BusinessWeek: January 11, 1993

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After tasting lean fare in 1992, when it had to cut prices to hold on to its grocery-store customers, Afood distributor Fleming Cos. should do better in 1993. Its $13 billion in sales may increase 4% this year, vs. no growth in 11/22, analysts say. Yet the Oklahoma City titan is reacting differently to this recovery than it has to past upturns: To ensure growth in good times and bad, it has decided to expand abroad. To build ties overseas, it is licensing distribution system software to Japanese and Korean distributors. And in early December, with a Mexican partner, it opened the first of 50 planned supermarkets south of the border. "In foreign countries, some opportunities are greater than in the U. S., where most major cities are overstored," says Fleming Senior Vice-President Robert G. Dolan Jr.

Four lackluster years in a row, punctuated by consolidation and a bank-credit crunch, have persuaded many of the the nation's 300,000 wholesalers that their business has changed forever. Influenced by slow growth at home and such developments as the pending North American Free Trade Agreement, distributors of everything from food to lab gear are deciding to do more business abroad. By the year 2000, predicts the National Association of Wholesaler-Distributors (NAW), wholesalers will generate 18% of their revenues outside the U. S., nearly double the current share. The industry needs a boost: The NAW also predicts that gross profits of merchant wholesalers may grow just under 4% this year, to $372.2 billion. Although that's better than last year's 2.8% gain, it's below the industry's 5%-plus annual growth of the late 1980s.

LOCAL GUIDANCE. The move to foreign markets may be the cure-if distributors get a lot of local help. Fleming averted a major gaffe in Mexico when its advisers there counseled it not to name its chain "Super Mercado." That translates to "supermarket," but it has a bargain-basement connotation for many Mexicans. So the company switched to the English "SuperMart," a more upseale word.

Since wholesalers fundamentally are locally oriented, many hire foreign nationals to run their businesses abroad. McKesson Corp., the big drug wholesaler, counts almost entirely on Canadians to manage its three-year-old operation north of the border. The locals better understand the tight regulations Canada applies to pharmaceuticals-including prices. In 1991, figuring that antitrust concerns precluded it from making U. S. acquisitions, McKesson bought out its Canadian partner, Provigo Inc. This year McKesson expects about $1.5 billion, or 13%, of its $11.5 billion in sales to come from Canada.

Some foreign expansion is being driven by customers. vwR Corp. in West Chester, Pa., a $500 million distributor of laboratory gear, is now the third-largest wholesaler of such equipment in Canada, largely because customers such as DuPont Co. demanded that VWR sell there. Big buyers want to deal with as few suppliers as possible, partly because it's cheaper and less time-consuming to school just a few in corporate quality programs. 'They want to deal on an Americas-wide basis," says VWR CEO Jerrold B. Harris.

BEACHHEAD. Even some wholesalers who expect robust gains at home in '93 are eager to go overseas. McLane Co., a $4.8 billion Wal-Mart Stores Inc. unit in Temple, Tex., has grown at a double-digit pace for years by selling to convenience stores such as 7-Eleven. This year, it will also start supplying British outlets with candy and food from a warehouse in Rushden, England. "The development of retail convenience stores in other countries is about 15 to 20 years behind the U. S.," says a McLane vice-president, Robert Hudspeth, who wants to help close the gap.

Distributors who shun foreign markets may find it hard to grow this year. While the recovery will help those who sell general merchandise and food, those that supply builders may not do especially well. Citing a "downsizing of the construction industry," Lloyd U. Noland,III, president of $400 million Noland Co. in Newport News, Va., doesn't expect the go-go days of the 1980s to return anytime soon. Yet he would still rather try to win market share from his U. S. competitors than venture iabroad.

The domestic market will no doubt remain No. 1 for American wholesalers, partly because overseas expansion is expensive. Either way, however, U.S. distributors may end up competing with foreign wholesalers. In November, for instance, Britain's Wolseley PLc snapped up another in a series of small plumbing houses-U.S. Supply Co. of Kansas City, with $50 million in sales. Wolseley now logs about $L7 billion a year in U. S. sales of plumbing and construction supplies. 'It's real says vwr's Harris. "We're in a global market now."

Joseph Weber
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