Lionel Aillerie, Group Head of M&A at Rubix, explains how ESG is accelerating the consolidation of European industrial distribution.

European industrial distribution is a highly fragmented market worth c.€90bn. The top five players have eight percent of it, while Rubix – the market-leader – is twice the size of the nearest competitor.

The vast majority of players are family or founder-run local businesses, with long-standing customer relationships, a commitment to delivering great service and an established reputation within specific product categories or sub-categories.

By their nature, the one thing they can’t offer is scale. And industrial distribution is an industry where scale really matters.

Manufacturing businesses from large multinationals through to SMEs and start-ups rely on the range, availability and value that only scale distributors can offer.

As those businesses, particularly larger and often-listed manufacturers, increase their focus on environmental, social and governance topics, they are rightly focusing on their supply chains. Here, scale matters too.

All suppliers, including those required for the maintenance, repair and overhaul (MRO) of factories and plants – such as Rubix – are now expected to report on a range of topics including carbon emitted in delivering products and services.

Beyond reporting, industrial distribution businesses are also expected to provide products and services that support manufacturing businesses in their ambitions to improve vital ESG metrics.

As an example, we offer air leakage surveys to help manufacturers address the costly and often overlooked issue of compressed air waste. By combining expert engineering with advanced ultrasonic technology, we can identify and quantify leaks, which can account for up to 30 percent of compressed air loss in a typical manufacturing plant.

Such inefficiency drives up energy costs and reduces operational performance.

It’s a very general principle, but as the size of manufacturing businesses increase, so do the ESG-related expectations.

We track a pipeline of more than 700 potential merger and acquisition (M&A) targets. Through recent conversations, we see that the ESG requirements from manufacturing customers can be prohibitive to the longer term commercial success of distribution businesses with more than roughly €20m to €25m of annual sales

Under that, the relationship with larger manufacturing customers is generally light enough that they aren’t subject to the ESG requirements, or their customer book simply doesn’t include businesses that are making those demands.

Above that, industrial distributors are increasingly being asked ESG-related questions that they can’t answer now, and that require significant investment for them to be able to respond.

That’s because they will have relationships with larger manufacturing businesses that have reporting requirements and the expectation to be supported by their suppliers on ESG performance. They will be on the radar of their ESG and procurement teams managing supplier relationships.

There will of course be a number of motivators for any business owner to consider a sale, but right now ESG is an increasing factor in the decision-making process.

If those individuals want their businesses to continue serving their customers and the ESG-related investment is just too big, or the gap simply too great to catch up, joining Rubix – the market leader – makes a lot of sense.

Having just secured our third EcoVadis gold rating in three years, with a score that places us in the top three percent of companies in our industry, our customers can see both our commitment to improving our own business and our dedication to supporting theirs.

Now consider that we are one of a few major privately-owned industrial distribution businesses to participate in CDP, and you start to see how our own ESG track record is further entrenching our position as the industry consolidator of choice.

The ever-increasing focus on ESG is both essential and worth celebrating. Improving standards in these areas is imperative for the long-term prosperity of European manufacturing as end consumers in every market continue to increase their demands.

Where quality businesses are unable to meet the ESG-related needs of their customers or where the path to catching-up is too long and winding, joining an established player with a great track record makes a lot of sense.

For those businesses considering a sale, get in touch with Rubix by visiting www.rubix.com.