been acquired by broad-line companies taking the acquired product lines direct and, as a result, further weakening the two-step distribution network that specialists like our client rely on.
  • Product Offering: A key competitor had markedly improved its customer value proposition by lowering prices at the high-end while off-shore competitors were entering from the low-end.
  • Underlying Demand: Recent run-up in the real estate markets had fueled significant growth. It was unclear what impact a market correction would have.

Given these trends, appropriate expectations needed to be set about continued market expansion, and prioritized plans needed to generate growth from several areas: distribution realignment, new product introductions, and geographic expansion.

approach

Bridge adopted a holistic approach to address key strategic questions:

  • Analyzed industry analogs, which revealed that two-step distribution usually survives the course of evolution in most industries. Consolidation of the supplier or the customer base creates pressure to drive the business model away from two-step distribution. Nonetheless, Distributors that thrive find ways to represent the right product lines and expand into related value-added service areas. These findings provided a basis for evaluating and managing the client’s distribution partners.
  • Assessed low-end product cost and resulting margin that could be achieved through design changes, sourcing, and other manufacturing cost reductions.
  • Profiled competitors and developed a number of scenarios to assess the likelihood and size of threats along with potential counter strategies.
  • Assessed geographic expansion as a high-impact growth initiative, but also as a significant organizational undertaking. Securing reliable distribution and customizing products to country-specific needs were challenging issues for the client to address as part of an international market entry strategy. 
  • Quantified the expected top and bottom-line growth from product upgrades, mix changes, share gains, and geographic expansion over time—testing the sensitivity to underlying market demand.

results

Identified distributors who warranted monitoring and developed market-specific contingency plans to address possible financial collapse of distributors and, in some cases, proactively change-out the distribution partner.

Concluded a low-end offering should be a defensive rather than an offensive strategy.

Prioritized the growth initiatives required to meet the targets with a realistic sense of risk and appropriate level of resources required to execute the plan.